Reuters Money

Why household debt reduction could jumpstart economy

If we could move beyond the housing crisis, where would we find the seeds of a broad-based turnaround?

Right now most of the country is anguished over the slack job market and global economic uncertainty. Almost half of U.S. homeowners are feeling house poor. That is, most folks can’t get their wealth out of their homes or even put a realistic price tag on it. They may even be stuck in a house that’s worth less than its mortgaged value.

This morass has led to a massive liquidity and consumer psychology malaise. Is there a way out? Yet there are signs that the clouds are parting.

Ingo Winzer, president of Local Market Monitor, a real estate information service, says he is seeing indications that lower consumer debt and increased spending may lead to an uptick.

“After 28 straight months of pulling back on the reins, consumers have finally found a level of debt that feels good enough to allow more spending to flow,” Winzer surmises.

“During those 28 months, the level of consumer debt per person — let’s leave mortgages out of this — fell 13 percent, from $8,600 to $7,500. During the last recession with a real estate crash, 20 years ago, consumer debt dropped 14 percent.”

Yet what about all of those millions of homes on the market, the unresolved foreclosure mess and an economy that isn’t really creating any new jobs?

AARP sues Wells Fargo, Fannie Mae over reverse mortgage foreclosure

AARP’s legal battle against wrongful reverse mortgage foreclosures has shifted from government regulators to lenders.

The AARP Foundation Litigation unit filed a class action lawsuit yesterday against Wells Fargo Bank and the Federal National Mortgage Association (Fannie Mae), charging that they failed to allow surviving spouses and heirs of reverse mortgage borrowers to purchase the property for the appraised value after loans came due — typically after the borrower’s death.

AARP’s litigators won an earlier round on reverse loan foreclosures in April, when the U.S. Department of Housing and Urban Development (HUD) reversed itself on a rule that was forcing spouses borrowers into foreclosure.

At the heart of the dispute is what happens to the most popular type of reverse mortgage, the Home Equity Conversion Mortgage (HECM), which is regulated and insured by HUD passes on to a spouse or an heir. The HECM is designed so that borrowers can never owe more than the value of their homes, even though the loan balances rise over time. The intent was to assure elderly borrowers that HECMs were safe.

AARP’s litigation against HUD sought foreclosure relief for spouses of deceased reverse mortgage borrowers. It charged that HUD illegally implemented two important rule changes in 2008. The first stated that the non-recourse provision would apply only when properties are sold. That meant that if the spouse dies, the surviving non-signing spouse would have to repay the full outstanding HECM balance, even if the home’s value had dropped.

HUD also changed a rule stating that a borrower could sell a secured property for 95 percent to 100 percent of its appraised value. The new rule stated that only “arm’s-length transactions” would be allowed under that range of prices. That effectively meant that a non-signing surviving spouse could retire a HECM only by repaying the full loan balance, but that a third-party buyer could purchase the property for as little as 95 percent of appraised market value.

The first AARP lawsuit alleged that, as a result of the rule, many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing that exceeds the current value of the property. The lawsuit argued that the rule violates other HUD rules and existing contracts between reverse mortgage borrowers and lenders, and that it negates a key purpose for which borrowers had been paying insurance premiums.

Trading up in a down housing market

There’s no getting around it: In much of the country, this is a terrible time to unload your home.

Roughly 11 million mortgages are now “underwater” and over a million properties are in foreclosure proceedings. Even after all the carnage, home prices in 20 U.S. cities just dropped by the most in 18 months.

Yeesh. It’s enough to bring to mind that classic quip of gallows humor: It’s always darkest before it’s pitch black.

But even if it’s not the perfect time to shop your home, sometimes life intervenes. A new child enters the world, or a toddler becomes a teen. Homeowners with growing families often have no choice but to trade up to something bigger and better, because the walls are starting to feel like they’re closing in.

And so begins the complicated kabuki dance, of selling one home and buying another. Because there’s so much at stake, with large sums of money on both sides of the equation, it can be a highly stressful moment. Kind of like those movie scenes where sweaty bomb-defusers are trying to figure out which wire to cut: One false move, and you could blow up your finances for good.

That’s what terrified Claire Benson-Mandl. This year, the healthcare consultant in Vancouver, Canada, traded up from a townhouse to a freestanding home with an extra suite and a roomy private yard. She did it so her family, which includes a 3-year-old daughter, would have space to grow. But the home juggling didn’t come without some sleepless nights.

“It was horrific, just terrible,” remembers the 40-year-old. “I’m sure the anxiety took a toll on my lifespan. There were times when I was considering crawling to friends, family, even Facebook associates, wondering how I was going to come up with the money to bridge the gap.”

Reverse mortgage loans headed for third straight declining year

The reverse mortgage industry is headed for its third straight year of declining loan activity in the wake of the housing crash and the exit of three of the market’s biggest lenders.

Reverse mortgages are available only to homeowners over age 62. They allow seniors who need cash to tap their home equity while staying in their homes. The most popular loan type is the Home Equity Conversion Mortgage (HECM), which is regulated and insured by the U.S. Department of Housing and Urban Development (HUD).

New loan activity was down 37 percent in 2010 from the peak year in 2008, and 2011 will be another down year, according to John Lunde, president of Reverse Mortgage Insight, which tracks industry performance data.

The steep drop in 2010 brought the industry down to a total of 72,638 new loans. That decline, Lunde says, resulted mainly from a decision by HUD to reduce the percent of a home’s value that could be accessed through a reverse loan – the principal limit – by 10 percent. The change reflected caution by HUD, which insures HECM loans, in the wake of the housing crash.

This year, three of the biggest reverse mortgage lenders announced plans to exit the business — removing significant marketing and sales firepower from the market, at least temporarily. Bank of America, Wells Fargo and Financial Freedom all said they would stop accepting new loan applications, although all will continue to service existing loans. Together, these three companies accounted for about 35 percent of the reverse lending market, according to Lunde.

Bank of America’s exit in February has already had a dampening effect on the industry. “We’ve noticed a down trend since Bank of America stopped taking applications,” Lunde says. Wells Fargo announced its plans in June, so it’s too early to say how the company’s exit will impact the market.

But overall, Lunde expects 2011 to be another down year for reverse lending. “The industry was on pace to grow before the exits. This year’s decline will be all about these companies leaving the market.”

It’s time for banks to pay back their debt to the rest of us

The devilish deficit dance going on in Congress right now has been a convenient distraction for big U.S. banks. They’ve not only escaped new taxes for now, but they also are relishing their taxpayer bailout by earning robust profits.

Except for Bank of America, the major U.S. banks are doing just fine, thank you. Yet for all of the abundant generosity and forgiveness of the American people, have banks lent out enough money to Americans to make a difference to the economy at large?

No. Banks are lending less to consumers than they did in 2007, the year before the full-blown financial meltdown, according to recent Federal Reserve Consumer Credit tallies.

Outstanding consumer credit was $2.5 trillion in 2007 compared to $2.4 trillion through May of this year. Revolving credit was down fivemo percent in the first quarter of this year. Total consumer lending was down about $100 billion in 2010 and 2009 alone from 2007 levels.

The net effect was less money flowing to consumers, who are the engine of the U.S. economy. Even if you wanted to build that addition to your home or buy a foreclosed home, good luck getting a large loan from a bank — unless you have perfect credit ratings.

Banks’ bowstring-tight standards for mortgages and home-equity loans triggered the lending squeeze. The Fed’s July 13 Monetary Policy report told the story:

“Mortgage originations trailed off with the end of the refinancing wave that occurred last fall, when interest rates declined … Bank lending through home equity lines also remained extraordinarily weak, reflecting in part tight lending standards amid declines in home prices that cut further into home equity.  Both credit card and other consumer loans from banks contracted, on balance, over the first half of the year.”

Luxury real estate: How to snag a deal on a foreclosure or short sale

Opportunities to buy foreclosed — or soon-to-be foreclosed — luxury homes are on the rise. But watch out for the pitfalls that could sour what seems like a sweet deal.

“We’re certainly seeing more of those properties coming to market and more of those properties foreclosed on,” says Rick Sharga, senior vice president of RealtyTrac Inc., publisher of the largest database of foreclosure and bank-owned property records.

Foreclosures of homes valued at more than $1 million increased by 90 percent between 2007 and 2010, a RealtyTrac analysis found. Banks had been reluctant to foreclose on higher-end properties due to the limited number of potential buyers, but Sharga says he expects more higher-end foreclosures in the future.

“There are bargains to be had,” Sharga says. But “unless you’re absolutely in love with the property,” hold off until you know you’re getting a great deal, he notes. Foreclosures sold at prices an average 27 percent below non-foreclosed property in the first quarter of 2011, he says.

James Reid, a businessman from Anchorage, Alaska, was looking to pick up a house in the Seattle area to avoid staying in hotels on his regular trips there. He and his wife found a property on Puget Sound that had sold for $1 million-plus and was on its way to foreclosure. While the price to get the two-bedroom, two-bathroom waterfront home was discounted in a short sale to about $750,000, Reid said he made a cash offer of $650,000.

“We were reluctant to purchase a short sale home because of the horror stories we’ve heard about closing, negotiations, time,” he said. The Reids were also building a vacation home and didn’t want any more hassles.

They learned that while the seller might be okay with their offer, it was still up to the mortgage holder to agree to the price, since a short sale is an agreement to accept less money than is owed to avoid the more cumbersome and lengthy foreclosure process. The first mortgage holder agreed. But a second mortgage holder that did not. After a lot of negotiating, the deal was sweetened to $730,000 and closed in about three months, Reid said.

Real estate: How to buy a luxury home with cash

Cash is king in high-end real estate this year, serving to stabilize the market as tight credit conditions and depreciated home values continue to plague the embattled real estate sector.

At least 30 percent of all purchases were financed with cash between mid-April and mid-May, according to the May 2011 Realtors Confidence Index by the National Realtors Association, and the numbers are even more robust for the luxury property market.

In the Fort Lauderdale, Florida area, 57 percent of all single-family homes purchased and priced over $1 million were cash buys between Jan.1 and May 31 of this year, says Vickie Arcuri, an agent with EWM Realtors. In the million-dollar plus condo market, 42 out of the 47 units sold during the same time period were cash purchases.

The south Florida market is particularly hot for out-of-state and foreign investors, who often find it more difficult to secure financing.

“Tight credit and lending criteria are some of the reasons why cash is so popular and it significantly affects the upper-end of the market,” says Arcuri.  Jumbo loans — those too big for underwriting by Fannie Mae and Freddie Mac — typically have higher interest rates than government-backed mortgages. The loan amount that falls into jumbo loan territory varies from one local real estate market to

another. In the Fort Lauderdale area, a jumbo loan is anything above $620,000.

Wells Fargo exit underscores trouble in reverse mortgage industry

The country’s largest reverse mortgage lender is exiting the business, saying the loans have become too risky in the current climate of falling home values.

Wells Fargo & Co. said last week it will stop originating new reverse mortgage loans at the end of June, expressing concern about rising loan defaults and the threat of foreclosures foreclosures among seniors. The bank — which accounts for 26 percent of the market — will continue to service 125,000 existing loans it has already written. Wells Fargo’s decision follows Bank of America’s exit from the market in February.

Reverse mortgage foreclosures have grown rapidly over the past two years. While borrowers aren’t required to make monthly mortgage payments, they can end up with a loan in default if they fall behind on their property taxes and insurance payments.

Reverse mortgages are available only to homeowners over age 62. They allow seniors who need cash to tap home equity while staying in their homes. Unlike an equity line of credit, repayment of a reverse mortgage typically isn’t due until the homeowner sells the property or dies.

But falling home values in the aftermath of the 2008 financial meltdown and real estate collapse have created new concerns about reverse mortgages.

The rising number of non-performing loans has raised concerns about the ugly prospect of seniors losing their homes, and also about the risk of losses for the Federal Housing Administration Insurance Fund, which insures the loans. A report last year by the U.S. Department of Housing and Urban Development’s (HUD) Office of Inspector General estimated that the fund’s liability from potential foreclosures could cause a $1.47 billion loss. The fund collects hefty fees from HECM loans to finance its insurance — two percent of the home value, plus 1.25 percent of the ongoing balance. The latter fee was increased last year from 0.5 percent.

Wells Fargo worried about its inability to assess borrowers’ ability to keep up with insurance and tax payments, according to Franklin Codel, Wells Fargo executive vice president and head of national consumer lending. Under the Home Equity Conversion Mortgage (HECM) program — which is administered by HUD — lenders can’t turn away home owners over age 62 who have sufficient home equity, even if they have limited assets or income.

After the housing bust, what’s next?

Beyond the double-dip U.S. housing recession, is there a future for the American home market? What I see emerging as growth magnets are established city enclaves and “new urbanist” communities that resemble old-style neighborhoods without the sprawl. They are close to public transportation, walkable and loaded with culture and amenities. They personify the new American dream.

Unfortunately, I also see the slow death of the “spurb,” a word I needed to coin for my book The Cul-de-Sac Syndrome to describe sprawling, car-addicted ex-urban areas far from central cities. While I think many inner suburbs will do fine and prosper, the next wave of real-estate growth favors vibrant cities and energy-efficient communities.

Before I eulogize the spurb, it’s time for a serious housing policy discussion. I agree with Edward Glaeser, Harvard economist and author of Triumph of the City, that the post-war government homeownership policy has over-subsidized suburban growth at the expense of cities. It’s outdated, wasteful and needs to change.

“Homeownership subsidies were a bribe to leave cities for the suburbs,” Glaeser told the Congress for the New Urbanism on June 3. “We need to rethink our fetish for suburban homeownership. It’s risk-enhancing, regressive and bad for the environment.”

More to the point: While suburban homeownership has been a linchpin of the American dream, it’s become an economic pit for millions.

In an era of rising taxes, decaying infrastructure and global warming that “little pink house for you and me” may not make sense anymore. It’s energy intensive to heat and cool and you have to drive everywhere. Wages have not kept up with rising energy costs, home maintenance and property taxes.

While Glaeser told me he sees a “long stagnation” in housing prices, I’m much less optimistic. In many areas, housing prices may not recover for a generation, if at all. If you examine the areas most overbuilt and sprawl-centric, they are also damaged by a freefall in prices and foreclosures: Central/Southern California, Las Vegas, Phoenix, South Florida. I don’t think it’s a coincidence.

Communities not keeping pace with graying home owners

A report issued today on the nation’s housing market is full of all-too-familiar news on the state of America’s housing industry. But one statistic from The State of the Nation’s Housing stands out: home owners are going  gray.

The number of U.S. households headed by someone over age 65 will jump 35 percent in the coming decade as baby boomers age, according to the report from the Joint Center for Housing Studies at Harvard University (JCHS).

Aging home owners will add needed ballast and stability to the housing market. They tend to have less debt and more equity built up in their homes, and they move less frequently. But the graying trend also points to some big opportunities and challenges for the housing industry, and for communities serving an increasingly gray population.

Overall, this year’s JCHS study doesn’t offer much hopeful news: millions of owners remain underwater on their mortgages; existing home sales remain depressed and new home sales remain near record lows. High vacancy rates and foreclosures continue to place downward pressure on prices. Nothing is likely to change, JCHS reports, until demand turns upward with a broader economic and jobs recovery.

“While the sharp declines in both home prices and interest rates have left homes in many places more affordable than they have been in decades,” says Eric S. Belsky, the managing director of JCHS, “stubbornly high unemployment and tightened lending standards have limited the ability of many first-time buyers to capitalize on the situation.”

“The state of the nation’s housing,” he adds, “is sobering.”

Against that backdrop, the graying trend points toward some challenges and opportunities. Contrary to stereotypes of seniors moving to golf communities or other types of senior living communities, most older Americans aspire to age in place. That means staying in the homes they already own, or downsizing to housing near friends and family — and most will be doing so in the suburbs.