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New Rules for Lending

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | January 17th, 2014

Comic Bill Maher ends his weekly show on HBO with a segment he calls "New Rules." So allow us to begin the new year with a report on the nation's "new rules" for obtaining a mortgage.

As of Jan. 10, a number of new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act took effect. The main difference between the lending standards and Maher's rules is that there is nothing funny about the new lending canons.

Indeed, they are no joking matter. Consumer Financial Protection Bureau Director Richard Cordray calls the new common-sense rules a "back-to-basics approach" to mortgage lending. "No debt traps, no surprises, no runarounds," he says.

Here's a brief rundown:

-- Qualified mortgage (QM): Borrowers won't be offered qualified mortgages, at least under that name. Rather, the term refers to loans that meet the requirements set down under the Dodd-Frank Act and enforced by the CFPB.

Under the rules, lenders will not be liable should a borrower run into difficulty years after the mortgage was originated as long as the loan met the QM standards. So, to protect themselves, lenders will be playing it close to the vest, making sure they meet the letter of the law.

But that doesn't mean mortgages outside the rules will no longer be available. They will, though they are likely to cost more, both in terms of interest rates and fees.

-- Ability to pay: Every lender must make a reasonable, good-faith determination that you can afford the mortgage before you take it on. Obviously, they can't tell whether you will lose your job three years from now, or whether you or a family member won't be struck by a major illness. But they must now look at your income and assets and weigh those against the monthly payments over the long term.

-- Ratios: The debt-to-income ratio on loans insured by the Federal Housing Administration cannot exceed 43 percent, down from 46 percent previously. But some lenders are likely to impose an even stricter limit.

At the same time, lenders can and will offer any type of mortgage they believe you can repay. And the new rules do not prevent lending to any borrowers with a DTI ratio over 43 percemt.

Mortgage bankers, for example, can rely on the less-restrictive rules for loans backed by Fannie Mae and Freddie Mac, the two quasi-government entities which purchase mortgages from primary lenders. And smaller community banks can choose to keep their loans on their own books.

But no matter what rules your loan is written under, your lender must believe without a doubt that you can repay. And they must verify and document everything.

-- Down payments: Though much has been written about lenders now requiring a minimum of 20 percent down, the new rules say nothing about a minimum down payment. Consequently, loans with as little as 5 or 10 percent down should still be readily available.

-- Fees: To meet the QM standards, upfront points and fees cannot exceed 3 percent. (A "point" is 1 percent of the loan amount.)

-- Loan limits: Though the QM rules say nothing about the amount banks or mortgage companies can lend, separate changes announced by federal regulators have ratcheted down limits on government loans.

As of Jan. 1, FHA loans can not exceed $625,000, even in high-cost areas, down from $729,750. As a result of lower maximum loan amounts, according to the National Association of Home Builders, the ceiling on FHA loans will decline by more than 20 percent in nearly 150 counties and from 40 to 50 percent in 17 counties.

Although there was plenty of hand-wringing about whether Fannie and Freddie would also lower their limits, their regulator, the Federal Housing Finance Agency, elected to hold the line for 2014. This means that either company can still purchase loans of up to $417,000 in most locations and up to $625,500 in high-cost markets.

But again, lenders in the so-called "jumbo" space can lend as much as they so desire.

-- Self-employed: People without verifiable W-2 income face much more of an uphill battle than they used to. Even with substantial net worth and a high credit score, they are going to have to jump through hoops to show they are mortgage worthy.

For example, whereas daily expenses are used to reduce taxable income on most self-employeds' tax returns, these write-offs will be used against would-be borrowers by lenders, who will deduct them from income when computing DTI ratios and your ability to pay.

-- Documentation: Lenders will dig deeper into validating your income, employment, credit glitches and expenses. How deep? One borrower had to report not only how much he was paying for his homeowner's insurance policies on all his properties -- not just the one he was attempting to refinance -- but was also asked to produce the cover sheet for each policy.

If you are not ready for this kind of intrusion into your financial picture, your application could be delayed for weeks until you can provide the proper proof.

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Mortgage Market Safe From Me

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | January 10th, 2014

I am an unintended consequence.

I have loads of money. I own four properties free and clear. I have no debt. My credit file is impeccable. I have a credit score of 760.

And I was just turned down for a mortgage.

Not just any mortgage, but a cash-out refinance of less than six figures on a foreclosure I bought for cash, rehabbed and turned back on the market as a rental. Furthermore, I was only asking for a loan-to-value ratio of 70 percent, meaning I was leaving 30 percent of the home's value as equity. And I was rejected!

All of my rental properties are fully leased, each supported by current rental agreements. The lender had copies of my tax returns for 2011 and 2012, each year validated by copies from the IRS. The lender also had copies of each and every one of my bank statements.

And the lender still said "No!"

I pay all my bills on time. As soon as a bill arrives in the mail, a check goes out -- in full! The very next day! Every bill, no matter how big or small, out the next day. Sometimes I even take the envelope to the post office the same day. But the lender doesn't think I am a good risk!

The reason: I had recently switched from being a W-2 employee who also had 1099 wages to a full-time 1099 worker. That is, I left the world of the fully employed to that of a full-time freelance journalist.

And since I could not show that I earned enough 1099 income over the last two years to pay for the loan -- the history just wasn't there -- the lender's underwriters said I wasn't a good enough risk.

Here's what my denial form letter said: "Due to change of employment from some W-2 to all self-employment, Fannie Mae cannot approve due to the short time of all self-employment."

Now, my loan officer is as aghast as I am. But he's not the one who gets to make the decision. He's basically a salesman. It's the underwriters who have the final word. Not even my agent's branch manager held any sway. The underwriters said "no," and that's that.

Oh yeah: I was told, come back in 2014 when you can show at least 12-18 months' worth of freelance or contractor income, and we'll give your loan application another look.

Thanks a lot, Dodd-Frank. Thanks much, CFPB.

Dodd-Frank is the common name associated with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law Congress passed in 2010 to make sure the kind of lending that brought on the housing recession never happened again. You know, the liar loans, aka no-doc ("no documentation") loans, in which all the borrower had to do was fog a mirror. And CFPB is the Consumer Financial Protection Agency, the federal agency created by the law to carry out its dictum.

But surely lawmakers didn't mean people like me when they changed the rules. Now everything is income-based, and borrowers have to prove -- and I mean prove -- they have the ability to repay. Apparently I can't, at least in the eyes of the underwriters.

It doesn't matter what the underlying value of the property is. It doesn't matter what kind of assets you have in the bank. It doesn't matter whether you have a profit and loss statement. It doesn't matter what your credit score is. It doesn't matter whether you can validate everything.

All those factors are still important, of course. But if you can't show you have enough coming in to support what's going out, those things don't mean diddly.

Don Frommeyer, an Indiana mortgage broker and president of the Association of Mortgage Professionals, calls the new ability-to-pay rules the "new gold standard for lending." He says lenders now must follow a set of guidelines to establish your income, assets and obligations before deeming you eligible.

And things are becoming particularly tough on self-employed borrowers like me, because income is calculated to consider the borrower's write-offs: the tax deductions all of us self-employed dudes take to reduce our taxable income.

So here I sit. What I thought was a slam-dunk mortgage has turned into a pink slip. You got me, legislators. You nailed me, regulators.

You have protected the mortgage system -- and the greater economy -- from the likes of me. People who have worked hard all their lives and done things the right away. We save, we pay our bills on time -- but we can't get a home loan.

I hope you are satisfied!

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It's in the Book

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | January 3rd, 2014

Based on data from 2007, the Census Bureau estimates that the typical American moves a dozen times in his or her lifetime. But not Florence Knapp.

Knapp, who passed away in 1988, lived in the same house in Montgomery Township, Pa., for 110 years. And for that feat, she earns the title as the person who has lived the longest time ever in one residence, according to the 2014 edition of the Guinness World Records.

Perhaps the greatest coffee table book ever, Guinness' annual tome is a treasure trove of housing-related trivia, such as the oldest houses, the narrowest and the tallest.

But first, while we're at it, a nod to the world's tallest real estate agents. Laurie and Wayne Hallquist are 6'6" and 6'10", respectively. She's a full-time agent with Prudential California Realty in Stockton, Calif., while he's a part-timer with the company.

Now back to the book, which doesn't always profile the places where we live. This year, it goes whole hog, with sections on palaces, hotels, shopping buildings, offices and urban spaces. Even elevators and escalators are spotlighted.

But more about those houses: The oldest were built in a Neolithic settlement in Turkey and date back to 7,500 B.C. The mud-brick houses are entered through a hole in the ceiling that also serves as smoke ventilation for the fires that heat the places.

The skinniest house on record is in Warsaw. It is 3 feet 2 inches wide at its narrowest point and just about 5 feet at its widest. It contains a floor area of 151 square feet, and instead a stairs, occupants climb a ladder to reach the bedrooms above.

Then there's the smallest temporary house, a 1-square-meter wooden "sleeping" structure designed by a German architect two years ago. It weighs just 88 pounds and has wheels so it can be moved from one location to another.

From the smallest to the largest, or at least the one with the most rooms: That title belongs to a place called Knole in Kent, U.K. It has 365 rooms, or one for each day of the year. It was built around seven courtyards in 1456 by the then-archbishop of Canterbury and extended by the Earl of Dorset 150 years later.

But Knole doesn't hold a candle to Windsor Castle, the largest inhabited castle and the residence of the British Royal Family. Windsor measures 1,890 feet by 540 feet, for a total of more than 1 million square feet.

Windsor's not the largest palace, though. The largest is the Imperial Palace in Beijing, which covers 178 acres. Built by a Ming emperor in the early 1400s, the site now comprises 980 buildings with 8,886 rooms. It hasn't been used as a residence since the 1920s, when the last emperor of China went into exile.

The world's tallest house is also the world's largest. Built in India near Mumbai just four years ago, it is 568 feet high, about the height of your typical 60-story office tower. There are "only" 27 floors, including a two-story fitness center and six floors of family residences to house the owner, his wife, his mother and his three children.

Oh yeah, it has nine high-speed elevators and three rooftop heliports.

No one knows how much it cost to build the place, but estimates say it was close to $2 billion, which also makes it the world's most expensive house.

Otherwise, the most expensive house, or at least the one with the highest advertised price, is the $165 million that was asked for a former home of newspaper tycoon William Randolph Hearst. The 75,000-square-foot villa is set on 6.5 acres in Beverly Hills and has 29 bedrooms and 40 bathrooms.

(This is not to be confused with the Hearst Castle in San Simeon, Calif., which was the world's most expensive house until the place near Mumbai was built.)

The tallest resident-only building is in Dubai. Princess Tower is 1,356 feet high, with the highest occupied floor at 1,171 feet. But the title of tallest residential apartments belongs to Burj Khalifa, also in Dubai, which combines a hotel, offices and apartments. There, the highest residential floor -- the 108th -- is at 1,263 feet.

Also worth mentioning is that eight of the world's 10 tallest residential buildings are in Dubai. The other two are in Australia and Shenzhen, China.

The tallest hotel is in Dubai, too. The JW Marriott Marquis stands at 1,165 feet. But the largest hotel is in Las Vegas, where the Venetian and Palazzo towers have 7,017 rooms between them. The oldest hotel dates back to 705 A.D. in Japan, whereas the smallest is in Germany and can accommodate no more than two guests at a time.

Of course, those big houses have to be filled with furniture. So there's the world's largest chair -- more than 98 feet tall -- in Austria; the longest sofa -- 2,920 feet -- in Norway; the largest rocking chair -- 42 feet high -- in Cuba, Mo.; and for the deck, the largest deck chair -- 31 feet wide and 27 feet high -- on display in the U.K.

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