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‘Duty to Serve’ Helps Borrowers

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | October 13th, 2017

Federal mortgage agencies Fannie Mae and Freddie Mac have long been tasked by Congress with serving areas that don’t get much attention from the private sector. And that could help you get a home loan.

Suppose you live in an underserved rural area -- Appalachia, say, or the Mississippi Delta -- or you are in the market for manufactured housing. Getting a home loan in both of those scenarios should be a little easier starting Jan. 1.

That’s the date the two giant funders of mortgage lenders have to start implementing their congressionally mandated Duty to Serve Underserved Markets plans, an idea that goes back to the start of the recovery from the mortgage market implosion of 2008.

Fannie’s and Freddie’s regulatory group, the Federal Housing Finance Agency (FHFA), started to implement “duty to serve” ideas in response to Congress’ 2008 Housing and Economic Recovery Act. But the agencies weren’t required to finalize their plans until this year, or to implement them until next year.

The new, formalized plans focus on three main areas: manufactured housing, rural housing and affordable housing preservation. Why do these companies have a “duty” to serve these areas?

“Numerous areas of the country will continue to experience housing challenges for years to come,” according to Danny Gardner, Freddie Mac’s vice president of single-family affordable housing.

Actually, Freddie and Fannie don’t work with consumers directly. You can’t apply to them for a mortgage. But they do fund the lenders that will make you a mortgage, and their reach is vast.

After a lender closes on a home loan with you, it sells it to Fannie and Freddie. Instead of waiting for you to pay it back a month at a time for 30 years, your lender gets its cash back the same day your loan is sold in what’s called a secondary market transaction. They can then use that money to make another mortgage to someone else.

In short, Freddie and Fannie are the straws that stir the mortgage cocktail. If they say they are willing to fund something -- or if Congress directs them to -- lenders will start to line up, hat in hand. And consumers are the ones who benefit. It’s said that over the years, Fannie/Freddie-funded mortgages have saved consumers an average of a quarter of one percent on their interest rates.

As part of Freddie Mac’s plan, Gardner claims his company “will seek to work to increase loan purchases in the underserved markets mentioned, develop new offerings, conduct market research, build technical skills for industry participants, and expand homebuyer education, community engagement and local outreach.”

If your loan falls in one or more of the duty to serve categories, lenders are going to be putting more spin on the ball very soon. And, like students bringing apples to teachers to gin up favorable impressions, the agencies can choose to go above and beyond.

“Certain impactful activities, including activities that promote residential economic diversity in an underserved market, are eligible for Duty to Serve extra credit,” says the FHFA.

Take manufactured housing. This is a murky area of the lending universe, because sometimes these loans are mortgages, and sometimes they are not. If the home is anchored to a permanent foundation and counted as “real” property (as in real estate), they may get mortgages that can benefit from favorable interest-rate pricing through Fannie and Freddie.

If the home can be moved, as with trailers, they are considered personal property and, in the past, have gotten “chattel” loans, which are often far more expensive than mortgages. Soon, those chattel loans will be eligible for sale to Fannie and Freddie, as will loans for manufactured housing communities. That could make those types of loans less expensive.

In the rural housing market, the duty to serve applies to middle Appalachia, the Lower Mississippi Delta, and a couple of other poorly served regions or groups or people, including agricultural workers, American Indian reservations and the “colonias” that dot the U.S.-Mexican border.

The third area, affordable housing preservation, applies to sustaining low- and moderate-income housing supplied by such federal programs as HUD Section 8 and the Low-Income Housing Tax Credit.

Though there are differences between Fannie Mae and Freddie Mac, Freddie’s plan gives you a good snapshot of the kinds of things both of them plan to do through the year 2020.

Gardner says Freddie will be “working with mortgage originators and other professionals in these communities to help more American families with their housing needs by developing and expanding solutions to some of society’s most persistent housing problems.”

Manufactured housing, for one thing. There is a lot of it. Gardner points out that in 2010, 17 million people lived in nearly 7 million manufactured units in America.

For “real” property, Freddie plans to “work with lenders to increase Freddie’s Mac’s purchases of loans in this important market.” And for “personal” property, Freddie plans to “initiate a chattel pilot offering” and “develop homebuyer education to support chattel financing.”

That’s important, because 80 percent of manufactured housing loans are chattel, so mortgages have not been a big part of that market.

Rural areas are a significant part of the country’s land base, Gardner says. And the problems there are many, not only with affordability but also with “persistent poverty, declining employment opportunities and limited access to financial services.” Freddie will seek to increase financing and homeowner education in these areas.

As for affordable housing sustainability, “Freddie Mac’s efforts to preserve affordable single-family options will focus on two fronts: energy-efficient home improvements and shared-equity programs.” Freddie plans to study both to bring some standardization to highly fragmented markets.

Ultimately, Freddie’s efforts will be to “bring liquidity, stability and affordability to these underserved but deserving markets.” So early next year, start asking your local realty agent and lender if you can get in on the action.

-- Freelance writer Mark Fogarty contributed to this report.

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The Forgotten Costs of Homebuying

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | October 6th, 2017

There’s no doubt that buying a house is an expensive proposition. Anybody who goes into the process thinking otherwise is in for a rude awakening.

Even if the house is a bargain, you’re still paying big bucks -- likely the biggest purchase of your life. And if you’re not paying cash, the interest can run into the tens or even hundreds of thousands of dollars over the life of the loan.

Then there are those heady closing costs, which run anywhere from 3 percent to 5 percent of the price of the house. These are charges like the recording fees and document stamps that local governments charge every time the house changes hands, plus those pesky lender charges for services such as appraisals and land surveys.

Next comes another round of what many describe as “hidden expenses.” They’re considered hidden because buyers tend to focus on the sticker price of the house -- or perhaps even the monthly mortgage payment -- and forget about other recurring costs until they get to the closing table or a month or two later.

These costs include property taxes, homeowner’s insurance, flood insurance, homeowner’s association fees and, of course, utilities. According to Zillow, these can add up to $9,000 annually to your household budget.

But wait! You’re not done yet. You still have your moving expenses to think about. It costs more to hire a moving company than rent a van; consider offering a case of beer to your buddies in exchange for helping with the move.

Either way, though, you’ll absorb some costs that most people don’t think about until they have to. And while you’re at it, don’t forget to budget for setting up your utilities: water, power, cable, internet and more. Many utilities require first-timers to put up big deposits to open accounts.

Now you’ll have to turn your new house into a home. And according to new research from the National Association of Home Builders (NAHB), that means another round of spending for appliances, furnishings and alterations and repairs. If you are building a new house, figure on spending $10,601 in your first year of ownership on these items. If moving into an existing house, you’ll lay out a little less: $8,212. (This compares to only $4,122 spent annually on appliances, furnishings, etc. by people who are not moving at all.)

The NAHB came up with these numbers by perusing data from the Department of Labor Statistics’ consumer expenditure survey.

Not surprisingly, buyers of new houses outspend those buying existing houses when it comes to furnishings. They spend five times more money on things like living room chairs and tables, and nine times more on dining room and kitchen furniture.

Window coverings are another big spending category. And here, new-house buyers shell out four times more than existing homebuyers. But the most expensive item is a sofa, for which new-house buyers spend 60 percent more than existing-house buyers.

But what is puzzling is that new-house buyers also outspend others when it comes to appliances, and spend almost as much on alterations and repairs. Don’t most new houses come with appliances already installed? And doesn’t “new” suggest that no alterations or repairs are necessary, since the house has never been occupied?

For the most part, yes, according to a survey by the Housing Innovation Research Labs, which found that virtually all new homes come with cooking stoves, ranges or ovens. But two-thirds of the houses built in 2015, the latest year for which data is available, had no washers or dryers, and 36 percent had no fridge.

Another head-scratcher is that existing-house buyers shell out only $250 more on repairs and alterations during the first year of ownership than new-house buyers.

As it turns out, buyers of new homes tend to spend their money outside, on things like landscaping, a new driveway or walk, or fences. On the other hand, existing-house buyers put their cash into kitchen and bath remodeling, new heating and air conditioning systems, security systems and flooring -- all items new buyers rarely spend a dime on in that first year.

Meanwhile, a separate study published by the National Bureau of Economic Research (NBER) puts another twist on the homebuyer spending spree. It says buyers -- both new and existing -- burn through “only” $5,000 on top of the purchase price to turn their newfound abodes into their own personalized residences.

This study analyzed spending by 70,000 households from 2001 to 2013, as well as building permits for some 9 million properties. That the study period included the most recent recession, when such spending dropped off the table, accounts, in part, for the roughly $5,000 difference between the NAHB study and that of NBER researchers Efraim Benmelech, Adam Guren and Brian Melzer. But there is no further explanation.

Another interesting point in the NBER study: Homebuyers started to increase their furnishings and renovation spending three months before closing. It peaked during the first month afterward, and started to decline slowly as time went by.

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How to Vet a Remodeler

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 29th, 2017

Finding and evaluating a home improvement contractor is a difficult process. Do it right, and you will be happy with the work. But do it wrong, and your project could be a nightmare.

Unfortunately, most people don’t have a clue how to go about it. According to a survey of its members by the National Association of the Remodeling Industry, customers are asking the wrong questions.

The most common ones: When can you start? When will you finish? What time will you start each morning? What time will you stop working for the day? Are you going to work every day? Can you finish by a certain date? How much will it cost per square foot?

In other words, “How fast and how much?”

Certainly these are important questions, to which you will want answers. But there are far more important things you need to know. After all, you are not only going to be inviting a stranger into your home, you are asking the contractor rip up your house and interrupt your life, perhaps for a long period of time.

Here’s what you really need to ask.

-- License. Ask for the contractor’s license number and confirm it with your state or local government regulator to make sure it is valid and current. Many jurisdictions set minimum experience and educational requirements, and administer exams to make sure the contractor is up to snuff. Fail the test? No license.

Many places also maintain relief funds for homeowners whose projects go wrong and are unable to secure satisfaction. But they cover only licensed contractors.

-- Tenure. How long has the contractor been in business? Generally, the longer, the better. It indicates he or she is a pro and is delivering the work consumers expect.

There are many skilled construction workers who try their hands at general contracting. Typically, those who flounder do decent work, but have no clue about how to run a business.

-- Insurance. By law, remodelers must carry both business insurance and worker’s compensation. If they don’t, you could be liable, especially if someone is hurt while on the job.

Ask for a copy of the certificate of insurance and call the issuing agency to confirm coverage is valid and up-to-date.

-- Verify. Something else to confirm is the company name, address and phone number. Do you really want to hire someone who runs the show out of the back of a pickup truck?

-- Referrals. Get a list of previous customers. But not just any customers: Ask for a list of people whose jobs were similar to what you are contemplating. And request jobs that were completed recently, within the last six to 12 months. Being unwilling to provide references is a bad sign.

The list will probably contain their best customers -- why give out the names of dissatisfied clients? -- but check them out anyway. Obtaining a firsthand description of the way the contractor works can be invaluable, and go a long way toward answering the questions mentioned above.

Also, check the contractor out with your local Better Business Bureau, as well as the state or local consumer affairs agency where you live and where he or she is headquartered.

-- Supervisor. Taking to a nice, well-dressed, well-spoken salesperson is one thing. But you’ll want to know who will actually be the supervisor on the project. If you can meet and speak with him or her, even better. You’ll want to be able to communicate with your contractor, for sure. After all, this is the person who will address your questions and concerns once the project starts.

Now, a few things that indicate the contractor may not be trustworthy:

-- Beware of high-pressure tactics such as “sign a contract today or lose out on special pricing.” Don’t be rushed into making a decision. Take your time. If they want your job, that “special” pricing will always be there.

-- Be cautious about a demand for a large down payment. Many states don’t allow contractors to take more than a certain amount upfront. Certainly, don’t put up more than a third, and never in cash. A contractor who wants nothing in advance is rare, but it usually means he or she is well capitalized and doesn’t need your money to buy materials.

-- If contractors don’t inform you of your right to cancel the contract within three business days, don’t sign anything, and ask them to take a hike. The law requires notification in writing of your “right of recession” if the contract was solicited in your home or someplace other than the contractor’s place of business. This is a grace period that allows you to change your mind without penalty.

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