Baby boomers have reached, or are nearing, the age at which many will be down-sizing, moving from into smaller dwellings or retirement communities. The question is: Who will buy the homes they currently own?
The answer is not nearly as clear, or as optimistic, as it would have been a decade ago, a report by the Bipartisan Policy Center, concludes.
The expected buyers – members of a generation demographers have dubbed “Echo Boomers” – have the numbers to absorb the homes their parents (and grandparents) will be selling, the report, “Demographic Challenges and Opportunities for U.S. Housing Markets,” points out. But their finances are fragile and may prevent them from moving up the housing ladder, or from entering the housing market at all, according to the report.
Income, or the lack of it, is the major problem. Real median income increased more or less steadily between 1975 and 2000, enjoying a couple of major growth spurts during that period. But since 2000, the report notes, median income hasn’t increased much at all, ending the decade about where it was in 1998.
The recession, from which the economy appears finally to be recovering, forced many would-be home buyers to remain in the rental market and led many young adults to delay forming their own households, or to dismantle households they had formed – and move in with their parents.
About half of the 25-34-year olds who took that route (back to their parents) had incomes that would have put them below the poverty line otherwise, hardly I a position to rent dwellings, let alone to purchase them. Absent these and related trends, the report says, there would have been nearly 2.7 million fewer vacant homes cluttering the housing market today.
Even as the economy recovers and job prospects improve, the home buying capacity of the Echo Boomers will be limited, the report says, by the high levels of credit card and student loan debt many of them carry – a prospect that bodes ill not just for the Boomers but for the housing market as a whole, according to the report, which emphasizes the importance of developing thoughtful, well-targeted housing policies going forward.
“Housing policies will likely affect individuals’ decisions about whether, when and with whom to form households,” the report notes. “Even more, the housing policies that emerge by the end of the 2010s will influence whether many households buy or rent, where they decide to live and whether houses currently owned by Baby Boomers are sold, rented or leave the housing stock entirely. Whether for newly forming households or long-established ones, therefore, housing policies that emerge by the end of this decade have the potential to affect significantly the wealth portfolios of tens of millions of American families.”
FORCING THE ISSUE
A federal judge has cleared the way for a class action suit challenging the “force placed” insurance a mortgage lender forced a homeowner to purchase. Although the suit targets only one lender (Wells Fargo), it threatens an industry practice that is both common and extremely lucrative for lenders and insurers.
Mortgage contracts typically give lenders the right to purchase insurance policies for owners whose policies have lapsed and force owners to pay the cost. Consumer advocates have long argued that the premiums on force-place policies are much higher than those the buyers were paying previously, and unjustifiably so.
The Florida class action suit – Williams v. Wells Fargo, et. al. — goes further, alleging that the premiums the insurance company (QBE) charged were inflated artificially by illegal kickbacks the company paid to Wells. Evidence submitted by the plaintiffs indicated that QBE paid about 40 percent of the premiums as commissions to subsidiaries and to Wells, while paying only about 7 percent in claims – a ratio that most state insurance regulators would find unacceptable.
An American Banker article published earlier this year found that force-placed premiums industry-wide were as much as 10 times the cost of policies purchased voluntarily. That article and consumer complaints have focused regulatory attention on the force-placed issue. The New York State Department of Financial Services has launched an investigation of the policies and the Office of the Comptroller of the Currency has expressed interest in the issue as well. Fannie Mae recently announced that it intended to establish a relationship with an insurance company to control the issuance and pricing of force-placed policies on loans Fannie has purchased.
“The (proposal) is structured to ensure that insurance costs are significantly reduced," a Fannie Mae statement announcing the proposed rule stated. The company also plans to issue guidelines detailing the circumstances under which lenders can force-place insurance and specifying the charges they can require borrowers to reimburse.
"Our goal is to reduce costs for Fannie Mae and thereby taxpayers, and to reduce a barrier for homeowners becoming current on their loans," Andrew Wilson, a spokesman for Fannie Mae, told Reuters.
Bank regulators in New York have said their investigation will continue, notwithstanding Fannie Mae’s announced policy change, and attorneys representing plaintiffs in the Florida class action have said the litigation will not stop there.
"There will likely be national class actions," one of the plaintiffs’ attorneys told American Banker.
A HEAVY LOAD
If college graduates aren’t tossing their caps into the air as often or as enthusiastically as in times past, it’s probably because they are too heavy. Rising college costs and strained family incomes have forced an increasing number of students to fiancé some or all of their educations with student loans. As a result, student debt outstanding not totals a staggering $870 billion as of the third quarter of last year. And that burden hangs heavy over the economy, a report by the Federal Reserve Bank of New York, warns.
Student loan debt outstanding now exceeds consumer credit card balances, according to the report, even though only 15 percent of consumers hold student debt compared to 80 percent who have credit cards.
“Student loan debt is not just a concern for the young,” the report said. “Parents and the federal government shoulder a substantial part of the postsecondary education bill.”
A recent report by the National Council of Bankruptcy Attorneys (NCBA) estimated that 17 percent of parents whose children graduated in 2010 took out loans to finance their education, up from 5.6 percent in in 1992. More than 80 percent of the attorneys responding to an association survey said they have seen a substantial increase in the number of clients seeking relief from student loans in recent years.
The New York Fed report, based on an analysis of Equifax credit reports, found that 40 percent of the borrowers in this pool had outstanding student loans, with an average balance of $23,000; approximately 10 percent owed more than $54,000; 3 percent owed more than $100,000; and an estimated 27 percent of the 37 million borrowers with outstanding student loans currently have past due balances of 30 days or more – about double the delinquency rate for other consumer loans.
Those statistics “don’t fully capture” the delinquency picture, the report notes, because a significant proportion of borrowers and balances are not yet in the repayment cycle. The implication …for future changes in the student loan delinquency rate are a very important area of research,” the report concludes.
The combination of rising student debt load and declining incomes, making repayment increasingly difficult for many, “could very well be the next debt bomb for the U.S. economy,” William Brewer, head of the NACBA, has warned. His major concern is not the near-term impact on the economy of loan defaults, but the longer-term implications if students are unable or unwilling to borrow the money they need to attend college. “Our best and brightest won’t necessarily get the education that they need to move us forward,” he said.
CASH IS KING
With high unemployment rates and sagging incomes keeping many would-be buyers out of the market and stricter underwriting further limiting the pool of buyers able to qualify for loans, investors paying cash for homes have a decided edge.
Cash buyers accounted for more than one-third of the home sales completed in January, according to an analysis by Campbell Surveys ad Inside Mortgage Finance. That compares with an average of 10 percent that industry executives would view as “normal,” this report suggests.
Desultory returns on other investments are making real estate an attractive option to many investors; their ability to close quickly without obtaining a mortgage makes investors popular with lenders anxious to clear their bulging REO portfolios, who are willing to accept the steep discounts many investors demand for that reason, according to Bob Davis, executive vice president of the American Bankers Association (ABA).
"It's all about the calculation of which buyer will result in the most loss mitigation to the bank," he explained in a recent interview with National Public Radio.
Although investor discounts are depressing home prices in the near-term, they are also helping to clear the back-log of foreclosed homes more quickly – a good trade-off, in the opinion of many analysts, who say home prices can’t begin to stabilize until inventory levels decline.
Foreign investors are also doing their part to help. They bought $41 billion in residential real estate last year, the National Association of Realtors (NAR). If you include homes purchased by immigrants in this country for two years or more and by foreign visitors with visas of six months or more, that total doubles.
When Japanese investors were gobbling up American real estate in the 1980s, lawmakers and commentators were horrified, warning that foreign nationals might own the entire country. Foreign purchases have elicited no such outcry this time, real estate columnist Lew Sichelman notes in a recent article, because “they are helping unclog the logjam of unsold and foreclosed houses.”
Michael Fratantoni, vice president of research at the Mortgage Bankers Association, agreed, telling Sichelman, "At a time when there are a lot of homes on the market and an overhang of distressed properties, an active foreign demand relieves these worries."
MORTGAGE FRAUD
Dicey loans originated four years ago, at the height of the housing boom, are boosting mortgage fraud statistics today.
The Financial Crimes Enforcement Network (FinCEN) reports that financial institutions filed 19,934 suspicious activity reports citing mortgage fraud in the third quarter of last year, a 20 percent increase over the same period in 2010. More than 60 percent of the filings targeted loans originated at least four years ago; nearly 30 percent were originated between October 2009 and September, 2011. Most of the filings involved fraudulent loan applications, but a large number also involved questionable loan modification, debt elimination and refinance programs targeting distressed homeowners, FinCEN said.
“As housing markets look to recover, criminals persist in their efforts to prey on struggling homeowners, while financial institutions continue to uncover apparent fraud as they work through their portfolios of earlier mortgages now in default,” FinCEN Director James Freis, said in a press statement, adding, “FinCEN will continue to monitor these reports and work closely with law enforcement to help them track illicit actors.”
California sits at the epicenter of mortgage fraud activity, according to the FinCEN report, with three of the metropolitan areas (San Jose, Riverside and Los Angeles) generating the highest per capita suspicious activity reports. California was second in the state ranking (Hawaii was first) followed by Nevada, Florida and Delaware.
FinCEN also noted an increase in the number of unauthorized disclosures of suspicious activity reports – instances in which bank officials or their attorneys improperly disclosed the filings to the individuals cited – a violation of the agency’s rules.
FinCEN officials expressed their concern about that issue in an advisory, warning financial institutions “and in particular, the lawyers that advise them, of the requirement to maintain the confidentiality of [SARs],” the advisory said. “FinCEN is concerned that an increasing number of private parties, who are not authorized to know of the existence of filed SARs, are seeking SARs from financial institutions for use in civil litigation and other matters.”
