by Rick Roque
They are young, tech-savvy, debt-burdened, and cash-strapped. The entire American housing market economy depends on their participation, but the credit markets see them with apprehension. They are the elusive first-time home buyers; the missing, yet uncertain element in a full-blown recovery of the real estate market in the United States.
A generally accepted assumption of real estate macroeconomics estimates that 40 percent of housing market participants must be first-time home buyers so that the market can be efficient and beneficial for the overall economy. In early 2013, U.S. News and World Report cited statistics that placed the percentage of first-time home buyers at just 35 percent. An updated article, however, puts that estimate closer to 40 percent.
Has the participation level of first-time home buyers really increased five percent in just a few months? Probably not. What is changing, however, is the profiling of these newcomers to the housing market. Real estate and marketing analytics firm Doorsteps recently issued new information on first-time home buyers and their reasons for approaching the housing market with caution.
The Young Millennials
Generation X made it through the dot-com bubble, the housing bubble and the Great Recession. Many of them were first, second and even third-time home buyers during the housing bonanza of the early 21st century. The time is nigh for Generation Y to take their turn as the great hope of the housing economy.
Married couples and single females in their early 30s are the most likely candidates to buy their first home under current market conditions. Their average income is a respectable $62,800 per year, but many of them are saddled with about $30,000 in student loan debt. Only about 11 percent of single millennial males are in the market for a new home.
It is clear that Generation Y cares about location, but young house hunters are not too crazy about long commutes. More than 15 percent are not willing to compromise when it comes to driving a long distance to get to work. It is important to remember that Generation X and Generation Y have both migrated from the suburbs in the last few years to be closer to urban centers that present work opportunities.
Financing and Down Payment
Good news for mortgage lenders: Millennials are in the market for a mortgage. The bad news is that most do not qualify. The issues of Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) are still wild cards at this time for first-time home buyers. More than 76 percent of millennials expect to tap into savings when it comes to down payments, and they are willing to sacrifice vacations and entertainment expenses to accomplish this.
Banks with heavy real estate-owned (REO) portfolios should also take note that only 35 percent of the new first-time home buyers will shun a foreclosed home. The great majority will consider purchasing distressed and REO properties.
Not part of this article is my own observation the Real Estate Investment Trust, Hedge Funds and small private investors are purchasing as much housing inventory as possible because this segment of the market will rent, if they can not buy at this time, rather than move in with mom and dad.
by Diana Aqra | 29 Apr 2013
The mortgage market will likely have a difficult time making its business model work
around the giant student debt bubble growing in the United States, mortgage and
real estate experts say.
The amount of student loan debt issued in the US has nearly tripled from $350 million in 2004 to nearly $1 trillion in 2012, making it very difficult for the mortgage industry to find first-time homebuyers — a critical element of a
functioning housing market.
According to the Household Debt and Credit: Student Debt report by the Federal Reserve in
February, at the end of 4Q12, there were about 39 million borrowers in the US with outstanding student loan debt, of which 17.5% — or 7 million — were delinquent.
These are the people who will have an exceptionally hard time qualifying for or affording a mortgage, industry professionals explained.
“With delinquent student debt, mortgage origination is very difficult,” according the Federal Reserve report. The share of new mortgages being originated for borrowers with student loan debt dropped from roughly 9% in 2005 to 5% in 2012,
while the share of new originations for borrowers who were delinquent on their debt dropped from 2% to nearly zero.
“Rising student loan debt will increase the overall debt obligations of the newest generations of first time home buyers, leaving less for a mortgage payment,” said Mark Fleming, Chief Economist at CoreLogic, a real estate research and
Fleming was part of a mortgage industry panel held in February called Supporting Homeownership, in which industry experts debated the most pressing issues facing the future of homeownership. In a press release by Radian Guaranty — the host of the panel and one of the largest US private mortgage insurers — Fleming said, “Based on historical norms, we have a net deficit of homebuyers now, with underwriting standards becoming very tough and student debts serving as a
Changes in consumers’ debt profile and life events
Fleming added in a separate emailed statement that despite mortgage affordability [low interest rates], debt burdens “will reduce the amount of housing purchased and potentially delay the decision to buy a home.”
The 2012 Annual Profile of Home Buyers and Sellers by the National Association of Realtors reflected that, on average, people are waiting until they are 42 years old to buy their first home, up from 39 years old in 2010. More debt means
“significant changes to lifecycle events,” according to Mark Kantrowitz, the creator of FinAid.org, publisher of FastWeb.com, and author of several financial aid and planning publications. This means that there is a low likelihood for
borrowers in their 20s and 30s (who make up about 66% of all student loans outstanding) to buy a home anytime soon.
For the roughly seven million borrowers who have already defaulted (90-days or more past due) on their loans, the prospect of buying a home in the near future is even bleaker. According to RealtyPin.com, a home buyers’ website, it could take years before a defaulted student loan clears from a borrower's history.
Little Relief for Student Debt
There could be hope for rising student debt in the US if there were practical relief options for borrowers, but there simply isn't, according to Kantrowitz. When the student loan industry consolidated in 2011, and the Federal government became
the “direct” lender of all student loans, competition plummeted, he said. The number of non-bank student lenders dropped from 60 before the financial crisis to six in its aftermath, he mentioned.
Now, the six select government-contracted lenders (who service 85% of all student loans) have little reason to offer serious refinancing or principal forgiveness because they have a great deal of "control and flexibility,” over the market, he added.
Instead, the real fix for the student debt problem would be early financial planning and counseling for borrowers before they take out loans, Kantrowitz said. Although there has been a great deal of improvement in loan disclosures and financial aid education at the college level, he said, there is still room for a great deal of improvement in overall financial planning for younger generations.
Although CoreLogic’s Fleming explained that “the mortgage market is well prepared to address these first time home buyer constraints with existing first time home buyer loan products and counseling programs,” it seems more likely that the mortgage industry may just have to wait until student debtors make room in their lives for a mortgage.
With the cost of college remaining high and the majority of youth still desiring higher education, debt industries may have to come up with more creative ways to achieve both affordable education and homeownership.
Wells Fargo and Citigroup have halted the vast majority of their foreclosure sales in multiple states following the release of new guidance by the Office of the Comptroller of the Currency.
The abrupt slowdown came in response to the OCC's April release of minimum standards for foreclosure sales, which are usually the final act in the foreclosure process.
Within two weeks of the release of the guidance, Wells Fargo, Citi and JPMorgan Chase all but stopped foreclosure sales, which are usually the point of no return in the foreclosure process. JPMorgan has since resumed its normal volume.
The halt is most dramatic with Wells, the nation's largest mortgage originator. The bank's foreclosure sales in five Western states—California, Nevada, Arizona, Oregon and Washington—dropped from as many as 349 a day in April to fewer than 10 a day across the entire region, according to Foreclosure Radar, a California real estate monitoring firm.
"Wells Fargo has temporarily postponed certain foreclosure sales while we study the revised guidance from the OCC," a spokeswoman for the bank wrote in response to questions from American Banker. The bank expects the delay will be brief.
Citi did not immediately respond to a request for comment. JPMorgan acknowledged that it temporarily halted foreclosure sales "out of an abundance of caution," but says it has resumed them after validating that its processes comply with the OCC guidance.
The OCC acknowledged that some banks had drastically cut back on foreclosure sales. It declined to say if its April guidance was the result of new perceived shortcomings in the industry.
"The OCC did not direct a slow down or pausing," agency spokesman Bryan Hubbard says. "However, if servicers are not certain they are meeting these standards, pausing foreclosures is a responsible and productive step."
The significance of the banks' move is hard to gauge. New foreclosure filings continue unabated, searches of court records in California and Florida suggest.
It is not clear what—if any—specific concerns caused the banks to rein in sales. But the banks' steps are an echo of the 2010 foreclosure halt that kicked off several years of wrenching procedural scrutiny of the mortgage servicing industry.
"That [the robo-signing debacle] was the only other time we've had a similar event where a bank slowed down significantly," says Sean O' Toole, Foreclosure Radar's founder.
The OCC guidance is significant because it applies to all OCC-regulated bank servicing, rather than specific consent orders. Most of the requirements—presented in a list of 13 questions banks should ask themselves before selling a home—are remedial. Question No. 1, for example, is "Is the loan's default status accurate?" Question No. 5 asks whether borrowers are protected from foreclosure by bankruptcy. Question No. 7 asks if the borrower is in an "active trial loss mitigation plan," otherwise known as a modification.
"Failure to comply with this guidance may result in unsafe and unsound banking practices, noncompliance with foreclosure related consent orders, as applicable, and/or require rescission of completed foreclosures," the OCC warned.
Neither Wells nor the OCC identified specific areas of concern for the bank. But Wells has faced scrutiny of its foreclosure handling, most recently from New York Attorney General Eric Schneiderman. At a heavily publicized press conference earlier this month, Schneiderman alleged that Wells Fargo has "flagrantly violated" its obligations to homeowners under a 50 state mortgage servicing settlement.
"There have been problems with Wells' servicing for a long time," says Ira Rheingold, executive director of the National Association of Consumer Advocates. "Everybody focuses on Bank of America but Wells has just as much trouble and the OCC is obviously serious about having them comply with the consent orders."
Wells has been the target of intense criticism for several years from consumer advocates, who forced CEO John Stumpf off the stage during a speech in March, protested at his home and urged the OCC to give Wells a failing Community Reinvestment Act grade based on its foreclosure practices.
Wells also has invited criticism from consumer advocates for failing to provide principal reductions and to report data on loan modifications, short sales and foreclosures based on race and income.
Joseph Smith, the independent monitor of the national mortgage settlement, is expected to issue a report in June. Many consumer advocates have criticized the top five mortgage servicers—B of A, JPMorgan Chase, Citi, Wells Fargo and Ally—for claiming to have met 304 different servicing standards and reforms as part of the $25 billion national settlement with 49 state attorneys general and federal regulators.
"It's a safe assumption that they're not meeting all the requirements and this is likely a preview, an early signal of what Joe Smith is going to find," Rheingold says.
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