TheMReport — News and strategies for the evolving mortgage marketplace.
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Th e M Rep o RT | 15 cover story T omorrow is another day," one proud homeowner declared on the silver screen. The problem is that for many potential homebuyers it's another day of dealing with credit issues, paying off student debt, worrying about rising home prices, and even fretting about the future of longstanding mortgage incentives. So is the American Dream of buying a home, well, gone with the wind? MReport asked a num- ber of housing experts, and their responses ranged from "night- mare" to "alive and well." Views are as varied as the home-buying process is complicated. "America has definitely not woken up from the dream of homeownership," said Nick Halaris, owner of Atlanta-based Sycamore Property Management. "America has from its incep- tion been about land, land, land, and the allure of real estate will remain a part of our mythology and ethos for generations to come. At the end of the day, American families all want to own." It is the hope of a owning a piece of the American dream that keeps Americans aiming for homeownership. "In our experience, the Dream of home ownership in America is alive and well," said Jeff Bonham, owner of The Bonham Group at Keller Williams Realty in Springfield, Missouri, citing the National Association of Realtors (NAR) annual survey of consumer reasons for purchasing a home. In it, the "overwhelming" top response, listed among 30 percent of respondents, was the consumer's desire to own a home. The "desire to own a larger home" came in as a distant second at 12 percent of respondents. Housing affordability has become a major concern in recent months, however. According to the NAR's latest quarterly report, the median single-family home price rose in 73 percent of the markets observed, or 119 out of 164 metro areas, in fourth quarter of 2013, with 26 percent or 42 of those metros posting double-digit gains. The national median exist- ing single-family home price in the fourth quarter was $196,900, up 10.1 percent from $178,900 a year earlier. "While affordability has taken a hit over the past year, things aren't nearly as bad as some of the recent reports would have you believe," said Rick Sharga, former mortgage company president and current EVP at Auction.com. "I don't think people have neces- sarily stopped dreaming about homeownership; I think many are facing a nightmarish set of marketplace realities making that dream hard to realize." Those harsh realities can be boiled down to two key structur- al challenges, according to Sharga. Wage stagnation, particularly in the middle class, makes any increase in home prices or inter- est rates very problematic. Then there's the combination of strin- gent new lending rules combined with student loan debt "that will make it impossible for many potential first time homebuyers to enter the market." "America may be experiencing a housing nightmare," said Alice Sorenson, chief investment officer at LRES, a valuation and asset management company. "That is, prospective homebuyers are real- izing that they may have to forego some niceties in order to afford a home. They will have to estab- lish priorities, and many will not want to do that." Tom Ward, founder of Path2Buy Homeownership Coaching Program said, "I think the first time homebuyer is confused. 'Do I buy or do I keep renting?'" In three recently completed fo- cus groups with new Generation Y renters, Ward discovered their top two homeowning concerns are the status of mortgage interest and real estate tax write-offs and uncertainty about whether the value of the housing market will ever appreciate as it once did. "The focus needs to shift back to what it was when our parents made the decision to buy a home after World War II," he maintained. "Shelter and a place to raise a family were the key concerns then. If house prices go up, then it's a bonus; it's not automatic. And the same goes for the write-offs. We should view it as a bonus. Build equity the old fashioned way, one month of principal reduction at a time. If you take a 30-year fixed-rate loan, eventually your payment will be less than your rent, since that increases each year." Historically, the first time buyer accounted for nearly 40 percent of all residential purchase transac- tions, but that number slid last year to 38 percent, noted Bonham. "A large percentage of that drop has been created by tighter lending requirements and the lack of a subprime market," he added. Halaris said, "The subprime generation definitely got ahead of itself in the first decade of the 2000s and will struggle to attain the dream [of homeownership] as they work through hordes of stu- dent debt and bad credit scores. But they will be back!" Sub Weighed T he subprime submarine ef- fect on both the market and economy has quite understand- ably caused many of the nation's lenders to hold tightly to credit scores of 640 or more. Naturally, this has significantly reduced the number of first time buyers able to qualify for a mortgage. The tide does seem to be turning though. "Subprime lending is already coming back and will continue to do so," Halaris said. "We might not see the extremes of 2007 again, but I believe that not only will there be a healthy subprime mar- ket, but we'll also see the return of the dreaded I/O loans, the 3-, 5- and 7-year ARMs, etc. Housing is such a huge component of the U.S. economy that the Fed, Congress, and the president will all put increasing pressure on the heavily regulated banking and mortgage industry to provide the products necessary to keep it all going." Word of the largest U.S. mortgage lender getting back into subprime lending would make major waves across the industry and could boost housing demand from those borrowers forced to the sideline during the recovery in home prices. However, Wells Fargo refuted a mid-February Reuters report that it was "tiptoe- ing back into subprime home loans again." The bank's loosening of its credit qualifications does send major signals to industry analysts and those potential borrowers looking for a way to make their dream of homeownership a reality. Wells Fargo issued this statement to MReport: "Wells Fargo's reduc- tion in its minimum credit score requirements on FHA purchase loans from 640 to 600 will increase access to credit—especially for first time and low- to moderate- income home buyers—consistent with FHA program guidelines, regulatory standards, and our own responsible lending principles. We made this decision after careful analysis of the current credit envi- ronment, discussions with HUD to ensure that we clearly under- stand their expectations and input from valued advocacy groups to ensure that we are appropriately balancing access to credit with responsible lending." Whether called subprime lend- ing or whatever euphemism fi- nancial institutions use these days, there is still a market for it, said LRES' Sorenson. Wipe away the stigma and view it as a real deal range on the credit risk spectrum for underwriters to evaluate. "Because of the higher risk to the lender, the borrower will " Setting the Stage