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A Financing Choice in the Wilderness

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | November 7th, 2014

Credit unions reached a pair of milestones recently, and that's good news for homebuyers.

The nation's 6,557 credit unions passed the 100 million-member mark in June, according to the Credit Union National Association. But more importantly, at least to the housing market, CUs have posted a 10 percent year-over-year increase in mortgage originations as of the first half of 2014.

That means these service-oriented, member-owned cooperatives now have more than an 8 percent share of the home loan market. That's three times what it was prior to the recession.

Granted, purchase-money lending by other institutions is way down, which automatically gives credit unions a larger share. But there's no doubt that while other lenders are losing business, CUs are boosting theirs.

Nearly two-thirds of all credit unions offer mortgages, and those that don't offer them tend to be very small. So some 98 percent of the vast credit union membership is affiliated with institutions in the mortgage business.

Mike Schenk, vice president of economics and research at CUNA, says his members have posted huge membership gains, in part, because they offer financing for new and existing houses.

"Definitely mortgages have played a significant role," Schenk says. "We've seen a very strong increase in originations over the course of the last several years."

Indeed, mortgages currently account for 41 percent of all credit union loans, as opposed to just 25 percent in 2000.

Credit unions are not-for-profit institutions that are controlled by their members. They were first introduced in 1909 to combat the loan sharking and high interest rates that were common at the time among financial institutions serving the working class.

These days, you still have to be a member to borrow money, whether for a house, car or boat. But if you don't have a credit union at work, there's probably one in your local community. Many are either tied to a church or are trade-related -- that is, oriented to an association, organization or union. And most are hardly what you'd call exclusive, meaning that practically anyone can join.

There are several reasons why CUs have gained ground in the mortgage space, not the least of which is that they answer to their members, not a group of outside stockholders demanding a high return on their investments.

"As members, you are the primary focus," says Schenk. "If you have an account, you are an owner and you have a voice in running that institution."

During the financial meltdown, moreover, credit unions refrained from making the toxic, consumer-unfriendly loans that took some lenders to the brink of failure and pushed others over the edge. That's why charge-offs at CUs were only a fourth of what they were for other lenders.

Furthermore, when other lenders hunkered down to weather the recession, credit unions tended to remain fully engaged. And as a result, according to research, consumers trust CUs more than other banking institutions. "People really do realize CUs are acting in their best interest," says the CUNA economist.

Many also realize they can save a bunch of money at their credit union. They usually aren't any cheaper when it comes to interest rates, but CUs tend not to tack on a bunch of superfluous fees that other lenders seem to love.

And because they are local and member-controlled, they are more likely to consider applicants with a story to tell than some underwriter five states over who is forced not to deviate from standard guidelines.

The typical loan amount at credit unions is $130,000, and 70 percent of their loans are the garden variety, plain vanilla, 30-year fixed-rate mortgage. But that doesn't mean they can't be innovative. Several are.

This spring, for example, Mountain American Credit Union, the second-largest in Utah with 488,000 members, was the first mortgage lender in the country to actually close on an electronically signed FHA loan. And earlier this fall, the pioneering CU closed on the first e-signed VA mortgage.

A few more examples:

-- Pentagon Federal, with 1.3 million members nationwide, pioneered a 5/5 adjustable mortgage in which the rate resets every five years to the market rate at that time. Then the Alexandria, Virginia-based institution gave us the 15/15 ARM, which adjusts only once, at the midterm mark.

-- Then there was the five-year fixed-rate mortgage from the 41,000-member National Institutes of Health Federal CU. Dubbed the "see ya" loan, it was basically a refinance product so owners could time a special event -- retirement, for example, or when the kids start college -- to the end of their mortgage payments.

Bottom line: If you've overlooked credit unions as a source of financing, look around. Join one and see what it has to offer.

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Student Debt, Lending Rules Stymie First-Timers

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | October 31st, 2014

Education comes at a price, and not just the cost of the degree itself. We're talking about the inability to take advantage of today's low mortgage rates and stable prices.

Student loans are now cited most often by young buyers as the main expense that prevents them from saving for a down payment. Nothing new there, perhaps. But a new report from a well-recognized real estate consulting firm is the first to quantify the impact.

According to John Burns Real Estate Consulting, some 414,000 new home transactions will be lost this year because of student debt. At the average price of $200,000 per house, that translates to about $83 billion in lost business.

Burns analysts Rick Palacios Jr. and Ali Wolf say that in a typical year, about 8 percent of people aged 20-39 would normally buy a house. But many are weighed down by their student loans. Every $250 per month in student debt reduces young buyers' purchasing power by $44,000, the 30-page report maintains. And of the 16 million people in the first-time buyer cohort, 5.9 million -- 35 percent -- pay more than $250 a month on their school loans.

Indeed, 5.9 million heads-of-household under the age of 40 now pay more than $250 a month in student loans, the Burns company study found. Large monthly payments like this can easily push would-be borrowers over the 43 percent debt-to-income ratio cutoff set by most lenders.

Here's another way to look at the issue: Assuming a median first-time buyer income of $61,000 and a maximum mortgage for the typical first-timer, you'd be able to qualify for a loan of up to $234,000 as long as you carried no extra debt.

But if you have student loans and pay $250 on them per month, your maximum mortgage would be cut to $190,500. If your monthly school debt payment was $500, you'd be able to borrow only $147,000.

Since 2005, the amount of student loan debt has swelled, now exceeding $1.1 trillion, the report points out. That's up from $241 bllion in 2013. And the average balance has nearly doubled during that period, from $10,650 to $21,000.

Historically, better-educated, higher-earning consumers were more likely to become owners by the time they reached 30. But that trend reversed itself in 2012 and continues today. Now, it's 30-year-olds with no history of student debt who are more likely to become owners.

Some 45 percent of all 25-year-olds have some student debt. But that's not the only thing that's holding them back.

Another report, this one from the National Association of Home Builders, says 83 percent of builders polled in August lost sales over the previous six months because their buyers could not qualify for financing.

Of course, contracts can fall through for any number of reasons. But well over half of the builders said lending standards were tight -- too tight for many first-timers to make the grade.

"If 83 percent of the builders lost 9.7 percent of their sales," said NAHB economist Paul Emrath, "that works out to an estimated 18,700 new home sales lost because buyers were unable to qualify."

Said NAHB Chairman Kevin Kelly, a builder from Wilmington, Delaware: "NAHB advocates for prudent lending standards, but we've seen banks and regulators swing the pendulum too far and create an environment where lending standards are too restrictive."

Getting back to higher education. While we understand the value of a degree, the question, at least to the Citizens Financial Group of Providence, Rhode Island, is: Is it worth the price?

Certainly, college grads earn more than those who only completed high school -- perhaps twice as much over their working years. But a study by Citizens Financial found that many grads don't believe going to college was worth the cost.

Indeed, more than three quarters wish they had planned better in paying down their student loans. And while nearly two-thirds of the former students agreed that "going to college enabled me to do great things in my life," a whopping 47 percent said they may not have chosen college at all had they known the impact college debt would have on their lives.

"Despite the well-documented, long-term value of a college degree," commented Citizens' Brendan Coughlin, "too many Americans continue to struggle with paying the rapidly increasing cost after they have graduated."

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Turnkey Investing From Afar

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | October 24th, 2014

Want to invest in a single-family house, but your local market stinks? And you've always been told to buy nearby so you can manage the property yourself?

You could invest in rentals in some far-off -- but really hot -- location, but who in the world wants to deal with the hassle of being a landlord? Especially in a place you can't get to at a moment's notice.

A relatively new online real estate investment platform called HomeUnion solves these problems. Based in Irvine, California, it provides all the services necessary for individuals to invest remotely in single-family rentals.

HomeUnion's "cradle-to-grave," turnkey service spans the life of the investment, from finding decent properties in respectable neighborhoods that will offer an acceptable return, to advising you on buying the place, finding tenants, managing the property and even selling when the time comes.

HomeUnion "offers two major value propositions," says its CEO, Don Ganguly.

First, it allows investors to put their money in the places that offer the best deals in terms of return on capital. Typical returns run 6 percent to 8 percent for cash investments, after expenses, and 8 to 17.5 for leveraged -- or mortgaged -- investments (again, after expenses).

And that's just cash flow. Appreciation, while possible, is not figured into those figures, according to Ganguly. That's "way better than you can get with other fixed-income investments," he points out.

The company analyzes dozens of factors to identify markets where investments make sense, including housing prices, rental rates, vacancies, trends, employment and population growth. It also relies on input from local experts with a more intimate knowledge of a particular market.

Once the proprietary analytics are completed, it "puts boots on the ground" in the best places to identify and vet individual properties, according to Ganguly. It is currently putting money to work in 15 locations, including Austin, Chicago, Dallas and Houston, and will soon announce its entry into five more places. The goal is 25 markets by year's end.

Typically, the company looks for properties in the $80,000-$100,000 range in nice neighborhoods. It particularly disdains expensive communities where rents don't pencil out. The goal is to find houses in places where the monthly rent is about 1 percent of the cost of the house -- for instance, a $100,000 house that generates $1,000 in rent.

Next, HomeUnion puts together a management team to operate the house on the investor's behalf. The team makes sure the house is in showing condition, finds and vets tenant candidates, takes care of leases, collects the rent and is on-call during occupancy should a problem occur.

In other words, all the things you'd have to do to manage the property, but can't do from afar.

Management fees run between 7 percent and 10 percent of the monthly rent, or about what you'd pay if you dealt directly with managers.

On top of that, HomeUnion charges a 1 percent asset-management fee that covers, among other things, handling the logistics of money transfers, contract negotiations with vendors and managing expenses.

Ganguly stresses that his young company is not a listing site. Rather, it is a platform to help investors identify and purchase single-family homes to rent. It is "hands-free investing for individuals to invest remotely," he says.

Another thing HomeUnion is not is a flipping service, in which you buy and sell within six months. On the contrary, says Ganguly, "we're looking for folks who are looking for stable incomes for at least three to five years."

Of course, if you buy a place using HomeUnion's platform, you can hold it as long as you like or sell whenever you desire. That's completely up to each individual investor.

Realize, though, that while investing in single-family rental houses is more stable than the stock market, rentals are not exactly liquid assets.

There's also no guarantee on your returns. "We're buying a lot of data" in searching for strong markets, says the CEO, "but nothing is without risk."

Currently, the company has maybe a thousand clients who run the gamut from retired individuals to young folks who see rentals as a good way to generate income. But Ganguly says that if the platform attracts the interest of just 100,000 of the 8-10 million people who earn enough to dabble in the rental market, "we'll be in pretty good shape."

"For the past two years, we have been plotting our real estate investment management program in a limited number of markets, and fine-tuning our models and asset-management practices so investors can find and buy properties based upon their own preferences, without having to become hands-on landlords," says Ganguly.

"We can now offer individual investors the efficiency and simplicity enjoyed by institutional investors."

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