American Renters Getting Squeezed

Rents continue to inch upwards and many renters say they know it would be cheaper to buy a home than rent, but they can’t qualify for a mortgage, Reuters News reports.

With rising demand for rentals, landlords are increasing their rents and some cities are even posting double-digit percentage rental increases annually. Apartment rents have risen at their highest rate since 2007, with costs soaring over the last three quarters, according to the research firm Reis Inc.

Landlords feel they can charge more since vacancies have reached at a 10-year low at the same time that demand has surged. Asking rents have jumped nationally to $1,091 during the second quarter, the largest increase since the third quarter of 2007, Reis reports. The average effective rent is $1,041 for the second quarter, increasing 1.3 percent over the previous quarter.

“The improvement in rents is pretty pervasive,” says Ryan Severino, a Reis senior economist. “Even in places like Providence and Knoxville, which you don’t think of as hotbeds for apartment activity, landlords felt the market was strong enough to raise rents on their tenants.”

New York remains the market with the lowest number of vacancies and also the priciest place to rent by far. The monthly rent there averages $2,935, which is more than $1,000 higher than the second-priciest place to rent in the U.S., San Francisco.

Many finance experts recommend budgeting no more than 30 percent of household income to pay for housing costs. Yet nearly 40 percent of Americans are now paying more than a third, according to a U.S. Census Bureau survey. In New York, one-third of households spend more than half their pay on rent.

“We have falling incomes, rising rents, and nothing but substantial upward pressure on those rents,” says Chris Herbert, director of Harvard University’s Joint Center for Housing Studies. “And nothing in the cards suggests it will turn around anytime soon.”

Meanwhile, for those who are able, purchasing a home has never been more affordable. It’s cheaper to purchase a home than rent in basically every major U.S. city, according to John Burns Real Estate Consulting.

But securing financing remains a renter’s biggest obstacle to buying a home. Banks are pickier in what they require to qualify for a mortgage. Loans for home purchases reached a 12-year low last year as lenders tightened their credit standards, according to Inside Mortgage Finance. Now, potential borrowers often need an average credit score of 762 to get a mortgage backed by mortgage giants Freddie Mac or Fannie Mae, according to Morgan Stanley research.

Source: “Americans Squeezed by Higher Rents, Tight Credit,” Reuters News (July 5, 2012) and “U.S. Apartment Rents Rise at Highest Rate Since ’07,” Reuters News (July 5, 2012)

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Report: FHFA Oversight of Fannie, Freddie Falls Short

According to a report by the inspector general of the Federal Housing Finance Agency (FHFA), loose oversight of thousands of contractors tasked with maintaining foreclosed properties caused neighborhoods to deteriorate and exposed Fannie Mae and Freddie Mac to fraudulent billing.

From 2008 through most of last year, the FHFA did not conduct the necessary targeted reviews of the two firms’ foreclosure management programs or the nearly 10,000 contractors hired to maintain distressed homes.

As of the end of December, Fannie Mae and Freddie Mac owned a combined 179,000 homes — three times their inventory from just four years earlier.

Source: “Federal Report Faults Fannie Mae and Freddie Mac Oversight of Repossessed Homes,” Palm Beach Post (July 4, 2012)

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Couple Seeks Do-Over in New Home Construction

A couple building a new home in the Hamptons was halfway through the construction of their new home, when they made a discovery that caused them to pull the brakes on the project and order the entire house be torn down. Their discovery: There wasn’t enough room to fit a pool in the backyard.

Eric and Margaret Friedberg ordered the house be torn down and started from scratch, The New York Post reports. The house, builders say, was built in the wrong spot and the couple had no room for a backyard or pool.

“Mistakes happen,” Margaret Friedberg told the New York Post. “I love my architect and my builder. This was a surveyor’s problem.” Search Homes For Sale

This was the second time the couple had demolished a home on the property, which they originally purchased for $2.478 million in May 2011. An upgraded 1,674-square-foot home that once stood there was torn down to make room for this new one.

The teardown of the most recent home had about $150,000 invested so far in the construction of the project. The framing of the first floor and partial framing of second floor had to be dismantled, and the 45-by-45-foot concrete had to be smashed, The New York Post reports.

Source: “Hamptons Couple Tears Down House After Construction Error,” The New York Post (July 2, 2012)

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Underwater Home Owners Say They’re Unable to Move

Several home owners say they want to sell their home but they can’t because they still owe too much on their mortgage.

While home prices have seen a slight uptick in many areas in recent months, home owners are still waiting to see a bigger jump to take them from underwater to above water on their mortgages.

Underwater homeowners’ reluctance to sell is causing inventories of for-sale homes to shrink at a time when home buyer demand has picked up considerably, USA Today reports.

“When you get [houses priced] under $125,000, it’s like a frenzy,” Linda Schlitt-Gonzalez, owner-broker of a Coldwell Banker franchise in Vero Beach, Fla., told USA Today. “It’s not unusual to have five offers.”

Inventories of homes for-sale tend to be the lowest in housing markets that have the most underwater home owners, according to CoreLogic.

Forty-five percent of home owners with mortgages have less than 20 percent of equity in their homes, according to data provider CoreLogic. In general, home sellers need at least 20 percent in “equity to generate enough cash to turn around and buy a similar or larger home using a conventional loan,” USA Today reports.

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“We thought, if demand was there, there would always be sellers. But instead the supply is sitting on the sidelines,” Stan Humphries, Zillow’s chief economist, told USA Today. “The inventory phenomenon … will make for a more volatile housing recovery than what we initially expected.”

Some major markets with the least amount of supply in homes for-sale — less than a three-month supply as of May — are Seattle, Phoenix, Denver, Sacramento, the San Francisco Bay Area, Washington, D.C., and portions of Southern California, according to the 18 major markets Redfin tracks.

“In order for us to see a more stable housing recovery, the basic rule of economics requires prices to change enough to bring a new wave of sellers on the market,” says Michael Orr, real estate expert at Arizona State University.

Source: “Housing Recovery Hindered by Negative Equity,” USA Today (July 2, 2012)

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Several States Try to Stall Foreclosures

Twenty-five states have bills in front of lawmakers that seek to make it more challenging for banks to foreclose on home owners, The Wall Street Journal reports. But lenders argue that the bills are roadblocks that are hindering a housing recovery.

For example, on Monday, California state lawmakers approved a bill that would apply a set of stricter rules on mortgage servicers who foreclose on home owners and open servicers up to new legal liabilities. While some say it will help ensure the foreclosure process is more fair and transparent, others have argued that it will lengthen the process of foreclosures in the state. The bill still must be approved by the state’s governor to go into effect.

Other states have adopted, or are considering, similar guidelines on foreclosures. Nevada lawmakers last fall approved a bill that made it a felony for lenders to make any false representations when signing off on foreclosures. The bill caused foreclosures to plunge in the state, but housing analysts say it created a backlog of severely delinquent mortgages.

Bank officials are concerned that states’ new rules will slow the foreclosure process and prolong the foreclosure crisis.

“Should all 50 states decide to go down their own path, lenders are going to have multiple processes, each with their own little nuances, and every single penny of that cost will be borne by tomorrow’s borrowers,” David Stevens, chief executive of the Mortgage Bankers Association, told The Wall Street Journal.

What’s more, the mortgage industry says the bills do little to truly help borrowers avoid foreclosure altogether but rather just drag out the process. Search MLS

“It would allow consumers to extend, in theory payment-free, the entire proceeding for months while waiting for the deliberation of the modification effort,” Stevens says.

Source: “Banks Face Foreclosure Regulation by States,” The Wall Street Journal (July 1, 2012), and “California Homeowner Bill of Rights Passes, Sent to Governor,” HousingWire (July 2, 2012)

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County Considers Using Eminent Domain to Tackle Negative Equity

In San Bernardino County, an idea is being explored that would apply the concept of eminent domain to solve the problem of underwater homes in the area.
Through eminent domain, the government can take private property from an owner if it can be argued that a greater public interest would be served by doing so. The property owner does receive “just compensation” for the seizure, but the owner does not get to negotiate the amount. Instances of this have been more commonly seen in cases where highways or public facilities needed to be built.
The use of eminent domain proposed in San Bernardino County and supported by the cities of Ontario and Fontana differs from more familiar applications in that it involves the forced purchase of homes from underwater borrowers at “fair” market value. This use of eminent domain was first presented by Robert C. Hockett, a Cornell University law professor.
Dubbed the Homeownership Protection Program (HPP), the solution considered proposes to have the local government purchase private label loans from current, underwater borrowers by using financing from Mortgage Resolution Partners. The program would have the original homeowner stay in his or her home, but with a new mortgage and a lower principal balance.
Mortgage Resolution Partners first approached San Bernardino County with the idea. In order to further consider the program, the Board of Supervisors in San Bernardino County approved a resolution to establish a Joint Powers Agreement (JPA) with Ontario and Fontana and other cities that decide to join.
Amherst Securities explained in a report that when the loans are refinanced, proceeds would be used to pay back investors who helped finance the program.
Even though many argue that something needs to be done to help underwater homeowners, Amherst Securities disagrees with the approach the JPA is considering.
“We believe this use of eminent domain sets a troubling precedent by targeting performing loans in private label securities,” the report stated.
The program’s lack of a mechanism to protect homeowners against a less than fair price was also noted as a concern in the report.
Between the two cities that approved the resolution, Amherst found that 3,165 loans meet the program’s criteria.
In the report, Amherst stated it believes that the intent of the program is to buy the targeted loans out of the trusts at 75-80 percent of automated valuation model (AVM) on the property.
A joint letter issued by 18 organizations, including Securities Industry and Financial Markets Association, Association of Mortgage Investors, and National Association of Home Builders, expressed strong opposition towards JPA’s consideration of the program.
“If eminent domain were used to seize loans, investors in these loans through mortgage-backed securities or their investment portfolio would suffer immediate losses and likely be reluctant to provide future funding to borrowers in these areas. It is essential to remember that investors in mortgage-backed securities channel the retirement and other savings of everyday citizens through their investment funds,” the letter stated.
The letter also stated that program could “further depress housing values in the county by restricting the flow of credit to home buyers.”
In an opinion piece published in the New York Times, Robert Shiller, professor of economics and finance at Yale, expressed support for the program’s use of eminent domain to address underwater mortgages.
“The original mortgage holders, the investors in the new mortgages, the homeowners and the nation as a whole will generally be better off. There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway,” wrote Shiller.
He also contended that the “true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.”

By: Esther Cho

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