Mar232016
The hidden perils of lender policies that suppress housing supply
Saving the banks required reflating the housing bubble, trapping a generation in their starter homes and slowing sales in the housing market.
The reason fewer homeowners than usual list their homes for sale is due primarily to loss mitigation policies at lending institutions. Many homeowners face circumstances in their personal lives that would ordinarily compel them to sell, but due to the excessive amount of mortgage debt they carry relative to the value of their homes, these homeowners fail to list their homes for sale.
Some homeowners don’t list because they are underwater and can’t sell for enough to pay off their loans. Some homeowners don’t list because they are barely above water and if they were to sell, they wouldn’t obtain an equity check large enough to make a move-up trade. Some homeowners don’t list because even if they have sufficient equity to do what they want, the payments on their low interest rate mortgage are so attractive, they don’t want to sell their homes and purchase another with higher-rate debt.
So how did these circumstances that hinder home listings come to pass?
First, lenders lost their collective minds and inflated a massive housing bubble from 2004-2006 using toxic mortgage products like the Option ARM that allowed buyers to leverage their income for double the amount a stable, 30-year fixed-rate mortgage would finance. This created a mountain of unstable and unsustainable debt. When the Ponzi scheme collapsed, home values fell back to pre-bubble levels, but the debt remained.
Second, lenders refused to write down their bad debts for fear of insolvency or bankruptcy, and legislators and the federal reserve worked with these zombie lenders to conspire to preserve they bad debt and reinflate the housing bubble to restore collateral backing to these bad loans.
Third, the federal reserve moved quickly to lower mortgage rates by lowering the federal funds rate and embarking on Operation Twist to drive down mortgage rates to record lows. Lower mortgage rates make bubble-era home prices financeable and to allow insolvent borrowers to reduce their interest costs so they could afford to repay the unstable loan balances under stable loan terms.
Fourth, to deter and prevent borrower cram downs, lenders aggressively modified home mortgages to more stable terms, and they stopped approving short sales if the underwater borrower wanted to get out. These policies effectively trapped a generation of borrowers in their starter homes. Hopefully, the lower payments made this a gilded cage.
These manipulations carry a hidden cost: a lack of MLS listings and low sales volumes, disappointing two generations of would-be homeowners. If none of the problems outlined above would have occurred, or if our policies and actions toward those events had been different, we would not have the shortage of MLS listings we endure today.
For example, if lenders foreclosed on delinquent borrowers and resold the properties like they used to, mortgage debt levels would be far lower today, and so would house prices. Lower aggregate debt levels and lower house prices are a recipe for brisk sales because fewer people would be burdened by excessive debts, and more people could afford the properties available. We didn’t do this because lenders convinced lawmakers that forcing lenders to face the consequences for their actions would have hurt the economy by devastating the banking system. Perhaps they were right.
In any case, a lack of MLS supply and low sales volumes are not what real estate agents want to see, so naturally, they complain about it as the end of the world.
The next housing crisis is here
And it’s caused by our response to the last one
By Myles Udland, March 21, 2016
And this time the crisis is all about one thing: supply.
Anything that stands in the way of a real estate commission must be a crisis, right?
First-time homebuyers are crowded out, with Trulia’s chief economist Ralph McLaughlin writing Monday that the number of starter homes on the market has declined 43.6% in the past four years.
Homeowners who want to move from a starter home to something better can’t afford the next step. McLaughlin notes that the number of “trade-up” homes on the market is also down about 40% over the same period.
On Monday, the latest report on existing-home sales showed the pace of sales in February fell 7.1% from January’s to an annualized rate of 5.08 million. …
Isn’t the lack of listings and low sales volumes proof of the cloud inventory hypothesis I described back in early 2013?
Also in Monday’s report, commentary from Lawrence Yun, chief economist for the National Association of Realtors — which publishes the report on existing-home sales — showed the kind of crisis the housing market is facing.
“The lull in contract signings in January from the large East Coast blizzard, along with the slump in the stock market, may have played a role in February’s lack of closings,” Yun said Monday.
The weather? Really? Passing off bullshit like that won’t help Yun’s dismal credibility much.
“However, the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers.”
This is a problem typical of a manipulated market. If the law of supply and demand were working properly, we wouldn’t have a shortage of low-priced home and a glut of high-priced homes. In an unmanipulated market, prices would come down until supply and demand were balanced at all price points.
Yun added (emphasis ours), “The overall demand for buying is still solid entering the busy spring season, but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers.”
That statement is bullshit by implication. He’s trying to suggest buyers are holding back by choice, but the reality of their meager incomes and high prices are forming a financial constraint, not a psychological one.
slow wage growth, rampant concern about the future, and an underbuilt low-end housing market have all kept renters renting.
If we take the view that the jobs being created aren’t that great … then what we’re going to see is a rising class of renters.
“These low paying jobs are not the type of job that are conducive to buying a home,” Tchir wrote.
(See: Tepid wage growth and rising house costs prices out low-income households)
“The first problem is saving for the down payment —a Herculean task in itself.
(See: Potential homebuyers can’t save for down payments with high rents)
The second problem, and the one that I think is addressed less frequently, is who really wants to commit to an area when the job isn’t that good and may not be stable?” …
I recently exchanged emails with a long-time reader who is unexpectedly changing jobs. A few years ago he was convinced his job was completely stable, as did many others before the bust. You never know in this economy how stable anything is.
The problem is there might not be enough houses, at the right price points, to go around.
This is the next crisis.
The only real long-term solution to the lack of inventory problem is higher house prices. Even if all excess debt were purged, homeowners wouldn’t possess the equity to execute a move-up trade. Given enough time, amortization will provide some equity, but to really motivate sellers, prices to rise enough to extricate the previous generation from their starter homes.
The policies that create cloud inventory put a minimum price on these houses because loss mitigation procedures prevent debt-burdened houses from ever transacting for less. Lenders already proved their willingness to wait as long as it takes to get out at breakeven, and homeowners want the extra equity for a move up.
These conditions will likely force lenders to keep mortgage rates low for a very long time because without rates at 4% or less, house prices won’t rise high enough to bail lenders out of their bad bubble era loans, and an entire generation will spend their adult lives in their entry-level house.
Come join us on Thursday
The homebuying season started early this year due to the low mortgage rates. If you or someone you know are considering buying this year, I invite you to come out to our event at JT Schmids on Thursday. We provide free appetizers and drinks and great presentations. I hope to see you there.
RSVP for event here.
[listing mls=”OC16058318″]
“…who really wants to commit to an area when the job isn’t that good and may not be stable?”
Even if your job is stable, who wants to commit to an area? Do you ever really find the perfect area to buy a house? Irvine is far from perfect for us. Both of our jobs are in Irvine. That is the primary reason we bought in this area – proximity.
Committing to an area isn’t forever, it just needs to be for five years or more. If you and your wife know that for the next five years that your circumstances likely won’t change, then owning is the right choice. If you can’t be reasonably certain on five years in one place, then renting is the best choice.
From my experience as long as you buy at rental parity 2 and 3 years have worked out…. 5 years is certainly better though
Just a minor comment regarding one of the graphics near the start (“All underwater homes include … Broken dreams”).
While walking through an empty house on a noisy street wending its way up to Rancho Palos Verdes, I commented on the noise, the awkward placement of one of the bedrooms and the overall darkness due to the lack of windows. This was around 2010, when prices were still somewhat insane, and I asked how anyone could have appraised it for more than $800K (its previous sale price). My friend said something along the lines of, “You know what this place was? Someone’s hopes and dreams.”
Someone was going to get rich from this house, but it was an REO, so it certainly wasn’t the previous owner.
2010? you should have bought that
It used to be that when people dreamed about owning their own home, they had visions of how they would decorate it, mark the growth of their children, and so on. The housing bubble made the house into an ATM machine, and the dreams associated with homeownership became grossly perverted.
U.S. existing home sales tumble in warning sign for housing market
U.S. home resales fell sharply in February in a potentially troubling sign for America’s economy which has otherwise looked resilient to the global economic slowdown.
The National Association of Realtors said on Monday existing home sales dropped 7.1 percent to an annual rate of 5.08 million units, the lowest level since November.
Sales have been volatile and prone to big swings up and down in recent months following the introduction in October of new mortgage regulations, which are intended to help homebuyers understand their loan options and shop around for loans best suited to their financial circumstances.
February’s decline weighed on investor sentiment, with the S&P 500 stock index falling after the data was released.
Sales fell across the country, including a 17.1 percent plunge in the U.S. Northeast.
Economists had forecast home resales decreasing 2.8 percent to a pace of 5.32 million units last month. Sales were up 2.2 percent from a year ago.
The median price for a previously owned home increased 4.4 percent from a year ago to $210,800.
The housing report runs counter to data showing strong job growth and a stabilization of factory output, which had taken a hit from weaker demand overseas and a strong U.S. dollar.
Housing continues to be supported by a tightening labor market, which is starting to push up wage growth, boosting household formation. But a relative dearth of properties available for sale remains a challenge.
“Finding the right property at an affordable price is burdening many potential buyers,” said NAR economist Lawrence Yun.
In February, the number of unsold homes on the market rose 3.3 percent from January to 1.88 million units.
The Housing Story Is Really Inventory
Existing home sales as reported by the National Association of Realtors fell 7.1% in February 2016 from the month before. It was a very large decline but followed a two-month surge beginning December 2015; which itself came after an unusually large decline in November. In other words, housing and home sales seems to be that much more volatile of late. That much is plainly obvious when comparing home sales since 2013 with the much tighter and more disciplined mini-bubble trend from before the “taper” selloff in the middle of 2013.
http://www.alhambrapartners.com/wp-content/uploads/2016/03/ABOOK-Mar-2016-NAR-Home-Sales-SAAR.jpg
Reading through the NAR’s accompanying press release and really Chief Economist Larry’s Yun’s commentary, one is struck by how nothing seems to have changed. Here is Yun last year in March 2015 describing that February disappointment:
Severe below-freezing winter weather likely had an impact on sales as more moderate activity was observed in the Northeast and Midwest compared to other regions of the country…
With all indications pointing to a rate increase from the Federal Reserve this year – perhaps as early as this summer – affordability concerns could heighten as home prices and rents both continue to exceed wages.
Here is Yun today:
Sales took a considerable step back in most of the country last month, and especially in the Northeast and Midwest. The lull in contract signings in January from the large East Coast blizzard, along with the slump in the stock market, may have played a role in February’s lack of closings.
The overall demand for buying is still solid entering the busy spring season, but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers.
Weather is an ongoing theme for February sales, as if winter in the Northeast and the Midwest is winter. Here is Yun in April 2014:
With ongoing job creation and some weather delayed shopping activity, home sales should pick up, especially if inventory continues to improve and mortgage interest rates rise only modestly.
I only note the ongoing appeal of snow for very slight comic value, instead it is this “tight supply” idea that demands further inquiry. What Yun wrote in 2014 was correct in that if jobs were truly expanding and inventory improved then home sales should have been more sustainably robust and far less volatile especially of late.
There really should be stronger levels of home sales given our population growth. In contrast, price growth is rising faster than historical norms because of inventory shortages.
Two years later, inventory continues to decline. That has had the effect of squeezing prices higher and out of reach for far too many, leaving them to depend on the whims of the FOMC (and really the 10-year UST yield since monetary policy is almost irrelevant) for holding mortgage rates. This makes no sense under the conventional narrative, as rising prices and gaining economic momentum should lead to increasing inventory, or, at the very least, the level of unsold homes rising to match overall sales.
Instead, starting last summer, the amount of inventory began to decline so that by December the non-adjusted ratio of “months supply” was less than 4.0 for the first time in a very long time. In other words, the “inventory shortage” that was apparent as far back as March 2014 has only increased despite rising prices and overall more favorable (according to the NAR) contract terms (35% of homes, for instance, were on the market for less than a month). People just don’t seem to want to sell their houses and move somewhere else.
There are financial imbalances to also consider, including those induced by monetary distortions provided to the housing market as “stimulus”; especially the rush of investor funds to buy up low end housing (foreclosures and distressed) to convert into rental units. The Fed didn’t care who was buying or what that might do to the overall economic balance in housing (Keynes, after all) so long as anyone was. The real estate outfit Trulia suggests in its housing data that these imbalances are significant factors limiting “supply”:
Trulia attributes the reason for the low inventory in starter and trade-up homes to a combination of factors, including the number of foreclosed homes that were bought by investors during the recession and turned into rentals.
The current high cost for premium houses also plays a role. As prices for premium houses rise, it becomes more challenging for buyers looking to trade up on their current property to find an affordable home, which in turn makes them disinclined to sell. The Trulia study reports that the cost of premium homes has increased by about 20.3 percent since 2012.
The gap was similarly high in the mid-2000’s but wasn’t so much a problem then because of bubble mechanics as well as different economic reality (or perceptions). It is the combination of those that seems to be limiting and squeezing the housing market into something unrecognizable to what should have been fundamental, organic growth had the Fed left it (and the economy) alone. A great deal of the housing flow is stagnated on jobs that are supposed to be having an effect but “somehow” aren’t and the artificial imposition of gaps between segments – the bifurcation of markets as well as the economy. Those that are doing well in this split, redistributionary circumstance have done really well, only making it that much harder for the rest to catch up, let alone join.
It seems in that sense the housing market is a microcosm of the Fed’s QE economy, where “stimulus” is that only in the narrowest sense of causing disturbances that might appear greatly dissimilar to contraction. That is a far different prospect, however, than a true and balanced recovery which is required for sustainability. In that sense, it is difficult to blame those reluctant to engage despite basic economics that demand they should; prices are rising but more so in where people want to go than in what they have, and they are to base taking on those yawning price risks upon economic prospects that never quite seem to come close to matching the mainstream rhetoric and now look even shakier.
In other words, in light of QE-math, years of “tighter inventory” makes perfect sense.
Low inventory in California signals more construction
California agents and homebuyers are feeling the squeeze of low inventory.
The number of homes for sale is 9% below a year earlier as of January 2016. This continues a steady, nationwide decline in home inventory from 2011. In fact, today’s home inventory is 38% below what it was in mid-2011. Granted, 2011 likely had an oversupply of homes on the market. But is today’s inventory too low to meet homebuyer demand?
To provide an answer, let’s look at the trends:
http://journal.firsttuesday.us/wp-content/uploads/California-Inventory-SalesVolume.png
The chart above shows California’s home inventory available for sale—the blue line—alongside the number of homes sold, monthly—the red line. For clarity, the home sales volume line is magnified so the trend is easily seen, and corresponds with the right axis. The home inventory line corresponds with the left axis and this number is in fact much larger than the number of homes that sell each month.
When the home sales volume number is expanded and placed on top of the inventory line, as in the chart above, a trend takes shape: when sales volume declines, home inventory goes up. When sales volume increases, inventory goes down. This is axiomatic.
Most recently, home sales volume slowed in 2014, ending the year 7% lower than at the beginning of that year. As a result, inventory rose. This occurred because homes were selling more slowly than new homes came on the market. In 2015, the reverse occurred. Sales volume took off, ending the year 9% higher than the end of 2014. Demand for homes increased more quickly than new homes came on the market, thus inventory declined.
Therefore, while it is true that inventory is low at the start of 2016, it’s for a very good reason. California had a great year for home sales volume in 2015, and a lower inventory is the price paid for increased home sales.
All of this has to do with homebuyer demand, which ultimately drives the direction the housing market takes. As we head through 2016, demand continues to outpace inventory. This is good news for sellers, as more demand for a shrinking supply leads to higher prices.
Low inventory points to future construction
As inventory continues to shrink in California, what’s a homebuyer to do?
Those determined to buy will not be shut out of the market — it just may take a bit longer for their homeownership dreams to come true.
If your homebuyer is frustrated with the lack of available inventory, consider pointing them to new construction. In fact, the number of new homes sold before construction has even broken ground is at a decade-high, according to Trulia. Construction on 32% of new home sales had not yet been started before being purchased as of January 2016. (This is good for homebuyers, as new construction includes extra energy efficient improvements, which will ultimately reduce the homeowner’s monthly costs).
Homebuyers reluctant to compete for today’s low inventory of homes may also turn their sights to the suburbs, where inventory is more plentiful and bidding wars less common. Further, areas with the lowest inventory are also experiencing a smaller increase in home prices. Rapid home price growth will eventually pull back home sales volume in these areas, and inventory will begin to climb again. Expect this to occur towards the end of 2016 or beginning of 2017.
Meanwhile, residential construction will continue to grow in 2016 and in the coming years as first-time homebuyers finally hit the market after years in the shadows following the 2008 recession.
NAHB director blames homeowners for slow spring season
National Association of Home Builders’ CEO Jerry Howard tells Bloomberg’s Vonnie Quinn, that the high end and low end markets are facing a variety of situations negatively affecting homebuyers, according to USA Today.
“At the higher end of the market, Vonnie, you’re seeing a situation where those buyers are concerned about the overall health of stock market, and their investments in general,” said Howard.
“At the low end of the market, household formations that are just coming into play post recession, are forcing a lot of people into the rental market,” added Howard.
In Trulia’s recent report, it states that America is experiencing a housing shortage.
This little tidbit lead one Gawker author to call homebuilders ‘a-holes’ (caution: NSFW language).
But there’s more to it, as it turns out.
Not only are there fewer homes available to buyers of all income levels, those just starting out or making their first foray into home ownership are worse off than they’ve been in years. There are fewer homes available, an even if they can find a home, it’s likely to be more expensive.
Tight inventory and low affordability are still major obstacles first time homebuyers are facing this spring homebuying season, according to a recent report from online real estate site, Trulia.
The report states that across the 100 largest metros, 95 have shown a decrease in the number of starter homes over the past four years. Of the 10 metros that have seen the largest drop, all are in the West and South. The number of starter homes in Salt Lake City has dropped the most, from 1,243 to just 151 – an 88% drop in four years.
“If inventory continues to shrink throughout the spring house hunting season, buyers will likely be faced with more bidding wars and offers above the seller’s asking price,” said Ralph McLaughlin, Trulia’s chief economist and the author of the study.
“Meanwhile, sellers will be better positioned to sell their homes than in years past, but may have difficulty finding another home to buy,” McLaughlin added.
According to USA Today:
In January, there was a four-month supply of existing homes for sale in the USA, well below a healthy six-month inventory, according to the National Association of Realtors. That drove up the median home price by 8.2% the past year, the biggest jump since last April.
The shortage is also helping constrain existing home sales, which totaled 5.25 million in 2015, below the 5.75 million considered normal in light of population growth, says Lawrence Yun, the Realtor group’s chief economist.
Yun says the main reason for the skimpy supply is sluggish single-family housing starts, which hit an eight-year high of 715,000 last year but remained well below a normal 1.2 million.
McLaughlin disagrees, noting that new home sales represent less than 10% of all housing sales.
Starter home affordability dropped in California after the demand of starter homes increased due to a “strong job growth.”
According to the study, faced with growing demand and tight supply, prices of all homes in California have risen sharply over the past few years. And as prices rise, homebuyers tend to follow the principles of supply and demand.
The latest existing-home sales report confirms how barren the market is as almost every sector of housing continues to suffer from the impact of barely any inventory.
Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, tumbled 7.1% to a seasonally adjusted annual rate of 5.08 million in February from 5.47 million in January. Despite last month’s large decline, sales are still 2.2% higher than a year ago, the National Association of Realtors report stated.
http://www.housingwire.com/ext/resources/images/editorial/Cynthia/Trulia-Starter-Homes.png
Sydney Home Values Have Biggest Quarterly Drop in Seven Years
Australian housing bubble may finally be bursting
* Home values in the city fall for the first time in 13 quarters
* Values across biggest cities up 0.2% in the December quarter
Sydney home values fell the most in seven years in the December quarter as a regulatory crackdown amid record prices pushed up mortgage rates and sapped demand.
The residential property index in Australia’s biggest city dropped 1.6 percent, the first decline in 13 quarters, according to government statistics released Tuesday. Sydney prices have, however, recovered in the first two months of the year, more recent data from research firm CoreLogic Inc. showed March 1.
Home-price growth in Australia’s biggest cities is expected to slow as mortgage-rate increases and tightening lending standards, introduced as prices climbed to a record, hurt buyer affordability. Sydney home values have climbed about 70 percent since the end of 2007, while in Melbourne they have risen about 50 percent, data from the statistics bureau show.
Home values across the largest cities in the country expanded 0.2 percent in the December quarter, according to the data. The total value of Australia’s 9.6 million residential dwellings increased A$31.6 billion ($24 billion) to A$5.9 trillion, the data show.
Fannie Mae, Freddie Mac finally set to reduce mortgage balances
Those who survived nearly a decade underwater get a few pennies in relief
After years of speculation and equivocation, Fannie Mae and Freddie Mac will begin to cut the mortgage balances for a number of homeowners later this year, according to a report from The Wall Street Journal.
The Wall Street Journal report, written by Joe Light, states that the Federal Housing Finance Agency recently approved a plan for the government-sponsored enterprises to engage in principal reduction on a large scale for the first time since the housing crisis.
For years their leaders claimed this would never happen. They all said the GSEs were in conservatorship, not receivership, and so a reduction in asset values would be counterintuitive to that status.
Perhaps this is why the scale of the reduction program is not as significant as some might expect, as Light reports.
From the WSJ:
Fewer than 50,000 “underwater” homeowners, who owe more than their homes are worth and are already behind in their mortgage payments, will likely be eligible, people familiar with the matter said.
Fannie and Freddie—which don’t make mortgages but rather buy them from lenders and wrap them into guaranteed securities—would also forgive principal only in cases where they determine the companies would lose less money with that option than foreclosure or other foreclosure-prevention methods. In addition, the new program will likely be limited to mortgages whose outstanding principal balance is under a certain dollar amount, people familiar with the matter said.
According to Light’s report, the plan will be officially announced “within the next few weeks.”
The issue of principal reduction has long been a hot button for many housing industry participants and observers alike.
Nearly four years ago, Ed DeMarco, who was the acting director of the FHFA at the time, said that the FHFA was not going to engage in principal reductions, despite the urging of then-Treasury Secretary Tim Geithner.
“I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs,” Geithner said in 2012. “In view of the clear benefits that the use of principal reduction by the GSEs would have for homeowners, the housing market and taxpayers, I urge you to reconsider this decision.”
But DeMarco refused Geithner’s request, stating at the time: “Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”
As Light writes, when Melvin Watt took over as the official director of the FHFA in 2014, some thought that Watt would move quickly to cut mortgage principal, but Watt took a “slower, more-measured approach” to considering principal reduction.
Watt was still “considering” principal reduction in February 2015, when he said that even if the FHFA was going to allow principal reduction, it would likely end up being on a much smaller scale than some people expect.
If the agency does decide to allow debt cuts for some borrowers, “I think it will be substantially narrower than the vision people have,” Watt told Bloomberg at the time. “Reducing everybody’s principal would cost taxpayers billions.”
Well, if we’re gonna reduce principal, enriching these underwater homeowners is probably the fairest way to do it.
For as much as I am opposed to principal reduction, now that so much time has passed, it’s probably the right thing to do. If these people had strategically defaulted and/or declared bankruptcy 8 years ago, they would be far better off today. We shouldn’t go out of our way to punish those who stuck it out this long.
I’m surprised with all the moral hazard arguments you’ve made over the years that this would be ok with you. I think if they’ve survived this long without a principal reduction, they should continue to survive just fine without one. When the situation arises where borrowers need to move, then approve short sales on a case by case basis, based on real need, as is already being done. (Really, a short sale is just a principal reduction upon the sale of a property.)
What if the GSE’s start approving mass principal reductions right before the next housing crash? Then you will have a bunch of newly underwater and entitled borrowers that believe they now deserve a bailout since somebody else is getting one. The moral hazard doesn’t disappear just because home prices are strong for the moment. This is a Pandora’s box that creates real risk for taxpayers if home prices turn South again.
You are right. Upon further reflection, even now this is still a bad idea.
You need to end with the good guy winning. That is unless you want everyone to be a bad guy in the next episode.
Beyond Credit Scores: 7 Factors That Affect a Loan Application
When it comes to good finances, credit scores get a lot of press. Based on a formula incorporating loan and repayment history, credit scores are often touted as the reason someone gets approved for a credit card, auto loan or mortgage – or denied one.
However, some financial experts say the role of credit scores may be overblown. “It is a very useful tool, but it’s just one tool,” says Kathleen Lindquist, a certified financial planner with San Diego Wealth Management. In addition to credit scores, lenders may look at everything from your housing history to your social media presence and credit decisions.
Mortgage and subprime borrowers may be subject to even greater scrutiny. That isn’t to say credit scores aren’t important, but their role may vary significantly depending on a lender’s three-digit number. “If your score is greater than 750, the decision is made primarily on your credit score,” says Rich Hyde, chief operation officer of Prestige Financial, which specializes in auto loans for buyers with subprime credit.
People with lower numbers may find lenders begin asking for more documentation. However, that isn’t necessarily a bad sign. “We’re in the business of loaning money,” Hyde says. “We’re looking for the good things.”
Mortgage lenders also tend to have more stringent requirements, Lindquist says. Beyond a credit score, they also look for details regarding income and assets to determine whether a borrower will have the means to pay off a large loan with a long term.
7 Other Factors Lenders May Consider
All lenders have their own criteria, but here are seven commonly considered factors that can play a role in a credit decision.
1. Proof of income. It’s not enough to simply state your income. Some lenders want to see proof, either in the form of pay stubs, bank statements or even old tax forms.
2. Investment statements. Some lenders may also want to see 401(k) or IRA statements, “particularly for those who are retired and don’t have an income,” says Mikel Van Cleve, director of personal finance advice for USAA Bank.
3. Employment history. Hyde says subprime lenders often look for a stable employment history when weighing the likelihood of a borrower being able to pay back a loan.
4. Housing history. As with employment, lenders are looking for stability when it comes to housing. Frequent moves could indicate money management problems or increase a lender’s chances of not being able to track down a borrower who defaults on a loan.
5. Debt-to-income ratio. Sometimes broken down as a payment-to-income ratio, this factor calculates debt as a percentage of your income. “It’s a good idea to keep that debt-to-income ratio below 36 percent,” Van Cleve says. However, a higher ratio may not automatically disqualify someone from a loan.
6. Recent payment history. If you have past bad credit, a lender may consider when that occurred. Missed payments from three years ago may not be a concern, but missed payments from last month could sink someone’s chances for a loan.
7. Social media. “Data companies are continuing to look for new ways to help lenders,” Van Cleve says. That includes surveying social media sites for signs a potential borrower may be irresponsible with their money. Van Cleve is quick to note this is a new strategy of evaluating applicants and not one used by USAA Bank.
Surprisingly, a bankruptcy may not mean you will automatically be denied a loan. “A recent bankruptcy means you don’t have other debt we have to compete with,” Hyde says.
Don’t neglect your credit score. While checking your credit score every day isn’t necessary, borrowers should still be aware of their number. By paying on time and keeping credit card balances low, you can boost your score and minimize the need for your entire financial life to go under a microscope.
AmEx and other credit card companies provide a free FICO to users. I think it’s updated monthly.
I noticed my bank now gives me credit score updates too.
I think this is a subtle marketing strategy, because getting you to think about your FICO is a way to get you thinking about borrowing money.
Warren Buffett on Booms, Bubbles, and Busts
Smart people still argue what caused the Great Depression, almost nine decades after it happened. That’s the nature of deep recessions. The desire to assign blame to tragedy — and the will to avoid being blamed — makes these debates less scientific than we’d like.
One way to make sense of what happened is piecing together stories from those involved. The government tried this six years ago when it set up the Financial Crisis Inquiry Committee, interviewing dozens of bankers, regulators, top investors and politicians to try to figure out what happened.
One person the committee questioned was Warren Buffett. The interview took place in 2010, but the transcript wasn’t public until last week.
You can read the whole thing here. It’s 103 pages and totally fascinating.
I pulled out a few of my favorite parts. The quotes are lightly edited for clarity.
On what caused the housing bubble:
“The basic cause, you know, embedded in psychology, was a pervasive belief that house prices couldn’t go down and everyone, virtually everybody, succumbed to that. But that’s the only way you get a bubble is when basically a very high percentage of the population buys into some originally sound premise. It’s quite interesting how that develops.
The originally sound premise that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action. So the media investors, the mortgage bankers, the American public, me, my neighbor, rating agencies, Congress, you name it — people overwhelmingly came to believe that house prices could not fall significantly. And since it was biggest asset class in the country and it was the easiest class to borrow against, it created probably the biggest bubble in our history.”
On regulations preventing bubbles:
“If Freddie and Fannie had said, “We will only accept mortgages with 30 percent down payments, verified income, and the payments can’t be more than 30 percent of your income,” you know, that would have stopped [the housing bubble]. But who can do that? In fact, I think if you recommend that as a course of a future mortgage action, you better get an unlisted phone number.”
On fraud leading up to the crisis:
“Well there was, obviously, a lot of fraud. There was fraud on the parts of the borrowers and there was frauds on the part of the intermediaries, in some cases. But you’d better not have a system that is dependent on the absence of fraud. It will be with us.”
On the future:
“We will have other bubbles in the future. I mean, there’s no question about it.”
MBA: Mortgage apps continue downward trend
Mortgage applications dropped again, falling 3.3% from one week earlier as the market heads into the spring season, the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending March 18 found.
Both the refinance and purchase index dropped from last week, decreasing 5% and 1%, respectively.
The refinance share of mortgage activity continued its downward trend and fell to 53.9% of total applications from 55% the previous week. The adjustable-rate mortgage share of activity stayed frozen at 4.9% of total applications.
The FHA share of total applications slightly grew to 11.8% from 11.7% the week prior, as the VA share of total applications ticked up from 12.3% to 12.6%. The USDA share of total applications marginally increased to 0.9% from 0.8% the week prior.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) dropped from 3.94% last week to 3.93% this week.
Similarly, the average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) fell to 3.85% from 3.86%.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA dipped to 3.74% from 3.77%.
The average contract interest rate for 15-year fixed-rate mortgages declined to 3.18%, down from 3.22%, while the average contract interest rate for 5/1 ARMs decreased to 3.13%, down from 3.23%.
Rates have ticked up some since the recent lows, so refinance volume is expected to decline.
What would the price of a starter home in OC be? Land costs a fortune in the OC anywhere you can build anything. By the time you factor in entitlements the cost of buildable land makes affordability a joke.
The cost of a starter home is right around the conforming limit of $625,500. People need larger down payments to finance any more than that, so that limits the move-up market to amounts higher than this.
just the median home price in Irvine is 25% above the conforming limit, so clearly the premium areas go well above that… even 10+ miles away from the coast…. and not just in Irvine.
If you, like me, need help understanding who these folks are supporting Trump, here’s a long article:
Why Donald Trump?
A quest to figure out what’s happening in America.
http://fivethirtyeight.com/features/why-donald-trump/
I was just thinking that we need Trump to say something outrageous to get the comments going this week.
you are also seeing more neo nazi populism in germany and europe….
there’s actually far greater reason for it to work in Europe right now.
It’s so simple. People support Trump because the establishment has thoroughly and completely abandoned them.
This doesn’t mean philosophically they feel abandoned. It means in a very real, visceral sense, they feel like the establishment has betrayed some core aspect of their being.
–
For me it was the Iraq war.
For others it is the outsourcing of a job they worked 20 years at.
For others it is the wave of illegal immigrants bringing down their neighborhoods and getting their tax dollars as welfare to boot.
For others it was watching the big banks get bailed out so they could continue to have their homes foreclosed upon.
For others it is the ongoing attempt to steal their retirements by diminishing Social Security and Medicare.
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These things all strike at the very core of a person’s being. Voting for Trump is the only way of getting back at the people that did this to us.
globalization mixed with capitalism is a bitch for the uneducated
it’s only going to get worse, regardless of who is president
“The key uncertainty, however, is the size of the capital outflows by Chinese companies and households this year:
One very experienced China watcher told us at the forum that the bulk of the outflows was due to companies covering their USD liabilities and should thus subside fairly soon as most of the hedging seems to have been done.
A less benign view proposed by other participants states that Chinese investors, having been forced to invest mostly in domestic assets in the past, are eager to internationally diversify their portfolios now that capital account liberalization has started. If so, capital outflows would have only just begun and even the more than $3 trillion of Chinese foreign exchange reserves could be depleted relatively soon.”
https://www.pimco.com/insights/economic-and-market-commentary/cyclical-outlook/calmer-cs-ahead-china-commodities-and-central-banks-dominate-the-global-outlook
I’ll gladly sell my Irvine stucco box for twice what I paid. Thanks China!
[…] (See: The hidden perils of lender policies that suppress housing supply) […]