Homeownership is a hallmark of the American Dream; it’s one of the few paths to building generational wealth and achieving financial freedom. Unfortunately, for many, it can feel like a pipedream.
According to a recent report from the U.S. Census, the homeownership rate has dropped to 63.1%, its lowest rate since 1970. Moreover, the outlook for individuals from minority communities is even more bleak. Based on a report from the National Association of Realtors in 2021, the homeownership rate among Black homeowners (43.6%) and Hispanic homeowners (50.6%) significantly lagged behind Asian homeowners (62.8%) and white homeowners (72.7%).
Much of the gap can be attributed to historical policies and practices, such as redlining, that prevented minorities from buying homes in certain areas, regardless of income level. As a result, individuals from underserved communities were denied the same wealth-generating opportunities. While many of those policies and practices are now illegal, homeownership still feels unattainable for some consumers.
Increasing the homeownership rate — particularly among diverse communities — is a marker of progress for our country. Closing the gap is paramount to uplifting individuals and households from underserved communities. We have a responsibility as a mortgage and financial services industry to drive meaningful change and create a more equitable path to homeownership.
Driving homeownership change requires resolve and education
While there are programs designed to create a path to homeownership for low- and moderate-income families, some of these programs haven’t gone far enough. For example, some families may be able to access down-payment assistance through non-profits and lenders, however, those families frequently need more financial assistance to maintain and remain in their homes over the course of many years. Without the additional help, some families may lose their homes.
Quite frankly, providing access to financial resources is only part of the homeownership equation.
Based on a recent Experian survey comparing the experiences of Black, Hispanic and white consumers, one barrier for Black and Hispanic consumers aspiring to become homeowners is not knowing where to start. In addition, 58% of Black and Hispanic consumers who were denied a mortgage do not know what they need to do to get approved in the future.
There’s a tremendous opportunity for mortgage lenders, non-profits and other financial services participants to redefine our financial inclusion efforts. In addition to addressing financial hurdles, we need to tackle some of the other barriers to closing the homeownership gap, including financial education. This could mean examining the types of questions individuals have about certain products or services, or meeting with community leaders to better understand the challenges that underserved communities are facing.
Individuals and households from underserved communities welcome the opportunity to learn about basic financial concepts, including how to navigate the housing market. Listening to the challenges they encounter, and imparting knowledge is how the mortgage industry can help them prepare to become homeowners.
For example, HomeFree-USA’s “Fast Track to Homeownership” program gets renters ready for mortgage approval and homeownership. Its intermediary network oversees 53 affiliated community and faith-based housing counseling agencies across the nation.
Financial educational resources, such as tips for building and maintaining good credit, that is customized to each community, coupled with classes that provide individuals with financial knowledge and access to tools, can help them to boost their credit score and grow the overall homeownership rate. Even something as fundamental as understanding the various tax refunds for homeowners who are eligible can make a huge impact on new homebuyers.
Inclusion cannot happen in a vacuum. Closing the homeownership gap among diverse populations requires a long-term vision and commitment from stakeholders across the financial services community. Providing access to financial assistance and the knowledge to navigate the housing market better prepares consumers to become first-time homeowners, and more importantly, to begin building generational wealth.
Wil Lewis is the global chief diversity, equity, inclusion and talent acquisition officer for Experian. Gwen Garnett is the executive director for HomeFree-USA.
We all know underwriting standards have improved immensely since the latest housing crisis.
When it comes down to it, they couldn’t have gotten much worse, seeing that lenders were turning to pay-option arms with zero down as a solid choice for borrowers.
Today, it’s all about sound underwriting and fixed-rate mortgages, which coupled with rising prices and ultra low mortgage rates, make for a pretty solid recipe.
But just how good are the mortgages being made today? Well, according to a new report from Black Knight Financial Services (formerly Lender Processing Services), they’re the best ever.
The company’s senior vice president of Data & Analytics, Herb Blecher, noted that 2013 originations were the “best-performing vintage on record.”
If you take a look at the chart below from their most recent Monthly Mortgage Monitor, you’ll notice performance is solid across the board, for Fannie and Freddie loans, FHA and VA loans, and portfolio and private loans.
The delinquency rate for loans six months out with 720+ credit scores and LTV ratios south of 80% is fractional.
From the chart it appears as if portfolio loans (those kept by banks on their own books) are performing best, followed by GSE loans (Fannie and Freddie), then Ginnie Mae loans (FHA/VA), and finally private.
The worst performing vintages vary by loan type, though 2006 to 2008 were the worst years without question.
For GSE loans, 2007 was far and away the worst vintage. Loans originated during this period accounted for much of the foreclosure activity seen over the past several years.
For Ginnie Mae loans, it wasn’t until 2008 that delinquencies hit their peak, and for portfolio loans, 2007 was the worst year.
As far as private loans are concerned, delinquencies skyrocketed in 2006, and have since improved tremendously.
Second Mortgages Far Less Common on Recent Vintages
Another plus related to recent vintages is that very few have second liens, a characteristic that was very commonplace leading up to the housing crisis.
More than 40% of active first mortgages from 2003 and 2006 vintages have a second lien, seeing that 100% financing was extremely popular and essentially the norm at the time.
Meanwhile, less than 20% of first mortgages from the 2010 vintage have a second lien, a sign of the times as lenders shied away from such high-risk offerings.
Of course, over time it is expected that more and more borrowers will take out two loans when purchasing a new home to extend mortgage financing and avoid mortgage insurance.
In fact, second mortgage home equity loan volume is up 206% from a year ago, while second lien HELOCs are up 168%. These numbers should continue to rise from their near-term lows, especially as home prices continue to rise and more borrowers tap equity.
With loan quality this good, it’ll be interesting to see if the new mortgage rules make any material impact going forward. You also have to wonder how much ultra-low mortgage rates and rising prices affect loan performance.
Robo-advisors have barely been around for 10 years, but in the past couple of years several have been steadily expanding their investment menus, and even offering valuable add-on services. One of the leaders in this regard is Wealthfront. The robo-advisor has been growing its investment capability in every direction but is now even offering financial planning. The platform now bills itself as offering High-Interest Cash, Financial Planning & Robo-Investing for Millennials. If you’re looking for more than just investing, Wealthfront has it. And as has become their trademark, it’s all available at a low cost.
What is Wealthfront?
Based in Palo Alto, California, and founded in 2011, Wealthfront has about $25 billion in assets under management. It’s the second-largest independent robo-advisor, after Betterment. And while dozens of robo-advisors have arrived in recent years, Wealthfront stands out as one of the very best. There isn’t any one thing Wealthfront does especially well, but many. And they’re adding to their menu of services all the time.
Their primary business of course is automated online investing. You can open an account with as little as $500, and the platform will design a portfolio for you, then manage it continuously. Your money will be invested in a globally diversified portfolio of ETFs–just like most other robo-advisors. But Wealthfront takes it a step further, and also adds real estate and natural resources.
Like other robo-advisors, Wealthfront uses Modern Portfolio Theory (MPT) in the creation of portfolios. They first determine your investment goals, time horizon, and risk tolerance, then build a portfolio designed to work within those parameters. MPT emphasizes proper asset allocation to both maximize returns, and minimize losses.
But in a major departure from other robo-advisors, Wealthfront now offers the ability to customize your portfolio and get access to a variety of investment methodologies and portfolios, including Smart Beta, Risk Parity and Stock-Level Tax-Loss Harvesting. And more recently, they’ve also stepped into the financial planning arena. They now offer several financial planning packages, customized to very specific needs, including retirement planning and college planning.
If you haven’t checked out Wealthfront in the past year or so, you definitely need to give it a second look. This is a robo-advisor platform where things are happening–fast!
How Wealthfront Works
When you sign up with Wealthfront, they first have you complete a questionnaire. Your answers will determine your investment goals, time horizon, and risk tolerance. A portfolio invested in multiple asset classes will be constructed, with an exchange-traded fund (ETF) representing each.
The advantage of ETFs is that they are low-cost, and enable the platform to expose your portfolio to literally hundreds of different companies in each asset class. With your portfolio invested in multiple asset classes, it will literally contain the stocks and bonds of thousands of companies and institutions, both here in the U.S. and abroad.
Wealthfront offers tax-loss harvesting on all portfolio levels. But they’ve also added portfolio options for larger investors, that include stocks as well as ETFs. The inclusion of stocks gives Wealthfront the ability to be more precise and aggressive with tax-loss harvesting.
Each portfolio also comes with periodic rebalancing, to maintain target asset allocations, as well as automatic dividend reinvestment. As is typical with robo-advisors, all you need to do is fund your account–Wealthfront handles 100% of the investment management for you.
More recently, Wealthfront has also added external account support. The platform can now incorporate investment accounts that are not directly managed by the robo-advisor. This will provide a high-altitude view of your entire financial situation, helping you explore what’s possible and providing guidance to optimize your finances.
And much like many large investment brokers, Wealthfront now offers a portfolio line of credit. It’s available only to investors with $25,000 or more in a taxable account, but if you qualify you can borrow money against your investment account and set your own repayment terms in the process
Wealthfront Features and Benefits
Minimum initial investment: $500
Account types offered: Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trusts and 529 college accounts
Account access: Available in web and mobile apps. Compatible with Android devices (5.0 and up), and available for download at Google Play. Also compatible with iOS (11.0 and later) devices at The App Store. Compatible with iPhone, iPad and iPod touch devices.
Account custodian: Account funds are held in a brokerage account in your name through Wealthfront Brokerage Corporation, which has partnered with RBC Correspondent Services for clearing functions, such as trade settlement. IRA accounts are held with Forge Trust.
Customer service: Available by phone and email, Monday through Friday, from 7:00 AM to 5:00 PM, Pacific time.
Wealthfront security: Your funds invested with Wealthfront are covered by SIPC, which insures your account against broker failure for up to $500,000 in cash and securities, including up to $250,000 in cash.
Wealthfront uses third-party providers to maintain secure, read-only links to your account. The providers specialize in tracking financial data, as well as employ robust, bank-grade security, and in general, they follow data protection best practices. In addition, Wealthfront does not store your account password.
Wealthfront Investment Methodology
For regular investment accounts, Wealthfront constructs portfolios from a combination of 10 different specific asset classes. This includes four stock funds, four bond funds, a real estate fund, and a natural resources fund.
Each portfolio will contain various allocations of each asset class, based on your investor profile as determined by your answers to the questionnaire. The one exception is municipal bonds. That allocation will appear only in taxable accounts. IRAs don’t include them since the accounts are already tax-sheltered.
Notice in the table below that most asset classes have two ETFs listed. This is part of Wealthfront’s tax-loss harvesting strategy. In each case, the two ETFs are very similar. To facilitate tax-loss harvesting, one fund position will be sold, then the second will be purchased at least 30 days later, to restore the asset class. (We’ll cover tax-loss harvesting in a bit more detail a little further down.)
The ETFs used for each asset class are as follows, as of December 29, 2018:
Specific Asset ClassGeneral Asset ClassPrimary ETFSecondary ETF
US Stocks
Stocks
Vanguard CRSP US Total Market Index (VTI)
Schwab DJ Broad US Market (SCHB)
Foreign Stocks
Stocks
Vanguard FTSE Developed All Cap ex-US Index (VEA)
Schwab FTSE Dev ex-US (SCHF)
Emerging Markets
Stocks
Vanguard FTSE Emerging Markets All Cap China A Inclusion Index (VWO)
iShares MSCI EM (IEMG)
Real Estate
Real Estate
Vanguard MSCI US REIT (VNQ)
Schwab DJ REIT (SCHH)
Natural Resources
Natural Resources
State Street S&P Energy Select Sector Index (XLE)
Vanguard MSCI Energy (VDE)
US Government Bonds
Bonds
Vanguard Barclays Aggregate Bonds (BND)
Vanguard Barclays 5-10 Gov/Credit (BIV)
TIPS
Bonds
Schwab Barclays Capital US TIPS (SCHP)
Vanguard Barclays Capital US TIPS 0-5 Years (VTIP)
Municipal Bonds (taxable accounts only)
Bonds
Vanguard S&P National Municipal (VTEB)
State Street Barclays Capital Municipal (TFI)
Dividend Stocks
Bonds
Vanguard Dividend Achievers Select (VIG)
Schwab Dow Jones US Dividend 100 (SCHD)
Wealthfront’s historical returns are as follows (through 1/31/2019). But keep in mind these numbers are general. Since the portfolios designed for each investor are unique, your returns will vary.
Specialized Wealthfront Portfolios
As mentioned in the introduction, Wealthfront has rolled out several different investment options, in addition to its regular robo-advisor portfolios. Each represents a specific, and generally more specialized investment strategy, and is typically available to those with larger investment accounts.
Smart Beta: You’ll need at least $500,000 to be eligible for this portfolio. Smart beta departs from traditional index-based investing, which relies on market capitalization. For example, since Apple is one of the most highly capitalized S&P 500 stocks, it has a disproportionate weight in strict S&P 500 index funds. In a smart beta portfolio, the position in Apple will be reduced based on other factors.
In general, under smart beta, the weighing of stocks in the fund uses a variety of factors that are less dependent on market capitalization. There’s some evidence this investment methodology produces higher returns. This portfolio is available at no additional fee.
Wealthfront Risk Parity Fund: This is actually a mutual fund–the first offered by Wealthfront. It involves the use of leverage with some positions within the portfolio. It attempts to achieve higher long-term returns by equalizing the risk contributions of each asset class. It’s based on the Bridgewater Hedge Fund, and requires a minimum of $100,000, with an additional annual fee of 0.25% (0.50% total). This is the only Wealthfront portfolio that charges a fee over and above the regular advisory fee.
Socially responsible investing (SRI): Wealthfront just recently began to offer a specific SRI portfolio option. Once you sign up, you’ll be able to customize your portfolio and add socially responsible ETFs.
Sector-specific ETFs: If you want to invest in a particular portion of the market, such as technology or healthcare, Wealthfront gives you the option to build a portfolio that focuses on certain industries to portions of the stock market.
Customized Wealthfront Portfolios:
Wealthfront also lets investors build their own portfolios, which is somewhat uncommon among robo-advisors.
Most robo-advisors will build your portfolio automatically based on your risk tolerance and goals. If you like that service, Wealthfront can do it. However, more hands-on investors are free to make tweaks to the automatically designed portfolio by adding or removing ETFs.
You can also build a portfolio entirely from scratch if you’d rather. You can choose which ETFs to invest in and how much you want to invest in them. You can then let Wealthfront handle things like rebalancing and tax-loss harvesting while maintaining the portfolio you desire.
Wealthfront Tax-loss Harvesting
If there’s one investment category where Wealthfront stands above other robo-advisors, it’s tax-loss harvesting. Not only do they offer it on all regular taxable accounts (but not IRAs, since they’re already tax-sheltered), but they also offer specialized portfolios that take it to an even higher degree.
Wealthfront starts with a tax location strategy. That involves holding interest and dividend-earning asset classes in IRA accounts, where the predictable returns will be sheltered from income tax. Capital appreciation assets, like stocks, are held in taxable accounts, where they can get the benefit of lower long-term capital gains tax rates.
But for larger portfolios, Wealthfront offers Stock-level Tax-Loss Harvesting. Three specialized portfolios are available, using a mix of both ETFs and individual stocks. The purpose of the stocks is to provide more specific tax-loss harvesting opportunities. For example, it may be more advantageous to sell a handful of stocks to generate tax losses, than to close out an entire ETF.
Given that Wealthfront puts such heavy emphasis on tax-loss harvesting, it’s not surprising they’ve published one of the most respected white papers on the subject on the internet. If you want to know more about this topic, it’s well worth a read. The paper concludes that tax-loss harvesting can significantly increase the return on investment of a typical portfolio.
US Direct Indexing
US Direct Indexing is an enhanced level of tax-loss harvesting that Wealthfront offers to people with account balances exceeding $100,000.
Instead of building a portfolio of ETFs, Wealthfront will use your money to directly purchase shares in 100, 500, or 1,000 US companies. By buying shares in so many companies, Wealthfront can emulate an index fund in your portfolio while owning individual shares in the businesses.
Owning individual shares in hundreds of companies makes tax-loss harvesting easier as it lets Wealthfront’s algorithm trade based on movements in individual stocks rather than in funds. This can increase the number of tax losses that Wealthfront harvests each year, reducing your income tax bill.
Other Wealthfront Features
Wealthfront Cash Account
Wealthfront offers acash account where you can safely and securely store your money for anything–emergencies, a down payment for a home, or to later invest. By working with what they call Program Banks, Wealthfront has quadrupled the normal FDIC insurance on this account, so you’re protected for up to $5 million.
There’s also no market risk since it’s not an investment account and the money isn’t being invested anywhere. You can make as many transfers in and out of the account as you’d like, and it only takes $1 to start.
So what’s the catch?
There really isn’t one. Wealthfront will skim a little off the top to make some money before giving you an industry-leading 4.30% APY, but other than that, you’re just giving them more financial data. Since we’re doing this all the time with technology anyway, it shouldn’t make that big of a difference.
I see no downside, especially if you’re already a client of Wealthfront.
They’re really making a play to be your all-in-one financial services provider, too.
A new feature, just launched, is the ability to use your cash account as a checking account. This includes the ability to access your paycheck up to two days early when you set up a direct deposit. Additionally, you can invest in the market within minutes using your Wealthfront Cash account. Put the two together and you give yourself the ability to invest more than 100 days more in the market. The account also allows you to auto-pay bills and use apps like Venmo and PayPal to send money to friends or family. Account-holders also get a debit card to make purchases and get cash from ATMs. And you can use the account to organize your cash into savings buckets – like an emergency fund, down payment on a house, or other large purchase – and use Wealthfront’s Self-Driving Money offering to automate your savings into those buckets.
If you have cash that’s getting rusty in a traditional bank account and you want to earn more, the Wealthfront Cash Accountis a great place to keep it.
Read more about the cash account in our Wealthfront Cash Account full review.
Wealthfront Portfolio Line of Credit
This feature is available if you have at least $25,000 in your Wealthfront account. It allows you to borrow up to 30% of your account value, and currently charges interest rates between 3.15% and 4.40% APR depending on account size. You can make repayments on your own timetable, since you’re essentially borrowing from yourself. And since the credit line is secured by your account, you don’t need to credit qualify to access it.
Wealthfront Free Financial Planning
This is Wealthfront’s entry into financial planning. But like everything else with Wealthfront, this is an automated service. There are no in-person meetings or phone calls with a certified financial planner. Instead, technology is used to help you explore your financial goals, and to provide guidance to help you reach them. And since the service is technology-based, there is no fee for using it.
The service can be used to help you plan for homeownership, college, early retirement, or even to help you plan to take some time off to travel, like an entire year!
Simply choose your financial objective, enter your financial information, and Wealthfront will direct you on how to plan and prepare.
Self-Driving Money
One of the biggest and largely unrecognized obstacles for most investors is something known as cash drag. That’s when you have too much of your portfolio sitting in cash, which may earn interest, but it doesn’t provide the investment returns you can get in a diversified investment portfolio.
Wealthfront has addressed the cash drag dilemma with their newly released Self-Driving Money features. It’s a free service offered by the robo-advisor that essentially automates your savings strategy. It does this by automatically moving excess cash to help meet your goals, including into investment accounts where it will earn higher returns. And in the process, it eliminates the need to make manual cash transfers, and the judgment needed to decide exactly when to make that happen.
Our vision of Self-Driving Money is going to be a complete game-changer for people’s finances, said Chris Hutchins, Head of Financial Automation at Wealthfront. We want to completely remove the burden of managing your money so you can focus on your career, your family or whatever is most important to you.
You can take advantage of Self-Driving Money from the Wealthfront Cash Account. You’ll set a maximum balance for the connected account, which should be an amount that’s more than you expect to spend or withdraw on a monthly basis.
How It Works
When Wealthfront determines you’re over your maximum balance by at least $100 it will schedule an automatic transfer of the excess cash based on your goals. For example, you can tell Wealthfront you want to save $10,000 in an emergency fund, then max out your Roth IRA, then put the rest toward saving for a down payment on a house. Once you set the strategy, Wealthfront will automate the rest.
And before it happens, you’ll receive an email alert, then always have 24 hours to cancel the transfer if you need to cover unexpected expenses. You’ll also be able to turn on and off your Self-Driving Money plan at any time.
It’s usually possible to set up automated transfers from external accounts into most investment accounts. But what sets Wealthfront apart is the fact that it will make those transfers automatically. They will make sure you always have enough cash to pay your bills, then automatically transfer any excess into your savings buckets or investment accounts to improve the return on your money.
The strategy is designed to optimize your money across spending, savings, and investments, and to make it all flow with no effort on your part. You can simply have your paycheck direct deposited into your external checking account or Wealthfront Cash Account, cover your expected monthly spending, then have excess funds automatically transferred into the Wealthfront account of your choice.
By delivering on its Self-Driving Money vision, Wealthfront is taking the robo-advisor concept to a whole new level. Not only do you not need to concern yourself with managing your investments, but now even funding those investments will happen automatically. The result will be near complete freedom from the financial stresses that plague so many individuals.
Wealthfront Fees
Wealthfront has a single fee structure of just 0.25% per year for their advisory fee. That means you can have a $100,000 portfolio managed for just $250, or only a little bit more than $20 per month.
The one exception is the Wealthfront Risk Parity Fund, which has a total fee of 0.50% per year.
How to Sign Up with Wealthfront
To open an account with Wealthfront, you’ll need to be at least 18 years old, and a U.S. citizen.
You’ll need to provide the following information:
Your name
Address
Email address
Social Security number
Date of birth
Citizenship/residency status
Employment status
As is the case with all investment accounts, you’ll also be required to supply documentation verifying your identity. This is usually accomplished by supplying a driver’s license or other state-issued identification.
As mentioned earlier, you complete a questionnaire that will be used to determine your investment goals, time horizon, and risk tolerance. Your portfolio will be based on your answers to that questionnaire, and will be presented to you upon completion of the questionnaire.
For funding, you can use ACH transfers from a linked bank account. You will also have the option to schedule recurring deposits, on a weekly, biweekly, or monthly basis. The platform can even enable you to set up dollar-cost averaging deposits.
If you already have a brokerage account with another company, Wealthfront makes it easy to transfer your funds to your new account. If you’re invested in ETFs that Wealthfront supports, Wealthfront will assist with an in-kind transfer.
That means that you won’t have to sell your shares before transferring funds, which lets you avoid capital gains taxes that would be triggered by a sale.
Wealthfront Alternatives
Wealthfront’s closest competitor, and the robo-advisor that offers the most comparable services, is Betterment. They also have an annual advisory fee of 0.25%, but require no minimum initial investment. That could make it the perfect robo-advisor for someone with no money, who plans to fund their account with monthly deposits. Read the full Betterment review here.
Related: Wealthfront vs. Betterment
Another alternative is M1. Also a robo-advisor, M1 enables you to invest your money in what they call “pies”. These are miniature investment portfolios comprised of both stocks and ETFs. You can invest in existing pies, or create and populate pies of your own design. Once you invest in one or more pies, the platform will automatically manage it going forward. What’s more, M1 is free to use. Read more about M1 here.
Related: Wealthfront vs. Vanguard
Read More: The Best Robo Advisors – Find out which one matches your investment needs.
Wealthfront Pros and Cons
Investment options: Wealthfront offers more investment options than just about any other robo-advisor, particularly for investors with at least $100,000.
Reasonably priced: The annual fee of 0.25% is extremely reasonable, especially when you consider the degree of sophistication offered by Wealthfront’s investment methodology.
Tax-loss harvesting: This is available on all accounts, and Wealthfront is probably better at this investment strategy than any other robo-advisor.
Portfolio credit line: Gives you the ability to borrow against your portfolio with ease, and represents a form of margin investing.
Financial planning feature: The financial planning service is free to use and is available to all investors.
Limited access for smaller investors: Some of the more advanced investment portfolios and services are available only to investors with $100,000 or more to invest.
$500 minimum initial investment: It’s a minor issue, though some competitors require no funds to open an account.
FAQs
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Should You Sign Up for Wealthfront?
In a word, absolutely! Wealthfront is one of the very top robo-advisors, and you can’t go wrong with this one. Not only do they offer far more services than most other robo-advisors, but they also allow you to grow along the way. For example, as your account increases in value, you can take advantage of more sophisticated investment strategies, including advanced tax-loss harvesting.
That Wealthfront offers its portfolio line of credit and free financial planning services only makes the platform a bit more attractive, But the real benefit is the actual investment service. Wealthfront’s investment service comes extremely close to that of traditional human investment advisors, but at only a fraction of the annual cost.
WASHINGTON — The Bank Policy Institute and the American Bankers Association penned a joint letter Tuesday urging federal bank regulators to delay finalizing the most sweeping revisions to the Community Reinvestment Act — an anti-redlining bill — in decades.
The letter, sent by BPI and ABA to the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency suggested regulators should delay any final CRA rule until the agencies’ joint Basel III capital rules are finalized. They posited regulators had not considered how the new capital requirements lower the incentive for banks to engage in CRA activities like low down payment mortgages to low-income families.
“The proposed capital rules would reduce incentives to engage in mortgage lending, which is central to the CRA programs of many banks,” they said. “Many banks offer low down payment mortgages as a means of meeting the credit needs of low- and moderate-income families.”
In addition to asking regulators to pause the CRA rule to accommodate the likely reduction in mortgage lending, the letter also said that a constitutional challenge to the Consumer Financial Protection Bureau’s funding structure should give regulators pause as they move ahead with a final rule. The banking industry has previously expressed opposition to the CRA revamp on the grounds it oversteps congressional authority.
A Texas district court judge last month temporarily barred the CFPB from enforcing its 1071 rule until after the Supreme Court rules on the constitutionality of the CFPB’s funding structure sometime next year.
“The banking agencies should delay finalization of the CRA rules until a final determination is made regarding the status of the rules promulgated under Section 1071, which will affect how the agencies administer certain aspects of the CRA rules,” the banking groups said.
While the necessity for a CRA update is widely acknowledged, the banking industry has expressed louder opposition as new Basel III endgame requirements and post-banking crisis reforms coincide with the new CRA standards.
In a comment letter in August, 2022 the Bank Policy Institute said the agencies’ joint proposed rule exceeded statutory mandate, added needless complexity and broad application and was overly punitive in its application toward banks. Another major trade group, the American Bankers Association, made similar claims in an August comment letter, saying the proposal missed the mark. ABA said they were concerned that significant numbers of banks would need to invest more in their retail lending departments to pass retail lending examinations under the new rule.
The Community Reinvestment Act was passed in 1977 to bar banks from accepting deposits from lower-income communities without making commensurate levels of loans to those communities — a problem for many communities of color in the first years since explicit racial discrimination in lending was outlawed. The law requires banks to make loans to low- and moderate- income borrowers in the institution’s “assessment area,” defined as areas where the bank has its headquarters, branches or deposit-taking ATMs.
Banks are assessed for compliance at least every five years by their primary regulator. Banks are graded in three areas: lending, investment and service, weighted as 50%, 25% and 25% of the examination respectively. Banks are then assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “noncompliant” based on their performance.
If a bank is deemed to have less than a “satisfactory” rating, then it may not merge with or acquire another banking institution or modify its charter until it achieves compliance. But critics have argued that most banks receive either an outstanding or satisfactory rating, meaning that virtually no banks face the regulatory burdens that the CRA can impose.
Former Comptroller of the Currency Joseph Otting sought to reform the implementation of the CRA during the Trump administration, but community advocates argued that his reforms were too favorable to banks and would yield little additional investment in the communities that need it the most. Bank regulators issued their revised proposal last year. — John Heltman contributed to this report
The increasingly popular Federal Housing Association is in need of reform, according to testimony from James Heist, assistant inspector general for audit with the Department of Housing and Urban Development.
While testifying at a House Financial Services Committee meeting Friday, Heist noted that the FHA’s large share of the loan origination market calls for increased personnel, training, and oversight.
FHA market share has grown considerably of late, accounting for 12.55 percent of all single-family home loan originations in fiscal 2008, up from 4.12 percent a year earlier.
As of September 2008, market share reached a hefty 21.13 percent, up from 6.35 percent in October 2007.
Meanwhile, roughly 6.5 percent of FHA loans are in default, putting strain on the agency’s insurance fund to cover related losses.
To manage the influx of loan activity, Heist called for improved internal control for assessing risk and updated information technology systems, which he said have been obsolete for nearly twenty years.
Additionally, he warned that the collapse of the subprime lending market has pushed more unscrupulous lenders into the FHA lending space, increasing the need for more thorough oversight.
Higher loan limits are also opening up new metropolitan areas to FHA lending, presenting new “unknown hazards” to the agency.
Last summer, FHA commissioner Brian D. Montgomery said his organization realized $4.6 billion in unanticipated long-term losses thanks to seller-financed down payment assistance loans.
He said the loans were three times more likely to end in foreclosure and warned that their availability put the future of the FHA at risk, leading to a ban of the controversial loans months later.
In October, the FHA raised upfront premiums to deal with rising demand and associated costs.
A new report from Black Knight Financial Services revealed that monthly mortgage origination volume fell to its lowest point on record in February.
And recent prepay speeds signal even more declines in refinance volume in the near future.
The company said mortgage originations hit at least a 14-year low during the second month of the year, thanks in part to an elevated share of all-cash transactions.
The government share of originations has also taken a hit, with HARP refinancing continuing to slow as the pool of eligible borrowers shrinks.
Homes Are Still Selling, Even If Mortgages Aren’t Being Originated
Despite the mortgage slowdown, traditional home sales (non-distressed) were up nearly 15% from a year earlier.
At the same time, distressed transactions continue to dwindle as short sales and foreclosures become less and less common.
Overall, residential real estate sales remained close to flat year-over-year, again because of the all-cash buyers, many of which were assumed to be investors.
Black Knight’s Data and Analytics division SVP Herb Blecher noted in a press release that cash sales accounted for nearly half of all transactions.
Mortgage Delinquencies Fall Below 6%
The good news is that mortgage delinquencies fell below six percent (5.97%) for the first time since 2008, and foreclosures were down 34% from a year ago to their lowest level since 2007.
Unfortunately, this means the foreclosure pipeline is steadily growing, with the average loan in foreclosure now 2.6 years past due, compared to 0.7 years in 2008.
The new CFPB rules don’t allow foreclosure proceedings to begin until after 120 days of delinquency, and data has revealed that foreclosure starts at the 90-day mark have pretty much come to a halt.
Florida, New Jersey, and New York have the highest level of seriously delinquent loans (90+ days late or in foreclosure), but foreclosure backlogs have grown the most in non-judicial states like California and Nevada thanks to newly imposed legislation.
Loan modification volume has also taken a hit, with activity ending the year around post-crisis lows. The only bright spot is the FHA-HAMP program, which has gotten a boost thanks to some recent program changes.
Those include eliminating the maximum back-end DTI ratio requirement of 55%, and allowing FHA borrowers to be more than 12 full payments past due.
Speaking of modifications, borrower equity continues to dictate re-default rates, with borrowers falling behind a second time 30% more when underwater.
Loose Mortgage Lending Hasn’t Arrived Yet
Black Knight also noted that only about 30% of mortgages last year went to borrowers with credit scores below 720, so it’s still very much about the most creditworthy individuals.
And though some lenders have announced pretty aggressive offerings of late, such as Carrington’s 550 minimum FICO score for an FHA loan, that type of subprime lending is still few and far between.
In fact, originations in the sub-620 bracket still account for less than five percent of residential mortgage lending volume, despite ticking up in recent years.
Many expect volume in this higher-risk band to increase as banks continue to grapple with flagging volume.
And the trend is already apparent in the FHA realm, where lending to borrowers with scores between 620-719 increased year-over-year after steadily declining.
However, the sub-620 category is still pretty flat and that doesn’t appear to be changing anytime soon.
“We are ecstatic and honored to be included in the Inc. 5000 list of 2023, a true reflection of our team’s hard work and unwavering dedication,” A&D Mortgage CEO Max Slyusarchuk said. “This achievement underscores our commitment to delivering exceptional services to our clients while maintaining a sustainable and robust growth trajectory in a challenging … [Read more…]
I have often found that where technology and financial services come together, the no’s are necessary. As such, shouldn’t we learn to make them happen productively? Saying no is an inevitability — or rather, it should be. Anyone who has tried to accommodate the ‘yes’s’ all the time could tell you that it is impossible to say yes to everything.
Those who try to say yes 100% of the time are often mistaken in thinking it’s working effectively for them and for those around them — even the parties they’re saying ‘yes’ to.
But, saying yes to everything removes us from the equation and renders our point of view immaterial. It makes our judgement about the effectiveness or outcomes moot.
The privilege of saying no
We should make saying ‘no’ a habit, but rather that the intuition, intelligence and experience that may lead us to consider ‘no’ as a viable conclusion are vital signals that we should not take for granted. The ability to bring these signals to bear involves first recognizing that as an option and then exercising it as an advantage — not only for us, but also on behalf of the people who are depending on us.
Capitalizing on the advantages of when to say ‘no’ can make the difference between good and great — between maintenance and breakthrough. Some of the best advice I ever received was when a former boss advised me to, “Say ‘no’ to the good, so you can say ‘yes’ to the best.” If you fill your plate with the “good,” then where is the time or room to take advantage of great opportunities that show up?
I heard another version of this advice when a coach commented on a personnel option he chose not to exercise: “Some of the best deals are the ones you don’t make.”
The boundaries of time
It becomes clearer where to set boundaries when we carefully consider our entire vision. Your end-goal is the guide that allows you to see what smaller goals lead toward, what challenges or actions may divert you away from it and what merely marks time.
Knowing what your “great” looks like can be a touchstone, a reference for when to agree to do something and when not to. While staying open to the unexpected, we can see opportunity in any development. The key is to keep our goals and vision in mind, and act distinctly.
Time is the ever-present resource on which we can exercise critical choices. Our calendars, schedules and agendas construct a gymnasium where purpose gains definition. Be deliberate in assigning time to the things that are most important to you and recognize that we must work on our business and not just in our business. This means apportioning time for analysis, strategy and evaluation.
If we only schedule operations and execution, then the business is running us. Therefore, we should make a point of scheduling the time to think — both alone and together.
The response you can expect
You may find it hard to practice saying no deliberately. If you’ve formed a habit of saying yes too often, it is easy to slip back into old patterns. The best way to overcome this sense of resistance is to stick with your plan and pay attention to what you’re getting in return.
Once you find that you have more time and energy to focus on what really matters to you, then the reward and value of saying no becomes more apparent.
Not everyone will understand when you say ‘no.’ This is not an obstacle, but rather a road sign. If everyone agrees with you, then it is unlikely that your decision is accomplishing anything worthwhile. Your options for dealing with this response can be yet another opportunity for progress.
Sometimes, explaining your decision can be a real opportunity to enhance the impact. It is vital that the timing and extent of your explanation isn’t seen as an apology or uncertainty. The risk of weakening your decision must be avoided, yet the chance to put the energy of understanding behind it can, on occasion, be worth taking.
Here, where technology and financial services come together, I have had the tremendous professional opportunity of seeing what works in real market situations, more or less immediately almost every day and I’m happy to share what I have learned.
Christy Soukhamneut is managing director of Mortgage Finance in Texas.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Texas Capital Bank.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Christy Soukhamneut at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
The Community Home Lenders of America (CHLA) this week submitted a letter to the Federal Housing Finance Agency (FHFA) in response to a recent request for input (FRI) on GSE single-family pricing framework. Its message? The trade group asked the regulator to “make no further changes for an extended period of time.”
The original RFI published in May was designed to gather public feedback on goals and policy priorities the agency should pursue in its oversight of the pricing framework.
CHLA says that its recommendation comes from the idea that “Enterprise pricing changes can create short term transition risk for lenders as they approach dates where prices change and that frequent pricing changes can pose a cost and resource burden on lenders, particularly with respect to necessary IT changes,” the letter said.
Because of this, CHLA says it would be “comfortable” if guarantee fees and loan-level pricing adjustments (LLPAs) remained at current levels for a “significant period of time,” which they define as through the end of 2024.
CHLA, which represents smaller lenders, said it continues to be “extremely critical” of a move by Congress at the end of 2021 to renew a 10 basis point increase to mortgage fees that Fannie Mae and Freddie Mac indirectly charge to consumers. The additional revenue generated by these fees was allocated for infrastructure spending.
The organization is critical of the move because “the proceeds of such fee collections [are] being used solely to pay for non-housing federal expenditures under the federal budget process,” the letter said. “This is a much broader concern than just Enterprise loans. CHLA has long been a vocal critic of budget and appropriations actions and rules under which federal agency mortgage loan fees are diverted to pay for non-housing spending.”
Because of that, CHLA is renewing its request to rescind the 10 basis point increase.
After expressing appreciation to FHFA for Preferred Stock Purchase Agreement (PSPA) changes that established guarantee fee parity, CHLA requests that such parity be extended to mortgage insurance pricing, and that a recent 400% increase by FICO for its credit scores should be scaled back to align more consistently with inflation.
“[FHFA] should direct FICO to eliminate the preferential pricing it arbitrarily gave to a select group of 54 lenders,” the letter said. “It is reasonable for FHFA to take such action, since FHFA requires a credit score on all Enterprise loans.”
Proposed LLPA changes to conventional mortgages initially announced in January have been a source of controversy. The mortgage industry itself expressed nervousness at the prospects of the changes, and an uproar eventually led to a sustained front of opposition by lawmakers in the U.S. House of Representatives which introduced a bill designed to block such changes from going into effect.
The changes specific to conventional borrowers with debt-to-income (DTI) levels at or above 40% were ultimately rescinded, but not before House Republican lawmakers took aim in a House Financial Services subcommittee hearing and an additional hearing with FHFA Director Sandra Thompson as a witness.
“I want to be very clear on one key point, and one that bears repeating: under the new pricing framework, borrowers with strong credit profiles are not being penalized to benefit borrowers with weaker credit profiles,” Thompson said during the hearing. “That is simply not true.”
A number of investors trade stocks and bonds through an investment broker. What is a broker? A broker — or brokerage firm — is the middleman between the buyer and seller and can help make a transaction go smoothly.
But an investment broker is not strictly necessary. Some companies offer a direct stock plan, allowing investors to purchase shares straight from the company without a broker.
In order to decide if you need an investment broker, it’s essential to know how a broker works, what exactly they do, and how to shop around for one that fits your needs.
What Is an Investment Broker?
Investment brokers enable individuals to buy and sell financial securities, like stocks or bonds, on an exchange market.
What does a broker do? Reputable brokers act as a boon to both buyers and sellers: They ensure that each party actually has the money to buy assets or the assets to sell.
Brokers settle trades by delivering securities and payments to each party, while also taking care of all the bookkeeping and tax-related documentation required. In many cases, going through a brokerage firm is the easiest and most accessible way for individuals to get started with investing. 💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.
Pros and Cons of Using an Investment Broker
As with any financial service, there are both benefits and drawbacks to using a brokerage firm to facilitate your trades.
Pros of Using a Broker
Accessibility
Thanks to the internet, you can open a brokerage account in minutes and start trading stocks as soon as your account is funded. That means employing a financial broker is one of the easiest ways to start an investment journey as quickly as possible.
Simplicity
When you buy and sell through a broker, a lot of the tedious footwork — like keeping tabs on your interest earnings for tax purposes — is taken care of for you. Depending on the type of brokerage firm you go with, you may also have access to professional financial advice and other advisory services that could help you make the most of your portfolio.
Cons of Using a Broker
Fees and Commissions
Although they’ll vary based on the specifics you choose and the type of account you open, some brokers charge maintenance fees and trade fees — also known as commissions — which can eat away at your nest egg. In fact, the average stock broker commission charged by brokerage firms is usually 1% to 2% of the value of the total transaction.
That said, you can minimize your investment fees, or even eliminate them, by shopping around for brokers with the lowest costs. For example, many online brokers offer no commission trading.
Required Portfolio Minimums
Although it’s not true of every brokerage firm, some require you to keep a minimum amount of money in your account to use their services. These minimums might be $1,000 or more, which can be a barrier to entry for some beginner investors.
Recommended: What Is Broker Call Rate?
Two Types of Brokerage Accounts
If you’re still asking yourself, what does a broker do?, it’s important to understand that not all brokers are created equal. There are many kinds of brokerage accounts to choose from. For instance, you may want to choose between a brokerage account vs. a cash management account, both of which are offered by brokerages.
The best product for you will depend on your individual financial goals and your budget. Here’s what you need to know to help make an informed decision.
1. Full-service Brokerage Accounts
Along with the ability to buy and sell assets, a full-service brokerage account might also include advice from human financial planners and portfolio management to help you make the best investment decisions possible.
However, these perks don’t come cheap. Full-service brokerage accounts and wealth-management companies usually calculate their charges as a percentage of your total portfolio, and may have account minimums as high as $250,000. They may also collect trade commissions and annual management fees.
2. Discount Brokerages
Discount brokers offer less consultation and guidance, allowing you to DIY your investment portfolio cheaply. Many have $0 account minimums and may charge less than $10 per trade — or even offer commission-free assets trading.
Both full-service and discount brokerages typically offer both cash and margin accounts. In a cash account, you’ll need the actual cash to buy your assets. In contrast, in a margin account, the broker will lend you some capital to make purchases, using the securities you already own as collateral. 💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.
Regulations for Investment Brokers
Investment brokers are regulated by the Financial Industry Regulatory Authority (FINRA). Brokers must register with FINRA, and they are required to follow a standard of conduct known as the suitability rule. Under this rule, brokers need to have suitable grounds for recommending particular investments to clients.
The rule also encompasses something called “know your customer,” which spells out the various steps brokers need to use to identify clients and their goals for savings, including making a reasonable effort to ascertain a client’s financial and tax situation when recommending investments.
Different Types of Investment Accounts
Aside from deciding what type of brokerage you’d like to do business with (and how much you’re willing to pay for financial services), you’ll also need to decide what type of investment account works best for your goals.
Maybe you’re investing for a shorter-term objective, like purchasing a house — or perhaps you’re trying to ensure you’ll have a comfortable retirement. Either way, specific investment account types, or “vehicles,” are designed to help you get there.
Recommended: Understanding a Taxable Brokerage Account vs an IRA
Taxable Brokerage Account
Think of this as a default investment vehicle. It may be a good choice if you’re looking to grow wealth and want to be able to add or withdraw funds on your own terms without waiting to reach a certain age or life circumstance. However, you pay taxes on earnings, so there are no tax advantages to this type of account. If you don’t make any specific investment vehicle choices when you open your brokerage account, this is most likely the one you’re getting.
Individual Retirement Account (IRA)
An individual retirement account, or IRA, is a type of investment account designed specifically for retirement goals and is available to self-employed people and those working for a company. IRAs carry specific tax incentives; for example, contributions to traditional IRAs are deductible, while Roth IRAs allow for tax-free distributions. However, you can’t access the funds without paying a penalty until you reach age 59 ½ or meet certain circumstantial requirements, such as purchasing your first home.
A broker may offer other savings or investment vehicles, such as a 529 college savings plan, a tax-incentivized plan to help people save for educational costs. For full details on the type of accounts available, it makes sense to check with your broker directly.
Alternatives to Investing With a Broker
Although using a broker to invest in the stock market might be a smart money move for some, there are other ways to get started with investing, including the following options.
Recommended: Buying Stocks Without a Broker
Automated Investing
Automated investment products, or robo-advisors, are platforms that utilize a combination of computer algorithms and human financial planners to create and manage diversified portfolios at low costs to users.
Your funds will be invested in a diversified portfolio, and the platform typically offers goal-planning tools and rebalancing services to help keep your funds moving in the right direction.
If you don’t want to pay the high prices for a full-service broker, but self-managing your portfolio makes you more than a little nervous, a robo-advisor may be right for you.
Buying Stocks and Fractional Shares Directly
Depending on whose stocks you’re interested in purchasing, you may be able to buy them directly from the issuer without needing to go through a brokerage firm.
It pays to read the fine print, however: Buying stocks directly may save you money on trade commissions, but you may also be subject to proprietary fees from the company or minimum purchase amounts. And if you’re buying fractional shares (fractions of shares of stock), you need to have an investment account, such as one with an online broker or robo-adviser.
Diversifying your assets can still be helpful for investors who buy stocks directly. If all of your investments are tied up in a single company, you may not be in a great position if that company begins to falter. In contrast, if you’ve invested in several different firms and other asset classes, you will likely have a wider margin for error.
Choosing Alternative Investments
Although the stock market is one of the most popular and generally low-effort ways to invest, there are plenty of other ways to try turning your money into more money.
You might consider exploring alternative investments. For example, you could invest in real estate and sell the property at a profit or turn a condo into a passive income source by putting it up for rent. Or you might invest in art; the value of paintings is not necessarily correlated with the behavior of the stock market, giving it the potential to rise even during a stock market crash.
That said, many alternative investments require significantly more time, work, and know-how than crafting a diversified portfolio of stock market assets. And as always, every investment involves risk. There’s no such thing as a sure thing.
Controlling Your Investments With SoFi
If you’ve decided stock market investments are the right move for you and your money, going through a broker can be a relatively simple and low-cost way to gain access to the market. However, if you’d rather avoid potential downsides, like fees or required account minimums, you may want to consider the option to invest directly. The choice is yours.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
What is the role of a stock broker?
A stock broker is a financial professional who buys and sells stocks on behalf of clients. A broker generally earns a fee or commission for their services.
How do brokers make money?
Brokers typically work on commission. The average stock broker commission is usually 1% to 2% of the value of the total transaction.
Why do people use brokers?
People use brokers to help them buy and sell stocks and bonds. Brokers also handle the necessary bookkeeping and tax-related documentation. For many individuals, using a broker is the easiest way to start investing.
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SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
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