platform workers) often enjoy the advantages of non-traditional arrangements, while contingent gig workers (on-call, contract, and temp workers) are treated more like employees without the ben- efits, pay, and stability that come with traditional employment.” “Tech-mediated gig work,” according to the National Law Employment Project, “is the latest iteration of a 50-year-old pattern of workplace fissuring – the rise of ‘non-standard’ or ‘contingent’ work that is subcontracted, franchised, temporary, on-demand, or free- lance. Gig companies are simply using newfangled methods of labor mediation to extract rents from workers, and shift risks and costs onto workers, consumers, and the general public.” “By 2023,” says MBO Partners, “over half (52 percent) of the private workforce is forecast to have spent time as independent workers at some point in their work lives.” We have long had independent contractors such as accountants and lawyers who are sole practi- tioners. What’s new and different is that the concept is spreading to fields where workers have tradition- ally been corporate employees. The growing gig economy disrupts the old definition of employment. The problem is that, at this point, we can’t be sure that gig employment means steady and reliable future income. Case in point: a 2018 study by the JPMorgan Chase Institute found that between 2013 and 2017, earnings for freelance drivers fell 53 percent. One can argue that much contin- gent freelance income — and thus the ability of such workers to borrow and repay — will face big challenges in future years. Here’s why: First, there are few barriers to entry. Lots of people can become dog walkers or freelance drivers.
of households will claim itemized deductions, down from 21 percent under old rules according to the Tax Policy Center. Effectively, the cost of homeownership will rise in most cases while the distinctions between owning and renting will narrow. Second, the value of income will change, depending on where you live. This very much impacts the concept of qualifying borrowers on the basis of gross income. Prior to tax reform, such things as mortgage interest, property taxes, and state income taxes were com- monly deductable, but now — with a larger standard deduction — the value of itemizing for most borrow- ers has fallen to zero. Imagine that two married couples each have a gross annual income of $120,000. They're alike in every way except for where they live. Living in Los Angeles, the couple will pay $8,004 in California state income taxes whereas in Florida, Texas, Wy- oming, Washington, South Dakota, Nevada, and Alaska, the tax bill is
income and residual income.
(49 percent). Including multiple job holders, 36 percent have a gig work arrangement in some capacity.” The common understanding of employment — 40 hours a week plus benefits — is giving way to the gig economy. We are increasingly a nation of freelancers, where more and more of us work independently, share jobs, or have multiple occu- pations. Corporations, in turn, love the new economy. With gig workers, businesses do not have to under- write payroll taxes, or offer health insurance, paid vacations, or retire- ment plans to non-employees. Gig work allows companies to tailor work schedules to avoid idle time. This also means many part- time workers are “on call” even if they are not actually working. Without a defined schedule, it’s difficult if not impossible to have a second job even though the hours are available. Gallup says we now have two gig economies and that “independent gig workers (freelancers and online
zero. There is no state income tax in these jurisdictions. The couple in the no-tax states has an additional after-tax, income. Why is that money – which is both real and spendable – not used to gross up the income for borrowers in Florida, Texas, etc? How is it any different from child support or busi- ness depreciation? There is, in fact, a way to capture the blessings of lower tax costs. The Department of Veterans Affairs (VA) requires lenders to look at residual income (the cash left over after ex- penses) when qualifying borrowers. "The VA’s residual income guide- line offers a powerful and realistic way to look at affordability and whether new homeowners have enough income to cover living expenses and stay current on their mortgage," says Chris Birk with Veterans United. "Residual income is a major reason why VA loans have such a low foreclosure rate, despite the fact that about 9 in 10 people purchase without a down payment.”
“In the end,” says Carrington’s Ray Brousseau, “residual income is critical. It’s what’s left that the family is expected to be able to live on. Residual income is an import- ant characteristic when measuring ability to repay.” The VA approach works ex- tremely well. In the fourth quarter, according to the Mortgage Bankers Association (MBA), the non-sea- sonally-adjusted foreclosure starts rate stood at .19 percent for conventional loans with either 20 percent down or backing with private mortgage insurance, .55 percent for FHA-backed financing with as little as 3.5 percent down, and .28 percent for VA loans which are readily available with zero per- cent down. We’re going to see the wider use of residual income. But that does not mean the gross income stan- dard will melt away. Instead, it will increasingly make sense to reduce origination risk and qualify appli- cants on the basis of both gross
WHAT DEFINES EMPLOYMENT? A key measure of borrower
finances is very simply the fact that they have a job. Lenders generally like to see a two-year history of employment at the same job or in the same field. But, how can this standard apply in an era when more and more of us are becoming gig workers? “Broadly defined,” said Gallup in a 2018 study, “the gig economy in- cludes multiple types of alternative work arrangements such as inde- pendent contractors, online plat- form workers, contract firm work- ers, on-call workers and temporary workers. Using this broad definition, Gallup estimates that 29 percent of all workers in the U.S. have an al- ternative work arrangement as their primary job. This includes a quarter of all full-time workers (24 percent) and half of all part-time workers
10 think realty housing news report
june 2019 11
Made with FlippingBook Online newsletter