Student Loan Debt Preventing Homeownership, Hampering Economy

Student Loan Debt Preventing Homeownership, Hampering Economy

Speaking before an audience at the Boulder Summer Conference on Consumer Financial Decision Making,Consumer Financial Protection Bureau (CFPB) director Richard Cordray spoke on the effects of student loan debt on the future of the housing market. The oft-criticized director commented on the growing $1.2 trillion of student loan debt, and how student debt will have negative ramifications on the housing market in the future.

“It is not an overstatement to say that we are now standing at a precipice when it comes to the magnitude and consequences of our student loan debt in this country. We have reached $1.2 trillion of student loan debt, second only to mortgage debt as a category of consumer finance. This fast-growing burden is a pressing problem and a matter of grave importance to public policy in America,” Cordray began.

He cited his experience at the CFPB listening to consumers, whose complaints range from their student loan debt burden as preventing them from buying a home, opening a small business, or starting a family. The obligation to pay back student loans has a ripple effect across the entire economy.

Cordray continued, citing a Pew study that found 40 percent of younger households, classified as homes headed by someone under the age of 40, as having student loan debt.

“Tuition costs have risen rapidly. Debt has risen even faster than tuition and default rates have increased. Graduates are earning less because of the recession. It has become increasingly clear that a weak labor market and rising student debt are putting the squeeze on young people,” Cordray said, noting the more than 7 million Americans in default on student loans.

He continued, “Notably, it appears that young people are not forming new households at the same rate they did in the past. Many are living with parents or sharing space with their peers. In fact, according to a recent Pew survey, more than one-third of young people aged 18 to 31 are living with their parents—a jump of nearly 18 percent since the start of the recession.”

A recent National Association of Realtors study found that 49 percent of Americans cited student loan debt as a “huge obstacle” to homeownership. Typically, higher education yields higher incomes, but post-recession this trend seems to be dwindling, if not petering out altogether. Cordray noted a Federal Reserve Bank analysis that said for the first time in at least a decade households with student loan debt are less likely to have a mortgage than those without student loan debt.

Furthermore, student loans can have a crippling long term effect on the economy, with younger borrowers unable to invest in small businesses or save adequately for retirement. The CFPB director called the current state a “vicious cycle.”

Cordray encouraged servicers to play by the rules and treat borrowers fairly in order to help mitigate some of the financial problems created by burdensome student loans. “Together with greater outreach to encourage more borrowers to utilize affordable repayment options on federal student loans, these efforts will help promote more latitude for those laboring under significant levels of student loan debt to find ways to better manage these obligations,” Cordray said.

He concluded that the current system is problematic, and that public policy decisions currently being made regarding higher education are “embarrassing.”

“In the end, we need to recognize as a nation that we cannot afford to put higher education on an unsustainable basis for people whose ambitions and abilities should mark them out as our future leaders. It is also profoundly discordant with basic notions of equal opportunity if young people with merit, and who lack only the means, are unable to advance or end up crushed under student loan debt for much of their lives,” he concluded.


9.7 Million Homeowners Underwater

9.7 Million Homeowners Underwater

The number of underwater borrowers continues to fall, but that was about the only good news Zillow had to report in its latest look at negative equity.

The company released Tuesday its Negative Equity Report for the first quarter, revealing an estimated 9.7 million homeowners continue to owe more on their mortgage than their home is worth. That number, down from about 9.8 million in Q4 2013, represents about 18.8 percent of mortgage-paying Americans, according to Zillow.

Conservative estimates from the company call for a negative equity rate of 17 percent by this time next year as home value growth moderates.

While the continuing downward trend in underwater rates is a welcome sign of improvement in the housing sector, the company notes that the “effective” negative equity rate, which includes homeowners with 20 percent or less equity in their homes, remains elevated at more than one in three.

“The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” said Zillow’s chief economist, Dr. Stan Humphries.

With so many borrowers lacking enough equity to comfortably sell their homes and afford a down payment on a new one, Humphries expects inventory to remain choked, driving home values higher and making affordability a greater concern.

What’s more, Zillow found that homes priced in the bottom third of home values nationwide have a greater negative equity rate, with 30.2 percent of that population currently underwater compared to 18.1 percent of those in the middle tier and just 10.7 percent in the top tier.

For those underwater borrowers who happen to be in the lower tier of home values, listing their home will remain difficult without engaging in a short sale or bringing cash to the closing table—another contributor to the supply shortage and a major obstacle for buyers in search of starter homes.

“It’s hard to overstate just how much of a drag on the housing market negative equity really is, especially at the lower end of the market, which represents those homes typically most affordable for first-time buyers,” Humphries said.

Lawsky to Look at Fee-Based Services at Non-Banks

Lawsky to Look at Fee-Based Services at Non-Banks

The New York regulator who earlier this year launched a probe into the practices of non-bank mortgage servicers revealed Tuesday he plans to expand his investigations to include their relationships with affiliated firms.

Delivering remarks at the Mortgage Bankers Association’s 2014 National Secondary Market Conference, Superintendent Benjamin Lawsky of New York’s Department of Financial Services said the agency plans to dig into fee-based ancillary services at non-banks such as Ocwen and Nationstar.

While Lawsky said there’s “nothing inherently wrong” with companies and affiliates providing ancillary services—ranging from debt collection to loan sales—he asserted that a lack of regulatory oversight up to this point has resulted in “potentially conflicted arrangements” between servicers and their affiliates.

“Servicers have every incentive to use these affiliated companies exclusively for their ancillary services, and they often do,” he said. “The affiliated companies have every incentive to provide low-quality services for high fees, and they appear in some cases to be doing so.”

Lawsky’s remarks are the latest in a saga that has played out since February, when the regulator halted a mortgage servicing rights (MSR) transaction between Wells Fargo and Ocwen, citing concerns about the latter company’s rapid growth over the year and allegations of customer abuse.

He followed that up with letters to both Ocwen and Nationstar inquiring about their practices and their relationships with affiliated firms.

Both servicers have exploded onto the scene, quickly climbing into the ranks of the top five servicing companies as they purchase MSRs from banks looking to offload their portfolios to a more lightly regulated operation.

While both Ocwen and Nationstar have pledged to work with Lawsky’s office to resolve his concerns, they maintain no wrongdoing has been committed.

Still, Lawsky remains unconvinced.

“Regulators have a responsibility to ask whether the purported ‘efficiencies’ at non-bank mortgage servicers are too good to be true,” he said.

Default Rates Decline in April to Lowest Post-Recession Rate

Default Rates Decline in April to Lowest Post-Recession Rate

Data through April 2014 showed a decline in the national default rate from March, according to S&P Dow Jones Indices and Experian for the S&P/Experian Consumer Credit Default Indices. The indices are a comprehensive measure of changes in consumer credit defaults, released monthly.

The national composite default rate recorded its lowest post-recession figure of 1.11 percent in April. The month’s number was the lowest default rate since June 2006. Default rates for first mortgages continued their downward slide, settling at 1.01 percent in April.

The first mortgage default rate in April was the seventh consecutive month of decline, and was the lowest level seen since July 2006. However, the second mortgage default rate saw an increase, which posted at 0.63 percent for April 2014.

“The prospect for further gains in economic activity and consumer confidence is good as shown by the continuing decline in consumer credit default rates,” says David M. Blitzer, Managing Director and Chairman of the Index Committee for S&P Dow Jones Indices. “Consumer default rates have stabilized at levels similar to those seen before the financial crisis.”

Blitzer continued, “The national composite is nearing a historic low while the auto loan reached a historic low in April. Neither the one-month uptick in consumer price inflation nor the Federal Reserve’s winding down of its bond buying threaten either consumer default rates or overall economic activity.”

All five cities (New York, Chicago, Dallas, Los Angeles, Miami) measured by the S&P/Experian saw default rate decreases for the second consecutive month. New York experienced the largest month-over-month downturn, dropping 18 basis points below March’s default rate.

All five cities posted default rates below the previous year’s rate.

Tornado Ravaged Area Seeing Reduced Foreclosures

Tornado Ravaged Area Seeing Reduced Foreclosures

Nearly a year after a tornado devastated the town of Moore, Oklahoma, foreclosure activity is slowly dwindling in the area, specifically in Oklahoma City, Oklahoma. RealtyTrac found that bank repossessions spiked 58 percent in the four months following the tornado but are pulling back as the area experiences recovery.

Foreclosure filings were reported on 898 properties in Oklahoma City in the first four months of 2014, a decrease of 19 percent compared to the first four months of last year prior to the tornado.

“The decrease of overall foreclosure activity in Oklahoma City is economically driven by the growth and expansion of the city since the tornado hit,” said Sheldon Detrick, CEO of Prudential Detrick/Alliance Realty, covering the Oklahoma City and Tulsa, Oklahoma markets. “Unemployment is down resembling pre-recession levels and Boeing just completed its move into Oklahoma City, which has helped elevate the economy in the city and its surrounding communities.”

“A year after the Moore tornado devastated the southern part of Oklahoma City, we are starting to exceed pre-recession levels in all categories of the market,” Detrick added.

Underwater homes are also declining—out of all the properties with loans, 14 percent are equity rich while 10 percent are considered seriously underwater.

As of the first quarter of 2014, 11 percent of the 1,267 properties in the foreclosure process in Oklahoma City had been vacated by the owner, compared to the national average of 21 percent.

“Vacant foreclosures pose a threat to the housing market in Oklahoma City because neither the distressed homeowner or the foreclosing lender are taking responsibility for maintenance and upkeep of the home—or at the very least facilitating a sale to a new homeowner more likely to perform needed upkeep and maintenance,” said Daren Blomquist, VP at RealtyTrac. “These properties drag down home values in the surrounding neighborhood and contribute to a climate of uncertainty.”

The median home price for residential properties in Oklahoma City in March 2014 was $119,250, down 1 percent. March marked the sixth consecutive month where Oklahoma City median home prices decreased on a year-over-year basis.

Economy and Housing Market Projected to Grow in 2015

Economy and Housing Market Projected to Grow in 2015

The good thing about economic recovery, even when it’s not living up to expectations, is that forecasters always remain optimistic for tomorrow.

Despite many beginning-of-the-year predictions about spring growth in the housing market falling flat, and despite a still chugging economy that changes its mind quarter-to-quarter, economists at the National Association of Realtors and other industry groups expect an uptick in the economy and housing market through next year.

The key to the NAR’s optimism, as expressed by the organization’s chief economist, Lawrence Yun, earlier this week, is a hefty pent-up demand for houses coupled with expectations of job growth—which itself has been more feeble than anticipated. “When you look at the jobs-to-population ratio, the current period is weaker than it was from the late 1990s through 2007,” Yun said. “This explains why Main Street America does not fully feel the recovery.”

Yun’s comments echo those in a report released Thursday by Fitch Ratings and Oxford Analytica that looks at the unusual pattern of recovery the U.S. is facing in the wake of its latest major recession. However, although the U.S. GDP and overall economy have occasionally fluctuated quarter-to-quarter these past few years, Yun said that there are no fresh signs of recession for Q2, which could grow about 3 percent.

A major key to housing growth, of course, is job growth. The U.S. overall has recovered nearly all of the eight million jobs lost to the Great Recession and, according to Yun, employment is expected to grow 1.6 percent this year and 1.9 percent next. Similarly, the GDP is on course to grow 2.2 percent this year and about 2.9 percent in 2015.

Eric Belsky, managing director of the JointCenter for Housing Studies at Harvard University, said that growth in the stock market and the recovery in housing, along with pent-up demand, are major factors driving the economy right now, leading economists like Yun and Belsky to suggest that housing will improve, just not on the schedule many other economists had expected.

One thing to keep in mind is that 2014’s spring housing sales figures are being compared to those from 2013, which saw impressive gains‒‒existing-home sales rose more than 9 percent to nearly 5.1 million last year‒‒after four years of sagging sales. Because of tight inventories and rising sales last year, the median existing-home price rose 11.5 percent to just over $197,000. Still, according to NAR, sales figures will likely decline about 3 percent over the rest of this year to just over 4.9 million, then trend up to more than 5.2 million in 2015.

According to Yun, home price growth is likely to moderate from more new home construction. “Based on our forecast for this year, the median home equity gain over three years is expected to be $40,000,” he said. “A gap between new and existing-home prices from rising construction costs shows that prices are well supported by fundamentals in most of the country.”

Housing starts have stayed below 1 million a year for the past six years, but need to reach the long-term average of 1.5 million to balance the market. “Because of the prolonged slowdown in construction, we now need 1.7 million housing starts per year to catch up,” Yun said.

The sluggish recovery in housing starts is greatly affected by the fact that construction costs are rising faster than inflation. Add to that labor shortages in the building trades, and the onerous financial regulations preventing small banks from giving construction loans to small local builders, and it’s no wonder why construction starts are behind schedule, Yun said.

Dennis McGill, director of research for Zelman & Associates in New York, offered some hope. McGill said that his firm’s most recent analysis of Census Data shows an average of only 720,000 housing starts annually from 2010 through 2013. “But our projections over the next five years exceed an average of 1.9 million,” he said. “We won’t ramp up to that level right away, but if you average housing starts for the entire period from 2010 to 2019, it would be about 1.44 million.”

McGill added that there is “a strong tailwind” to housing starts. “We’re starting to see capital come back to single family construction, which is very favorable,” he said.


Experts Undecided on Cause of Affordability Concerns

Experts Undecided on Cause of Affordability Concerns

A new survey from Zillow finds real estate and investment experts are divided on the likely culprits behind affordability concerns in the market.

In a survey of 106 economists, real estate experts, and investment and market strategists, Zillow found a slight majority—28 percent—pinned the most blame for declining affordability on stagnant income growth across the country, even as the rest of the economy has moved in a generally positive direction.

At the same time, the number of respondents pointing to “abnormally high rates of home price and rent appreciation” as the main problem was only slightly smaller at 27 percent.

The third most commonly cited answer, following close with 21 percent of responses, was the “abnormally low supply of homes currently available for sale or rent” due to a lack of sellers coming into the market and low rates of new home construction.

Still, given the host of issues hampering the housing market, “one could probably make the case that things could, and maybe should, be a lot worse,” said Dr. Stan Humphries, chief economist for Zillow, noting that tight credit also presents a problem of its own.

“We’re certainly in a better spot than we were just a couple years ago, but the housing market remains far from anyone’s definition of ‘normal,'” Humphries said. “It will take years for these issues to either be adequately addressed through policy, or to naturally work themselves out of the market.”

While affordability conditions are still generally favorable as a result of historically low mortgage rates, cost is becoming a more serious problem for homebuyers in a number of metros, including some of California’s largest markets, Zillow reported in a recent study.

The survey also turned up concerns about price growth inflating a new bubble if it continues at such a high pace. Those who say price spikes are the root behind affordability problems were most likely to express worries of a bubble, with 90 percent saying there is moderate to high risk—if one isn’t already inflating.

On average, panelists in the survey forecast nationwide home value appreciation of 4.4 percent through the end of 2014, nearly a point above the historical average of 3.6 percent. Growth next year is expected to fall to 3.8 percent, dropping again in 2016 to 3.4 percent.

Predictions ranged from a low of 3.2 percent this year to a high of 5.8 percent.

“After narrowing over the past year, in this quarter, the spread between the forecasts of the most optimistic and pessimistic groups not only expanded, but widened by a degree we have not seen in the four-year history of this survey,” said Terry Loebs, founder of Pulsenomics, which conducts the quarterly survey for Zillow. “Time will tell whether Washington’s unfolding plan to expand mortgage credit will have a durable, positive impact on home values, housing confidence, and market expectations.”