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DECEMBER 2018 VOL 12 ISSUE 12
Reverse Mortgages: can financing for seniors change with the times?
MY TAKE BEYOND WHAT’S YOUR HOME WORTH: INNOVATIVE AVM APPLICATIONS • P13
BIG DATA SANDBOX THE HOME FLIPPING BAROMETER • P17
DATA IN ACTION WHERE TO FIND FORECLOSURE INVENTORY • P18
Contents
For decades Federal Housing Administration-backed reverse mortgages were a pleasant and profitable federal business. Seniors used them to age in place and pull equity from their homes. Lenders had a niche product to market. Everyone was happy. In fiscal year 2018, said HUD, the HECM program had a negative capital ratio of 18.83 percent and a negative economic net worth of $13.63 billion. How could such an intuitively-good idea have gone so wrong? P1 REVERSE MORTGAGES: CAN FINANCING FOR SENIORS CHANGE WITH THE TIMES?
FEATURED ARTICLE
P1
P13 MY TAKE: BEYOND WHAT’S YOUR HOME WORTH: THE 7 MOST INNOVATIVE AVM APPLICATIONS
Times have changed since Zillow first introduced the consumer world to Automated Valuation Models (AVMs) 14 years ago, writes Richard Lombardi, COO at ATTOM Data Solutions. Increasingly complex AVMs using increasingly sophisticated big data tools such as machine learning and AI are improving the accuracy of automated property valuations — empowering a wide variety of businesses to build innovative products that are disrupting different niches of the real estate industry.
P13
P17 BIG DATA SANDBOX: THE HOME FLIPPING BAROMETER
The number of U.S. homes flipped in Q3 2018 dropped 12 percent compared to a year ago, the third consecutive quarter with a year-over-year decrease. The last time home flips decreased annually for three consecutive quarters was in 2014, when rising mortgage rates cooled the housing market. Our home flipping barometer shows you how to read the macro-market signals from home flipping trends.
P17
P23
P18 DATA IN ACTION: WHERE TO FIND FORECLOSURE INVENTORY
Lenders started the foreclosure process on 29,017 U.S. properties in October 2018, up less than 1 percent from the previous month but still down 8 percent from a year ago. But foreclosure starts increased from a year ago in 18 states and 70 of 219 metro areas analyzed (36 percent), bucking the nationwide trend. See where more foreclosure inventory is coming online.
P18
HOUSINGNEWS REPORT
SECTION TITLE
LEAD ARTICLE
Reverse Mortgages: Can Financing for Seniors Change with the Times?
BY PETER G. MILLER, STAFF WRITER
For decades Federal Housing Administration-backed reverse mortgages were a pleasant and profitable federal business. Seniors used them to age in place and pull equity from their homes. Lenders had a niche product to market. Everyone was happy. The U.S. Department of Housing and Urban Development prized reverse mortgages — what it calls home equity conversion mortgages (HECMs)
— so much that in 2000 it hiked allowable origination fees to attract more lender activity and in 2004 partnered with AARP to push the program even further. The issue, says David H. Stevens, is not the potential value to seniors, but the cost to taxpayers. “I agree the program concept has a role to fill the needs for seniors, but the question is why the taxpayer is
footing the bill for a product that produces billions in forecasted losses and drains the reserves of the fund, risking more taxpayer bailouts in the future,” Stevens, the former President and CEO of the Mortgage Bankers Association and a past FHA Commissioner, told the Housing News Report
How big a drain? In fiscal year 2018, said HUD, the HECM program had
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FORWARD AND HECM STAND-ALONE CAPITAL RATIOS FORWARD STAND-ALONE HECM STAND-ALONE
3.33%
3.07%
3.93%
3.11%
2.00%
1.17%
0.88%
-0.44%
-10.13%
-11.81%
-18.30%
-18.83%
2013
2014
2015
2016
2017
2018
SOURCE: U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
“a negative capital ratio of 18.83 percent and a negative economic net worth of $13.63 billion.” How could such an intuitively-good idea have gone so wrong? With billions at risk, will HUD be forced to close down the HECM program? Can HUD lower insurance premiums for FHA forward mortgages in the face of reverse mortgage claims? Boomers born between 1946 and 1964 and the Silent Generation born between 1925 and 1945 — are asset rich. Not all of them, and not equally, but as a group those aged 62 and above hold enormous wealth. Their real estate equity amounted to $6.9 trillion in the second quarter according to the National Reverse Mortgage Lenders Association (NRMLA). Harvard’s Joint Center For Housing Studies says that home-owning seniors age 65 and above have a typical net worth of $319,200 versus just $6,710 for renters in the same age group. The Great Disconnect America’s senior homeowners — Baby
“I agree the program concept has a role to fill the needs for seniors, but the question is why the taxpayer is footing the bill for a product that produces billions in forecasted losses and drains the reserves of the fund, risking more taxpayer bailouts in the future.”
DAVID H. STEVENS FORMER PRESIDENT AND CEO, MORTGAGE BANKERS ASSOCIATION
Real estate equity is often seen as “idle” capital. Unlike cash in a savings account, real estate equity generates no interest. Without interest or some other form of return, inflation eats away at asset values. While asset prices seem to be growing over time in cash terms, buying power per dollar — the real definition of wealth — declines as a result of inflation. The problem for seniors is magnified because in retirement incomes typically contract. Census data shows that in 2017 individuals between the ages of 60 and 64 had median household incomes of $63,919 — a figure which was reduced to $41,125 for those aged 65 and above. Forty-
three million retired workers get Social Security retirement benefits, but the average monthly check is just $1,413 or $16,956 per year. Many older property owners have a large net worth on paper but struggle with month-to-month cash costs. The Joint Center for Housing Studies estimates that 9.7 million senior households – nearly a third – spend at least 30 percent of their income for housing. Worse, 4.9 million senior households devote at least half their income for housing costs.
Part of the reason for steep housing costs is that seniors increasingly face
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AVERAGE U.S. HOMEOWNERSHIP TENURE (YEARS)
9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00
Reverse Mortgage Mechanics An FHA-insured reverse mortgage is a negatively amortizing loan secured by real property. This brief and basic definition hides a world of complexity. With a forward mortgage, you might borrow $100,000 at 5 percent fixed and then make monthly payments of $536.82 for principal and interest over 30 years. The loan balance goes down each month as a result of amortization and at the end of the loan term all principal and interest have been paid. The situation is very different from a reverse mortgage. If you borrow $100,000 at 5 percent there are no required monthly payments for principal or interest. It might seem as though the reverse mortgage borrower is “saving” $536.82 in cash per month when compared to someone with a forward loan, but what’s really happening is that repayment is being deferred and the loan balance is growing. As the old saying goes, there’s no such thing as a free lunch.
retirement with bulging mortgage debts. Fannie Mae explains that “among Baby Boomer owner- occupants aged 65 to 69 in 2015, fewer than 50 percent were mortgage-free, down 10 percentage points compared with the pre-Boomer group of homeowners who were the same age in 2000, prior to the housing bubble.” “Forty-four percent of 60- to 70-year- old homeowners bring their mortgage into retirement,” according to a survey from American Financing, a Denver-based mortgage lender. “And, 32 percent predict it will take them more than eight years to pay off. An additional 17 percent say they may possibly never pay it off.” Aging In Place Given rising cash costs, declining income, and trillions in equity, doesn’t it make sense for seniors to access household wealth, to right-size their income and assets?
“Adults,” said AARP in a 2018 report, “want to stay in their communities and homes as they grow older especially when considering life after their working years. People spend years making connections and commitments to homes, friendships, community organizations, and local social ties within their community. Communities become a source of support and engagement for its residents, particularly older adults who have an even stronger desire to age in place.” The age-in-place preference is profoundly important to most seniors. AARP says that among those 65 and older, two-thirds (66 percent) want to stay in their current residence and never move. Zillow found that when given a choice between moving and fixing up, 87 percent of those aged 55 and above prefer to stay put. This is the marketplace bullseye for reverse mortgages. It potentially includes millions of seniors with real estate equity and a powerful desire to age in place.
The answer is complicated because more than dollars are involved.
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If you look at the amortization schedules for typical forward and reverse mortgages you can see what’s happening. The forward loan balances decline every month even as reverse mortgage balances grow. While reverse mortgage balances increase each month there’s no guarantee that property values will also grow. Real estate is a localized commodity; prices can both rise and fall — and they do. Median home prices in the third quarter increased from a year ago in 143 of 150 U.S. metropolitan statistical areas analyzed by ATTOM Data Solutions, but they decreased in 7 of those 150 metro areas. Assuring Repayment Under the FHA program, reverse mortgages must be repaid when the borrower leaves the property, sells, or passes away. Since appreciation by itself cannot guarantee repayment, HUD has taken additional steps to limit its risk. HUD has established Principal Limit Factors (PLFs) which determine how much equity borrowers can extract from their properties. In October 2017 HUD reduced PLFs, meaning that in the event of default, more equity remained in the property to shield the FHA from losses. “At current rates,” said HUD, “PLFs will be lower compared to prior levels. As was the case with the prior PLF schedule, PLFs generally rise with borrower age and decline for higher interest rates.”
fair market value, more if you’re older and less if you’re younger — “younger” in this case meaning at least age 62, the minimum qualifying age for an FHA- backed reverse mortgage. Mortgage Insurance Premiums With forward FHA programs the upfront mortgage insurance premium (MIP) —
typically 1.75 percent — is based on the amount borrowed. An annual mortgage insurance premium (the annual MIP) is also charged, a fee generally equal to 0.85 percent of the loan amount.
With HECM financing there are also insurance fees, but the basis is different.
FHA REVERSE MORTGAGE CLAIMS BY CLAIM TYPE
CLAIM TYPE 1 : PROPERTY SOLD AT LOSS (LOAN NOT ASSIGNED TO HUD)
CLAIM TYPE 2 : LOAN ASSIGNED TO HUD WHEN LOAN AMOUNT REACHES 98% OF MAX CLAIM AMOUNT
$7,000,000,000
$6,000,000,000
$5,000,000,000
$4,000,000,000
$3,000,000,000
$2,000,000,000
$1,000,000,000
$0
2009 2010 2011 2012 2013
2016 2015 2014 2017 2018
CLAIM FISCAL YEAR
SOURCE: U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
$100,000 MORTGAGE AT 5% MONTHLY BALANCE
MONTH MONTH 1 MONTH 2 MONTH 3 MONTH 4 MONTH 5 MONTH 6 MONTH 7 MONTH 8 MONTH 9 MONTH 10 MONTH 11 MONTH 12
FORWARD MORTGAGE
REVERSE MORTGAGE
$99,880 $99,759 $99,638 $99,516 $99,394 $99,272 $99,148 $99,025 $98,900 $98,776 $98,650 $98,525
$100,417 $100,835 $101,255 $101,677 $102,101 $102,526 $102,953 $103,382 $103,813 $104,246 $104,680 $105,116
In effect, you can get a reverse mortgage for a portion of a property’s
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First, there is a 2 percent upfront mortgage insurance premium. Instead of being charged against the loan amount it is instead based on the property’s maximum claim amount (MCA). The MCA is the lesser of the property’s appraised value or the FHA lending limit. As an example, if a borrower with a $300,000 property obtains a fixed-rate HECM for $150,000, the upfront MIP will be $6,000 — 2 percent of the home’s value but 4 percent of the amount actually borrowed in this example. Second, HUD also charges an annual mortgage insurance premium equal to 0.5 percent of the outstanding loan balance for reverse mortgages. While the forward MIP fees produce robust reserves, that has not been the case with the HECM program. To understand why we need to look at how HECMs evolved. In The Beginning The HECM program as we know it today got its start through the
Housing & Community Development Act of 1987, legislation sponsored by Sen. William Proxmire, D-Wisconsin, creator of the famed Golden Fleece Awards. HECMs began as a small demonstration project to test the concept and then evolved into a full- blown FHA program. “Since the inception of the program, said HUD in its 2018 Annual Management Report, “FHA has insured 1,100,659 HECM loans with a maximum claim amount of $269 billion. Of these 1,100,659 HECM loans insured by FHA, 547,779 loans with a maximum claim amount of $144 billion are still active. As of September 30, 2018, the insurance-in-force (the outstanding balance of active loans) was $100 billion.” The most interesting time in HECM history was no doubt FY 2009. During that period 114,692 HECMs were originated, the record.
reserves within the Mutual Mortgage Insurance Fund (MMIF). An actuarial analysis prepared for HUD at that time estimated that “the economic value of the HECM portfolio will continue to increase over time with the addition of new books-of-business and improvements in forecasted economic conditions. The estimated economic value at the end of FY 2016 is $19.8 billion.” Indeed, by FY 2016 the program was supposed to throw off income worth $490 million. What Went Wrong The central presumption of the HECM program was that big MIP collections, rising home values, and stingy Principal Limit Factor percentages would prevent losses. Indeed the program was expected to ultimately generate massive profits. Why these projections did not come true — and why the HECM program is in so much trouble today — is the
Also in FY 2009, HECM reserves were combined with forward FHA mortgage
U.S. MEDIAN HOME PRICES & APPRECIATION
ANNUAL HOME PRICE APPRECIATION
U.S. SINGLE FAMILY & CONDO MEDIAN SALES PRICE
$300,000
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0%
$250,000
$200,000
$150,000
$100,000
$50,000
$0
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result of several massive marketplace changes.
But for most of the country appreciation is unlikely to be much of an offset. The National Association of Realtors estimates that home values will rise just 2 percent in the coming year. “The reverse mortgage industry faces some significant headwinds in the next few years,” said Mike Roberts, founder of MyHECM.com, a leading independent reverse mortgage resource for seniors. “Financial assessment, utilization limitations, and principal limit (PL) reductions have already made the landscape more challenging,” Roberts explained. “Now we’re facing rising interest rates, which will eventually trigger a decline in home values. Higher interest rates and declining home values are both negative for PLs. The pool of consumers for which a HECM is both workable and sensible will shrink over the next few years. The industry has had it pretty good over the last 10 years with low
simply less equity. HECMs in no way created the mortgage crisis, but like FHA financing in general they surely represented collateral damage. In the end, the cushion HUD built into the HECM program was simply insufficient. Second, the longer a HECM is outstanding, the greater the risk. As a 2017 HUD study explains, “as the principal balance of a reverse mortgage approaches the value of the collateral (that is, the borrower’s home equity is exhausted), the homeowner has less incentive to maintain the property. The dearth of regular home repairs and improvements may cause the value of the collateral to depreciate, magnifying losses for FHA.” But what about those rising property prices? Can’t they offset rising HECM balances? In areas with a lot of appreciation — think of the ZIP codes near the two recently announced Amazon headquarter projects — maybe yes.
First, median home prices in Q3 2018 are only 11 percent above the pre- recession peak in Q3 2005, according to ATTOM Data Solutions. That’s an average gain in home value of less than 1 percent a year. According to the Government Accountability Office (GAO), “households collectively lost about $9.1 trillion (in constant 2011 dollars) in national home equity between 2005 and 2011.”
Losses in the housing sector bled over into other areas of the economy.
“Dramatic declines in net worth,” said the GAO, “combined with an uncertain economic outlook and reduced job security, can cause consumers to reduce spending. Reduced consumption, all else equal, further reduces aggregate demand and real GDP.”
HECM losses had to rise after the mortgage crisis because there was
“The pool of consumers for which a HECM is both workable and sensible will shrink over the next few years. The industry has had it pretty good over the last 10 years with low rates and rising home values. The next few years won’t be so easy.”
MIKE ROBERTS FOUNDER, MYHECM.COM
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REVERSE MORTGAGE ORIGINATIONS
The looming question is whether HUD can continue to insure FHA- backed reverse mortgages. No insurance company would maintain a program that produced more than $13.5 billion in net worth reductions, but HUD is not a business, it’s part of the government. Rather than killing off the reverse program, the alternative has been to tighten HECM standards to the point where fewer and fewer borrowers want them. In 2014 HUD limited the cash borrowers could initially take from an HECM to 60 percent of the loan amount. In 2015 lenders were required to perform “financial assessments” to assure that borrowers could pay property taxes, insurance, and HOA fees. In 2017 the principal limit factors were changed to reduce loan sizes while in October 2018 HUD began requiring two appraisals for at least some reverse mortgage applications. “Fewer potential borrowers are eligible due to Financial Assessment and reduced principal limit factors,” said John L. Lunde, president of Reverse Mortgage Insight. “Borrowers on 2017 loans pay more mortgage insurance premium upfront but a lower annual rate over time, tilting the potential cost reduction toward those who borrow the most for the longest period.” A Turnaround “I can tell you,” said FHA Commissioner Brian Montgomery, according to Housingwire, “that the changes FHA made to the principal limit factors and the adjustments to the HECM
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
FISCAL YEAR
SOURCE: NATIONAL REVERSE MORTGAGE LENDERS ASSOCIATION
rates and rising home values. The next few years won’t be so easy. Lenders and originators are going to have to work a lot harder to achieve their sales goals.” Insurance Reserves The FHA program was established in 1934 and in fiscal year 2018 it insured 1,014,609 single-family forward mortgages as well as 48,327 HECMs. Ellie Mae says that FHA-backed mortgages represented 20 percent of the residential market in September. With an FHA-insured mortgage, a buyer can purchase a home with 30-year financing, 3.5 percent down, market-rate interest and no prepayment penalties. If something goes wrong, lenders can file claims against HUD’s Mutual Mortgage Insurance Fund (MMIF). Many on Capitol Hill worry that the MMIF will be insufficient to pay all claims in the event of a downturn. Congress requires HUD to maintain
a 2 percent capital ratio, meaning that the reserve must be equal to 2 percent of the FHA loans outstanding. In FY 2013 the MMI Fund capital ratio stood at -0.12 percent. With changes to the FHA program, HUD has substantially boosted reserves to the point where they now stand at 2.76 percent for the entire fund, an increase of $36.19 billion in just a few years. This, by any standard, is a substantial success. “The fiscal condition of FHA’s forward mortgage portfolio is materially better than the HECM portfolio,” HUD explained. “Excluding HECMs, FHA’s FY 2018 forward mortgages have a capital ratio of 3.93 percent and a positive Economic Net Worth of $46.8 billion. By contrast, the 2018 HECM portfolio has a negative capital ratio of 18.83 percent and a negative economic net worth of $13.63 billion. The problem is that within the reserve fund growth has been uneven.
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SHARE OF FHA REVERSE MORTGAGE WITH APPRAISALS EXCEEDING AVM BY 10% OR MORE
is that a reduction in forward MIP costs will remain unlikely.
>=10%
>=20%
>=30%
• The new two-appraisal requirement is beginning to impact HECM underwriting. About one- fifth (22 percent) of all new HECM applications since Oct. 1st have required a second appraisal. • Figures from Reverse Market Insight show that 2,553 HECMs were endorsed by HUD in November, down from the 6,308 HECMs insured in January Can HUD make additional changes that both protect the program and make it more enticing to consumers? MyHECM’s Mike Roberts says there is a strategy that could work. “In fiscal year 2010, adjustable- rate HECMs were just 35 percent of endorsements,” said Roberts. “In fiscal year 2018, they were nearly 90 percent of endorsements. Rates have already risen substantially this year. As they continue to rise, adjustable- rate HECM balances will grow faster. On top of that, we’re now seeing signs that rising rates are impacting home values. The Mutual Mortgage Insurance Fund (MMIF) could soon face the double whammy of rapidly growing loan balances and declining home values.” Roberts says that “a fixed-rate HECM with the flexibility and higher PLs of the adjustable-rate HECM could be a way to help limit future rate risk to the HECM program. It would also be very appealing to consumers.”
40% 35% 30% 25% 20% 15% 10%
5% 0%
2016
2017
2018
COHORT YEAR
SOURCE: U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
insurance premium we instated in 2017 were designed to help, but did not — and were not intended to — and will not fully solve the financial volatility of the program.” And yet in a short period such changes have had a substantial impact. With HUD’s new requirements the HECM program is plainly evolving. • In FY 2018 a total of 48,327 HECMs were insured, the smallest number since FY 2005.
• In FY 2018 the HECM portfolio had a negative net worth of $13.63 billion, an amount $870 million lower than the $14.5 billion negative net worth reported for FY 2017. If the HECM negative net worth continues to fall and forward net worth continues to be such a success it may be possible to simply carry the HECM program. Whether that will be politically feasible or financially acceptable over time is unknown. One by- product of the current situation
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But another approach looks like this. Cut lender fees and HECM originations will decline, along with the risk they represent. Writing on LinkedIn, and as first reported by HousingWire, Stevens said that “Brian Montgomery is trying to fix the abuse, but the product is the one that kept me awake at night when I was there — outrageous profits, predatory sales approach, and full-draw HECMs only fuel the fire.” “Seniors,” added Stevens, “do not need aggressive salespeople using former actors and presidential candidates as pitchmen.” A Private Response Has HUD made the HECM program too restrictive? If yes, might the private
sector be interested in pursuing the reverse mortgage marketplace? Already, according to the National Reverse Mortgage Lenders Association, four lenders offer private reverse mortgage products: Finance of America Reverse, Reverse Mortgage Funding LLC, Longbridge Financial, and One Reverse Mortgage. What makes private reverse mortgage products interesting is that they do not have to be HECM duplicates. Minimum ages, as well as maximum loan amounts and percentages, can differ from the federal program. More options give seniors more alternatives to consider and that’s good for the marketplace.
not lend against, as well as additional flexibility not provided by the HECM,” said Reverse Market Insight’s John K. Lunde. He added that private lenders might offer second lien position products and reverse mortgages with less restrictive home purchase contract terms. “I think there is a tremendous opportunity in the marketplace for private reverse mortgages that target consumers with high home values,” said Mike Roberts with MyHECM.com. “There are a few so-called ‘jumbo’ reverse mortgages available right now, but the rates are typically high and proceeds have to be taken as a lump sum at closing. Many consumers don’t want or need that much money at closing. It doesn’t make sense to them to accrue interest at a relatively high rate on money they don’t need. I think there is a big opening in the marketplace for a private product that offers more money, competitive rates, lower fees, and a line of credit option.” Will Tax Reform Create New HECM Demand? Reverse mortgage dollars can be used for any purpose. Borrowers might want to take bulk sums and fix up their homes, pay medical bills, or help finance a business. But arguably one of the best uses for HECM dollars is simply to pay off an existing mortgage. The elimination of forward mortgage debt can be a substantial benefit for households where monthly cash flow is an ongoing worry. The case for paying off existing mortgages — and the argument for reverse financing — has been greatly
“Non-FHA reverse mortgages can offer loans on property types that FHA will
“Non-FHA reverse mortgages can offer loans on property types that FHA will not lend against, as well as additional flexibility not provided by the HECM.” JOHN K. LUNDE FOUNDER AND PRESIDENT REVERSE MARKET INSIGHT
FHA REVERSE MORTGAGE PORTFOLIO BY ENDORSEMENT YEAR
MAXIMUM CLAIM AMOUNT ($ BILLIONS)
CURRENT PRINCIPAL BALANCE LIMIT ($ BILLIONS)
INSURANCE-IN-FORCE ($ BILLIONS)
18.0 16.0 14.0 12.0 10.0
8.0 6.0 4.0 2.0 0.0
2009 2010 2011 2012 2013
2014
2015
2016
2017 2018
SOURCE: U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
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HELOC ORIGINATIONS
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
strengthened with the passage of tax reform in 2017.
There will be less to write off as an itemized deduction for many taxpayers.
loan advances to you, not income you earned. Thus, the payments you receive are not taxable. Moreover, they usually don’t affect your Social Security or Medicare benefits.” “On the downside,” explains NOLO, “all the interest that accrues on your reverse mortgage is not deductible by you until you actually pay it, which is usually when you pay off the loan in full. Moreover, your mortgage interest deduction is usually subject to the same limits as other home equity loans — that is, you can deduct the interest on no more than a loan of $100,000.” For many senior homeowners the downside no longer exists. Since relatively few borrowers will be deducting mortgage interest under tax reform, most will have no HELOC or forward mortgage deduction to lose. Will Reverse Mortgages Offset HELOC Worries? In the same way that changes in the tax code could well lead to increased
Under the new rules, for example, those married and filing jointly will be able to take a $24,000 standard deduction for 2018, up from $12,700 in 2017. While the increased standard deduction has gotten much attention, it effectively eliminates the mortgage interest write-off for most taxpayers. “Beginning in 2018,” says the IRS, “taxpayers may only deduct interest on $750,000 of qualified residence loans.” Under the old rules interest on up to $1 million in qualified mortgage debt was deductible. While mortgage deductions remain on the books, in practice millions of homeowners won’t bother with them. The reason is that itemized deductions are likely to be smaller than the newly enlarged standard deduction, and you can only write-off one or the other.
“Your total deduction for state and local income, sales and property taxes,” says the IRS, “is limited to a combined, total deduction of $10,000 ($5,000 if Married Filing Separate). Any state and local taxes you paid above this amount cannot be deducted.” The result, says the Tax Policy Center, is that only 4 percent of all taxpayers are expected to itemize for 2018, down from 21 percent under the old rules. As the real price of forward mortgages goes up for many borrowers in terms of lost tax benefits, reverse mortgages are increasingly attractive for seniors looking to cut monthly costs. Not only does a reverse mortgage allow borrowers to end monthly costs for principal and interest, the money received with a HECM is not taxable. The reason, says NOLO.com, is that “reverse mortgages are considered
It’s not just size which makes the new standard deduction so attractive.
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to write-off itemized deductions as a result of tax reform, there’s no tax reduction off-set for most borrowers. For senior borrowers facing a mountain of mortgage and HELOC debt, a reverse mortgage might resolve the problem of huge monthly costs for principal and interest. The Age Factor In addition to tax changes and HELOC worries, there’s another factor which is likely to boost HECM interest: The senior population is soaring. According to the Population Reference Bureau, “the number of Americans ages 65 and older is projected to more than double from 46 million today to over 98 million by 2060, and the 65-and-older age group’s share of the total population will rise to nearly 24 percent from 15 percent.” The addition of more than 50 million seniors suggests that demand for such things as medical care, residential
“The senior issue with HELOCs concerns the repayment period. HELOCs may be perfectly affordable while in the workforce but with retirement and less income such payments can become problematic. For senior borrowers facing a mountain of mortgage and HELOC debt, a reverse mortgage might resolve the problem of huge monthly costs for principal and interest. ”
HECM interest, the same is also true with home equity lines of credit (HELOCs). It used to be that interest for as much as $100,000 in qualified HELOC interest was deductible. Now, says the IRS, HELOC interest is only deductible if the financing has been used to “buy, build or substantially improve the taxpayer’s home that secures the loan.” More than 361,000 HELOCs were originated in Q2 2018, a nearly 10- year high, according to ATTOM Data Solutions.
With a HELOC there’s first a “draw” period, say five or 10 years, when borrowers can take out money against their credit line and also put money back. Once the draw period ends there is then a repayment period, perhaps five to 20 years, when the money borrowed must be repaid with regular monthly payments. The senior issue with HELOCs concerns the repayment period. If a borrower has a $50,000 balance and 15 years to repay at 6 percent, the monthly payment will be $421.93. HELOCs may be perfectly affordable while in the workforce but with retirement and less income such payments can become problematic. As well, given the widespread inability
A HELOC is essentially a mammoth credit card secured by real estate.
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REVERSE MORTGAGE ENDORSEMENT ACTIVITY
available for new borrowers,” Reverse Market Insight’s Lunde
HECM MORTGAGES ENDORSED
MAXIMUM CLAIM AMOUNT ($ BILLIONS)
explained. However, he also points out that “to the extent interest rates fall it would reduce costs for existing loans and potentially make higher principal limits available to borrowers on new loans.” What Will Happen Next? With changing tax policies and a growing senior population, there’s no doubt that a significant interest in reverse mortgage financing exists. The catch is that such mortgages cannot be available at any price, no more than auto manufacturers can afford to take a loss on every car they produce. “Commissioner Montgomery knows the challenges he inherited here,” David H. Stevens told us, “but these same issues troubled me when I was commissioner. Resistance from special interest groups needs to be overlooked in favor of fixing this program in a way that will protect its long term survival. Some recent changes will help, but much more needs to be done.” In the face of the congressional mandate to maintain a 2 percent MMIF capital ratio, HUD cannot allow HECMs to undermine the far larger FHA forward program. The big question is whether current HECM trends will be enough to eliminate the need for additional program changes. Six months or a year from now we will better understand how HECM changes have impacted the marketplace, and whether additional modifications are necessary.
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35.0
120,000
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25.0
80,000
20.0
60,000
15.0
40,000
10.0
20,000
5.0
0
0.0
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2017 2018
design, and financial planning will grow significantly. In addition, it follows that demand for reverse mortgage financing will also increase. What About a Recession? The economy began to right itself following the housing crash. The result has been a continuous expansion since June 2009, one of the longest on record. Existing home prices, as one example, were up in October, the “80th straight month of year-over-year gains” according to NAR.
next recession will be here by 2020, about a year from now. How will a recession impact the reverse mortgage marketplace? A recession does not necessarily mean home prices automatically or universally decline. In many recessions price growth continues, albeit at a generally reduced pace. However, if there was a widespread series of price reductions the impact would likely be mixed. “To the extent that house prices fall it potentially harms existing loans for servicers and FHA’s insurance risk while also reducing total funds
Expansions cannot go on forever, and many economists believe the
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DEC 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
MY TAKE
Beyond What’s Your Home Worth: The 7 Most Innovative AVM Applications
RICHARD LOMBARDI COO, ATTOM DATA SOLUTIONS
inaccurate calculation of property value. Zillow even now acknowledges that the Zestimate is just “a starting point in determining a home’s value and not an official appraisal.” There’s no doubt that, especially early on, the Zestimate’s primary purpose was to drive traffic to the website, not to provide a highly accurate home value.
Although AVMs had been around long before Zillow, the Zestimate was the first widely successful consumer- facing application of the AVM, which calculates the estimated market value of a property at a given point in time based on a mathematical model that typically relies on recent nearby sales of similar homes, among other factors.
Fourteen years ago, Zillow introduced the consumer world to the Automated Valuation Model (AVM). Zillow called it a Zestimate, a name that received its share of ribbing but also was effective in catching the attention of consumers, eventually drawing hundreds of millions of prospective homebuyer and seller eyeballs to the Zillow website and generating myriad leads for real estate agents.
From the outset, the Zestimate received plenty of flack for its often-
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DEC 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
BEYOND WHAT’S YOUR HOME WORTH: THE 7 MOST INNOVATIVE AVM APPLICATIONS
Hill, a hot Seattle neighborhood. The owner would realize an additional $1 million in value that they would never know about by going to Zillow,” said CityBldr CEO Bryan Copley. “CityBldr tells the owner their property is most valuable to a developer – much more valuable. That’s life changing information that property owners should have before making the decision to sell.” Predictive analytics companies such as Audantic and Likely.AI leverage the AVM from ATTOM to predict inventory hitting the market in the near future. This provides high-quality leads for real estate agents, mortgage brokers and real estate investors. “In essence we score every U.S. property based on the likelihood of a sale in the near future, and once a property reaches a certain confidence threshold in our deep learning models, we say that is a valuable lead for real estate professionals,” said Likely.AI CEO Brad McDaniel. Audantic also scores properties, but specifically for the real estate investor audience, meaning its scoring is based on how likely a home is to sell at a discount below its “after-repair” property value. “A lot of investors have used intuition to determine how to do their marketing, and we’re able to apply predictive analytics to the data and get much higher results,” said Audantic CTO Franklin Sarkett, who 2. Are You Likely to Sell Soon (And at a Discount)?
“ATTOM Data Solutions has leveraged big data tools to develop an enterprise-grade property valuation model — the ATTOMIZED AVM — priced to be accessible not just to large, established corporations but also to smaller startups thinking outside the box.”
But times have changed. Increasingly complex AVMs using increasingly sophisticated big data tools such as machine learning and AI are improving the accuracy of automated property valuations — empowering a wide variety of businesses to build innovative products that are disrupting different niches of the real estate industry. ATTOM Data Solutions has leveraged big data tools to develop an enterprise-grade property valuation model — the ATTOMIZED AVM — priced to be accessible not just to large, established corporations but also to smaller startups thinking outside the box. The ATTOMIZED AVM is driving innovation in the real estate marketplace, and we get a front row seat to that innovation as the AVM provider.
Here are seven of the most innovative AVM applications we’ve seen that go far beyond just answering the question “What’s your home worth?”. 1. What Could Your Home Be Worth? In the world of property development, one of those most innovative applications of property valuation comes from Citybldr, which answers the question, “what could your home be worth if developed at its highest and best use?”. Citybldr applies machine learning to an AVM they get from ATTOM along with other public record property data from ATTOM and data from other sources to determine the best use of any parcel of land and then to determine what the property would be worth at its highest and best use.
“(A) good use case is a valuable redevelopment property in Capitol
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DEC 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
BEYOND WHAT’S YOUR HOME WORTH: THE 7 MOST INNOVATIVE AVM APPLICATIONS
worked as a data scientist at Facebook before joining Audantic. “We can eliminate 80 percent of the population, and we can double or triple their results.” 3. How Much Will You Accept For an Instant Cash Offer? So-called iBuyer companies such as Opendoor and Offerpad utilize the ATTOM AVM to help determine how much they should offer to prospective home sellers visiting their websites. After entering their home address, those owners receive a nearly instant cash offer that also comes with the convenience of not having to stage and show a home, along with the ability to select a pre- scheduled move-out date. Offerpad combines the AVM with additional data from ATTOM and other sources to analyze market trends and ultimately make offers on individual homes, according to Chief Real Estate Technology Officer Dan Mayes.
knows how to use when buying and selling homes,” he said. “From deep neighborhood data that helps set a benchmark for offers, to providing property characteristics to better help us determine the needs of our buyers.” 4. How Much Will You Donate to a Good Cause? Here’s an innovative AVM application that is more removed from the world of real estate — at least at first blush. Windfall Data utilizes an ATTOM AVM to help it identify, target and engage affluent consumers for nonprofits. Estimated property value and home equity represents a major source of wealth and affluence for most Americans. “Windfall models out the net worth of affluent consumers with more than $1 million in wealth,” said Windfall Data CEO Arup Banerjee. “In addition to net worth, we also provide additional household-level data (we call them triggers /signals) so that our customers can analyze their existing customer base and acquire
net-new customers through omnichannel marketing.”
5. How Quickly Can You Apply for a Loan? As a younger generation — many of them digital natives born with a silver iPhone in hand — enters prime homebuying years, the need for a low- friction, digital mortgage experience is becoming more critical for lenders who want to compete. Online mortgage marketplace LendingTree facilitates such an experience at the top of the loan origination funnel, using an AVM and other property data from ATTOM to streamline the online application process — and also validate property value and other information about a home. LendingTree’s streamlined loan application process attracts quality mortgage leads even in market cycles when lenders are struggling to gin up business through more traditional lead generation methods.
“Offerpad receives data from many sources, and most importantly
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DEC 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
BEYOND WHAT’S YOUR HOME WORTH: THE 7 MOST INNOVATIVE AVM APPLICATIONS
“Our business model can operate efficiently in a rising rate environment when lenders have difficulty in bringing in organic volume themselves,” said LendingTree Chief Economist Tendayi Kapfidze. “That’s when they’ll come to LendingTree to fill their pipeline, and we can market into that demand, or pull back if the unit economics don’t make financial sense.” 6. How at Risk is Your Home? Property values are being put at an increasing risk from natural disasters such as hurricanes, floods and wildfires given the twin threats of climate change and a growing frontline of homes in the urban- wildlife interface. Risk Management Solutions (RMS) helps financial institutions and public agencies understand, quantify and manage that risk using vast troves of data, including an AVM from ATTOM Data Solutions. RMS models — built on millions of data points, including the ATTOM AVM — are used by insurers,
reinsurers and other organizations to analyze the probability of economic loss from catastrophic events. RMS models are also able to quickly quantify estimated insured losses from an actual natural hazard event. 7. How Much Home Insurance Should You Have? Another innovate application of AVMs in the insurance space is employed by Cape Analytics, which automates the insurance underwriting process with the use of data, including an AVM from ATTOM Data Solutions. attributes that may impact property value to insurers via a simple API, allowing those insurers to better select risk and streamline the underwriting process even while also improving the agent and customer experience. “Whether during underwriting, rating, or renewing, information about properties is critical for carriers to Cape Analytics delivers the AVM along with other key property
understand their exposure to growing risks from climate change- driven impacts,” said Kevin Van Leer, product manager at Cape Analytics. “At Cape Analytics, we generate new forms of actionable, risk-relevant data, using computer vision and machine learning to analyze aerial imagery of properties across the U.S.” Instant and Accurate Property Valuations The AVM has come a long way in the last 14 years thanks to improvement in the modeling of property value along with innovative applications like the seven outlined above. Expect to see exponential progress on both fronts over the next 14 years as the industry continues to move closer to a world of instant and accurate property valuations. And expect to see ATTOM Data Solutions continuing to lead the way in powering that progress through ever- improving property valuation models that are accessible to both traditional and non-traditional players.
RICHARD LOMBARDI
A 27-year veteran of the data and financial services industries, Richard Lombardi serves as Executive Vice President and General Manager of ATTOM Data Solutions. In this role Richard oversees the data sales, sales operations, product management, database operations and database technology teams for ATTOM Data Solutions.
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BIG DATA SANDBOX
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HOUSINGNEWS REPORT
SECTION TITLE
DATA IN ACTION
Where to Find Foreclosure Inventory
OCTOBER 2018 FORECLOSURE STARTS BY METRO YEAR-OVER-YEAR PCT CHANGE IN FORECLOSURE STARTS -280% 840%
There were a total of 66,401 U.S. properties with foreclosure filings in October 2018, up 21 percent from an all-time low in the previous month, but still down 4 percent from a year ago, according to ATTOM Data Solutions. Counter to the national trend, October 2018 foreclosure activity increased from a year ago in 15 states, including Florida (up 55 percent); Texas (up 28 percent); Georgia (up 50 percent); Michigan (up 24 percent); and Arizona (up 1 percent).
CLICK HERE TO VIEW INTERACTIVE VISUAL
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DEC 2018 | ATTOM DATA SOLUTIONS
HOUSINGNEWS REPORT
WHERE TO FIND FORECLOSURE INVENTORY
Also counter to the national trend, 84 of 219 metropolitan statistical areas analyzed in the report (38 percent) posted a year-over-year increase in foreclosure activity, including Miami, Florida (up 55 percent); Houston, Texas (up 198 percent); Tampa-St. Petersburg, Florida (up 67 percent); Atlanta, Georgia (up 36 percent); and Phoenix, Arizona (up 3 percent). Foreclosure Starts Down Nationwide, Up In 36 Percent Of Local Markets Lenders started the foreclosure process on 29,017 U.S. properties in October 2018, up less than 1 percent from the previous month but still down 8 percent from a year ago. Counter to the national trend, 18 states posted year-over-year increases in foreclosure starts, including Florida (up 98 percent); Texas (up 23 percent); Michigan (up 60 percent); South Carolina (up 60 percent); and Alabama (up 11 percent).
“Lenders started the foreclosure process on 29,017 U.S. properties in October 2018, up less than 1 percent from the previous month but still down 8 percent from a year ago. Counter to the national trend, 18 states posted year-over-year increases in foreclosure starts, including Florida (up 98 percent); Texas (up 23 percent); Michigan (up 60 percent); South Carolina (up 60 percent); and Alabama (up 11 percent).”
analyzed in the report (36 percent) posted year-over-year increases in foreclosure starts, including Houston, Texas (up 285 percent); Miami, Florida (up 116 percent); Phoenix, Arizona (up 3 percent); Detroit, Michigan (up 82 percent); and Tampa-St. Petersburg, Florida (up 82 percent). Foreclosure starts have increased annually in at least six of the 10 months so far in 2018 in 32 of the 219 metro areas analyzed in the report (15 percent), including Houston, Texas (7 of 10 months); Miami, Florida (6 of 10 months); Detroit, Michigan (9 of 10 months); Orlando, Florida (6 of 10 months); Minneapolis-St. Paul (9 of 10 months); Jacksonville, Florida
(6 of 10 months); and Austin, Texas (10 of 10 months).
Bank Repossessions Bounce Back From All-Time Low In December Lenders repossessed a total of 23,714 U.S. properties through foreclosure (REO) in October 2018, up 119 percent from an all-time low in the previous month, and up 10 percent from a year ago. The District of Columbia and 28 states posted year-over-year increases in REO activity in October, including Florida (up 40 percent); New Jersey (up 5 percent); Ohio (up 52 percent); New York (up 16 percent); and Georgia (up 150 percent).
Also counter to the national trend, 70 of the 219 metropolitan statistical areas
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