FEATURED ARTICLE: Why Mortgage Applications Have to Change
You don’t need a license or a degree for many gig positions. The result is that increasing supply pushes down wages. Freelance drivers, according to the JPMorgan Chase Institute, saw monthly incomes fall from $1,469 to $763 between 2013 and 2017. Second, in the longer term, new jobs will be added as a result of marketplace change while others will largely disappear. While the secretarial pool was killed off with the introduction of personal com- puters and milkmen were done in by supermarkets, a huge number of service jobs have been added to the economy. Lyft, for example, may create more opportunities for programmers over time while reducing the need for drivers. As it explained in its recent IPO, “In the next five years, our goal is to deploy an autonomous vehicle network that is capable of delivering a portion of rides on the Lyft plat- form. Within 10 years, our goal is to have deployed a low-cost, scaled autonomous vehicle network that is capable of delivering a majority of the rides on the Lyft platform. And, within 15 years, we aim to deploy autonomous vehicles that are purpose-built for a broad range of ride-sharing and transportation scenarios, including short- and long- haul travel, shared commute, and other transportation services.” Third, the practical reality is that in a slow down, the first workers to be released will be contingent em- ployees. Full-time workers will be expected to pick up the slack. So, what to do when a contingent gig worker applies for a mortgage? How should such income be count- ed? Should gig income be grossed down in the same way that non-tax- able income can be grossed up? There’s certainly work for lenders to do. Automated systems will need to be refined to incorporate new
work patterns. Manual underwrit- ing will become more common, not less. The need for job experience is likely to grow with gig workers, re- quiring at least a look back at three or four years of past earnings and not just one or two. IS IT REALLYA PRIME RESIDENCE? Across America, the nature of residential real estate is changing. For many homeowners, it’s not so residential anymore. Several million travelers stay with home- owners on any given night. Empty bedrooms as well as unused attics and basements are increasingly seen as income opportunities. The hospitality industry is fight- ing back, demanding that local governments enforce ordinances which limit the competition faced by tax-paying hotels and motels. But the die have been cast: there are simply more homeowners than hotel magnates. Rather than fight short-term rentals, local govern- ments are increasingly coming to terms with the big rental platforms. They’re taxing the revenue received by property owners. More and more, it’s okay to rent a room as long as you pay the local government. According to Airbnb in 2015, “Home sharing is making it possible to take what is typically one of their greatest expenses — their home — to make additional income that helps them pay the bills. Policy- makers are taking notice and acting to support home sharing and the middle class.” While the connection between rental rates and tax collections is direct and obvious, there’s also evi- dence that, at least in some markets, short-term rentals are forcing up real estate prices and rental rates. This is good for owners, though not so good for buyers and tenants.
mortgage applications, along with a proper accounting of the costs required to operate such facilities.
wage earners in 71 percent of US housing markets. Many would-be buyers are being frozen out of the marketplace. But, if you can’t buy a home outright, perhaps it makes sense to buy part of a home. Looking forward, we are likely to see an increase in shared equity arrangements: • A property will have both a res- ident owner and a non-resident investor. • Each owner will be able to potentially deduct their portion of the mortgage interest and property taxes. In addition, the investor will be able to deduct a portion of the depreciation and repairs. In practice, the
For lenders, the growth of home sharing raises two questions: what is being financed and should the borrower’s income be bumped up on the basis of potential short-term rental income? Francois (Frank) K. Gregoire, an appraiser based in St. Petersburg and the four-time chairman of the Florida Real Estate Appraisal Board, told The Mortgage Reports in 2017 that, “a room rental situ- ation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or rooming house.” This new world of short-term rentals raises a number of ques- tions for lenders: • Is the property a prime resi- dence or a riskier investment property? • If the property is used for short- term rentals, has the income been declared for tax purposes? • If the home has not been used for short-term rentals, can an appraiser use short-term rental data from nearby and like prop- erties to create a valuation? A room rental situation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or rooming house.”
• Is the property insured for use as a short-term rental?
• If local ordinances or HOA rules ban short-term rentals, can the owners repay the debt if rent- al income stops because of a complaining neighbor or code violation crack-downs? There are already efforts to create financing options for short- term rental properties. “Hosts in the U.S.,” says Airbnb about its financing initiative, “will be able to work with participating lenders to recognize Airbnb home sharing in- come from their primary residence as part of their mortgage refinanc- ing application. The three mortgage lenders in the initiative are Quicken Loans, Citizens Bank, and Better Mortgage.” No doubt short-term rental income will be increasingly accepted for
THE QUESTION OF SHARED EQUITY No doubt other loan programs for short-term rentals will become available if only because the market for shared-income properties is large and growing. But, while the market is attractive, it will require careful underwriting to ensure that residential financing is not being provided for investment properties or for borrowers who cannot afford to finance without rental income. Or, maybe we need to look at this differently. Affordability is a big issue for many borrowers, especially first-timers. Research by ATTOM Data Solutions found in March that median-priced homes are not affordable for average
resident owner will be unlikely to itemize real estate write-offs while the investor will have business deductions.
HISTORICAL HOME AFFORDABILITY
MEDIAN HOMES PRICES
PCT OF AVERAGE WAGES NEEDED TO BUY MEDIAN-PRICED HOME
35% 35% 34%
$250,000
35%
33%
32% 32%
31% 32%
29% 30% 30%
29%
30% 29%
29% 29%
28% 27%
27%
26%
$187,500
26%
26%
$125,000
18%
$62,500
9%
$-
0%
FRANCOIS GREGOIRE
12 think realty housing news report
june 2019 13
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