President Donald Trump’s administration is teasing real estate investors with the possibility of significant tax breaks when they buy properties in “distressed economic areas” that have since been labeled as “opportunity zones” by the U.S. Treasure Department.
Steve Mnuchin, the Treasury’s Secretary, said the newly designated zones could attract as much as $100 billion in investment.
The idea for the tax breaks is to tempt investors to inject new capital into areas of the U.S. that have fallen behind the rest of the country since the Great Recession. The plan is that capital gains in a certified opportunity zone can avoid taxation through the end of 2026, or until the investment is sold, whichever comes first. Any gains would be permanently shielded from being taxed if the investors holds the asset for at least 10 years. In addition, after a seven year period, the initial investment will be discounted by up to 15 percent for taxation purposes.
The Treasury Department also says that “large scale” projects could possibly qualify for tax breaks. For example, those who invest capital for startup business in opportunity zones could be exempt. Also include are individuals, corporations, businesses, REITs and estates and trusts. More guidance will be issued at the end of the year, the Treasury Department said.
The Treasury Department has published a full list of “Opportunity Zones”, available here.
“The creation of opportunity zones is one of the most significant provisions of the Tax Cut and Jobs Act,” Mnuchin said earlier this year. “Incentivizing private investment into these low-income communities can be transformational, stimulating economic growth and job creation across the country. This administration will work diligently with states and the private sector to encourage investment and development in opportunity zones and other distressed communities so that they may enjoy the benefits of robust economic growth.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
President Donald Trump’s administration is teasing real estate investors with the possibility of significant tax breaks when they buy properties in “distressed economic areas” that have since been labeled as “opportunity zones” by the U.S. Treasure Department.
Steve Mnuchin, the Treasury’s Secretary, said the newly designated zones could attract as much as $100 billion in investment.
The idea for the tax breaks is to tempt investors to inject new capital into areas of the U.S. that have fallen behind the rest of the country since the Great Recession. The plan is that capital gains in a certified opportunity zone can avoid taxation through the end of 2026, or until the investment is sold, whichever comes first. Any gains would be permanently shielded from being taxed if the investors holds the asset for at least 10 years. In addition, after a seven year period, the initial investment will be discounted by up to 15 percent for taxation purposes.
The Treasury Department also says that “large scale” projects could possibly qualify for tax breaks. For example, those who invest capital for startup business in opportunity zones could be exempt. Also include are individuals, corporations, businesses, REITs and estates and trusts. More guidance will be issued at the end of the year, the Treasury Department said.
The Treasury Department has published a full list of “Opportunity Zones”, available here.
“The creation of opportunity zones is one of the most significant provisions of the Tax Cut and Jobs Act,” Mnuchin said earlier this year. “Incentivizing private investment into these low-income communities can be transformational, stimulating economic growth and job creation across the country. This administration will work diligently with states and the private sector to encourage investment and development in opportunity zones and other distressed communities so that they may enjoy the benefits of robust economic growth.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
After years of discussion, the U.S. Treasury Department is expected to propose a rule that would effectively end anonymous luxury home purchases in the coming weeks, according to the Financial Crimes Enforcement Network’s (FinCEN) regulatory agenda.
The rule, which department officials first said they planned to implement in 2021, would require real estate professionals, such as title insurers, to report the identities of beneficial owners buying real estate in cash to FinCEN. The department believes the proposed rule will close a loophole that allows corrupt oligarchs, terrorists and criminals to hide illegally obtained funds in U.S. real estate.
According to a state from Treasury Secretary Janet Yellen in March, as much as $2.3 billion was laundered through U.S. real estate between 2015 and 2020, a trend that she said has been going on for decades.
The new rule would replace FinCEN’s current reporting system known as the Geographic Targeting Orders (GTOs).
The GTOs require title companies to identify the people behind shell companies used in all-cash purchases of residential real estate.
As of mid-August 2023, 34 cities and counties throughout the U.S., including Litchfield and Fairfield Counties in Connecticut; Adams, Arapahoe, Clear Creek, Denver, Douglas, Eagle, Elbert, El Paso, Fremont, Jefferson, Mesa, Pitkin, Pueblo, and Summit counties in Colorado; Boston; Chicago; Dallas-Fort Worth; Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco; Seattle; Washington, D.C.; Northern Virginia and Maryland (DMV) area; the city and county of Baltimore; the Hawaiian Islands of Honolulu, Maui, Hawaii and Kauai; and Houston and Laredo, Texas.
In all of these GTOs, except for the city and county of Baltimore, which has a threshold of $50,000, all cash purchases of $300,000 or more must reported to FinCEN.
Officials have also been working on implanting a related rule that would force real estate professionals to report the identities of shell company owners who purchase real estate in cash through their shell company. While the American Land Title Association has expressed support of the new rule, it has also stated that its implementation should be delayed until the shell company rule is also complete.
The proposed rule will be open to public and industry feedback once it is announced
Americans take today’s selection of mortgages for granted, but financing a home is a much different experience than it was a century ago
By
Matthew Wells
The furniture industry was booming in Greensboro, N.C., 100 years ago. A furniture craftsman making a solid, steady income might have wanted to buy a home and build up some equity. But the homebuying process then looked very little like it does today. To finance that purchase, the furniture maker first would need to scrape together as much as 40 percent for a down payment, even with good credit. He might then head to a local building and loan association (B&L), where he would hope to get a loan that he would be able to pay off in no more than a dozen years.
Today’s mortgage market, by contrast, would offer that furniture maker a wide range of more attractive options. Instead of going to the local B&L, the furniture maker could walk into a bank or connect with a mortgage broker who could be in town or on the other side of the country. No longer would such a large down payment be necessary; 20 percent would suffice, and it could be less with mortgage insurance — even zero dollars down if the furniture maker were also a veteran. Further, the repayment period would be set at either 15 or 30 years, and, depending on what worked best for the furniture maker, the interest rate could be fixed or fluctuate through the duration of the loan.
The modern mortgage in all its variations is the product of a complicated history. Local, state, national, and even international actors all competing for profits have existed alongside an increasingly active federal government that for almost a century has sought to make the benefits of homeownership accessible to more Americans, even through economic collapse and crises. Both despite and because of this history, over 65 percent of Americans — most of whom carry or carried a mortgage previously — now own the home where they live.
The Early Era of Private Financing
Prior to 1930, the government was not involved in the mortgage market, leaving only a few private options for aspiring homeowners looking for financing. While loans between individuals for homes were common, building and loan associations would become the dominant institutional mortgage financiers during this period.
B&Ls commonly used what was known as a “share accumulation” contract. Under this complicated mortgage structure, if a borrower needed a loan for $1,000, he would subscribe to the association for five shares at $200 maturity value each, and he would accumulate those shares by paying weekly or monthly installments into an account held at the association. These payments would pay for the shares along with the interest on the loan, and the B&L would also pay out dividends kept in the share account. The dividends determined the duration of the loan, but in good economic times, a borrower would expect it to take about 12 years to accumulate enough money through the dividends and deposits to repay the entire $1,000 loan all at once; he would then own the property outright.
An import from a rapidly industrializing Great Britain in the 1830s, B&Ls had been operating mainly in the Northeast and Midwest until the 1880s, when, coupled with a lack of competition and rapid urbanization around the country, their presence increased significantly. In 1893, for example, 5,600 B&Ls were in operation in every state and in more than 1,000 counties and 2,000 cities. Some 1.4 million Americans were members of B&Ls and about one in eight nonfarm owner-occupied homes was financed through them. These numbers would peak in 1927, with 11.3 million members (out of a total population of 119 million) belonging to 12,804 associations that held a total of $7.2 billion in assets.
Despite their popularity, B&Ls had a notable drawback: Their borrowers were exposed to significant credit risk. If a B&L’s loan portfolio suffered, dividend accrual could slow, extending the amount of time it would take for members to pay off their loans. In extreme cases, retained dividends could be taken away or the value of outstanding shares could be written down, taking borrowers further away from final repayment.
“Imagine you are in year 11 of what should be a 12-year repayment period and you’ve borrowed $2,000 and you’ve got $1,800 of it in your account,” says Kenneth Snowden, an economist at the University of North Carolina, Greensboro, “but then the B&L goes belly up. That would be a disaster.”
The industry downplayed the issue. While acknowledging that “It is possible in the event of failure under the regular [share accumulation] plan that … the borrower would still be liable for the total amount of his loan,” the authors of a 1925 industry publication still maintained, “It makes very little practical difference because of the small likelihood of failure.”
Aside from the B&Ls, there were few other institutional lending options for individuals looking for mortgage financing. The National Bank Act of 1864 barred commercial banks from writing mortgages, but life insurance companies and mutual savings banks were active lenders. They were, however, heavily regulated and often barred from lending across state lines or beyond certain distances from their location.
But the money to finance the building boom of the second half of the 19th century had to come from somewhere. Unconstrained by geographic boundaries or the law, mortgage companies and trusts sprouted up in the 1870s, filling this need through another innovation from Europe: the mortgage-backed security (MBS). One of the first such firms, the United States Mortgage Company, was founded in 1871. Boasting a New York board of directors that included the likes of J. Pierpont Morgan, the company wrote its own mortgages, and then issued bonds or securities that equaled the value of all the mortgages it held. It made money by charging interest on loans at a greater rate than what it paid out on its bonds. The company was vast: It established local lending boards throughout the country to handle loan origination, pricing, and credit quality, but it also had a European-based board comprised of counts and barons to manage the sale of those bonds on the continent.
Image : Library of Congress, Prints & Photographs Division, FSA/OWI collection [LC-DIG-FSA-8A02884]
A couple moves into a new home in Aberdeen Gardens in Newport News, Va., in 1937. Aberdeen Gardens was built as part of a New Deal housing program during the Great Depression.
New Competition From Depression-Era Reforms
When the Great Depression hit, the mortgage system ground to a halt, as the collapse of home prices and massive unemployment led to widespread foreclosures. This, in turn, led to a decline in homeownership and exposed the weaknesses in the existing mortgage finance system. In response, the Roosevelt administration pursued several strategies to restore the home mortgage market and encourage lending and borrowing. These efforts created a system of uneasy coexistence between a reformed private mortgage market and a new player — the federal government.
The Home Owners’ Loan Corporation (HOLC) was created in 1933 to assist people who could no longer afford to make payments on their homes from foreclosure. To do so, the HOLC took the drastic step of issuing bonds and then using the funds to purchase mortgages of homes, and then refinancing those loans. It could only purchase mortgages on homes under $20,000 in value, but between 1933 and 1936, the HOLC would write and hold approximately 1 million loans, representing around 10 percent of all nonfarm owner-occupied homes in the country. Around 200,000 borrowers would still ultimately end up in foreclosure, but over 800,000 people were able to successfully stay in their homes and repay their HOLC loans. (The HOLC is also widely associated with the practice of redlining, although scholars debate its lasting influence on lending.) At the same time, the HOLC standardized the 15-year fully amortized loan still in use today. In contrast to the complicated share accumulation loans used by the B&Ls, these loans were repaid on a fixed schedule in which monthly payments spread across a set time period went directly toward reducing the principal on the loan as well as the interest.
While the HOLC was responsible for keeping people in their homes, the Federal Housing Administration (FHA) was created as part of the National Housing Act of 1934 to give lenders, who had become risk averse since the Depression hit, the confidence to lend again. It did so through several innovations which, while intended to “prime the pump” in the short term, resulted in lasting reforms to the mortgage market. In particular, all FHA-backed mortgages were long term (that is, 20 to 30 years) fully amortized loans and required as little as a 10 percent down payment. Relative to the loans with short repayment periods, these terms were undoubtedly attractive to would-be borrowers, leading the other private institutional lenders to adopt similar mortgage structures to remain competitive.
During the 1930s, the building and loan associations began to evolve into savings and loan associations (S&L) and were granted federal charters. As a result, these associations had to adhere to certain regulatory requirements, including a mandate to make only fully amortized loans and caps on the amount of interest they could pay on deposits. They were also required to participate in the Federal Savings and Loan Insurance Corporation (FSLIC), which, in theory, meant that their members’ deposits were guaranteed and would no longer be subject to the risk that characterized the pre-Depression era.
The B&Ls and S&Ls vehemently opposed the creation of the FHA, as it both opened competition in the market and created a new bureaucracy that they argued was unnecessary. Their first concern was competition. If the FHA provided insurance to all institutional lenders, the associations believed they would no longer dominate the long-term mortgage loan market, as they had for almost a century. Despite intense lobbying in opposition to the creation of the FHA, the S&Ls lost that battle, and commercial banks, which had been able to make mortgage loans since 1913, ended up making by far the biggest share of FHA-insured loans, accounting for 70 percent of all FHA loans in 1935. The associations also were loath to follow all the regulations and bureaucracy that were required for the FHA to guarantee loans.
“The associations had been underwriting loans successfully for 60 years. FHA created a whole new bureaucracy of how to underwrite loans because they had a manual that was 500 pages long,” notes Snowden. “They don’t want all that red tape. They don’t want someone telling them how many inches apart their studs have to be. They had their own appraisers and underwriting program. So there really were competing networks.”
As a result of these two sources of opposition, only 789 out of almost 7,000 associations were using FHA insurance in 1940.
In 1938, the housing market was still lagging in its recovery relative to other sectors of the economy. To further open the flow of capital to homebuyers, the government chartered the Federal National Mortgage Association, or Fannie Mae. Known as a government sponsored-enterprise, or GSE, Fannie Mae purchased FHA-guaranteed loans from mortgage lenders and kept them in its own portfolio. (Much later, starting in the 1980s, it would sell them as MBS on the secondary market.)
The Postwar Homeownership Boom
In 1940, about 44 percent of Americans owned their home. Two decades later, that number had risen to 62 percent. Daniel Fetter, an economist at Stanford University, argued in a 2014 paper that this increase was driven by rising real incomes, favorable tax treatment of owner-occupied housing, and perhaps most importantly, the widespread adoption of the long-term, fully amortized, low-down-payment mortgage. In fact, he estimated that changes in home financing might explain about 40 percent of the overall increase in homeownership during this period.
One of the primary pathways for the expansion of homeownership during the postwar period was the veterans’ home loan program created under the 1944 Servicemen’s Readjustment Act. While the Veterans Administration (VA) did not make loans, if a veteran defaulted, it would pay up to 50 percent of the loan or up to $2,000. At a time when the average home price was about $8,600, the repayment window was 20 years. Also, interest rates for VA loans could not exceed 4 percent and often did not require a down payment. These loans were widely used: Between 1949 and 1953, they averaged 24 percent of the market and according to Fetter, accounted for roughly 7.4 percent of the overall increase in homeownership between 1940 and 1960. (See chart below.)
Demand for housing continued as baby boomers grew into adults in the 1970s and pursued homeownership just as their parents did. Congress realized, however, that the secondary market where MBS were traded lacked sufficient capital to finance the younger generation’s purchases. In response, Congress chartered a second GSE, the Federal Home Loan Mortgage Corporation, also known as Freddie Mac. Up until this point, Fannie had only been authorized to purchase FHA-backed loans, but with the hope of turning Fannie and Freddie into competitors on the secondary mortgage market, Congress privatized Fannie in 1968. In 1970, they were both also allowed to purchase conventional loans (that is, loans not backed by either the FHA or VA).
A Series of Crises
A decade later, the S&L industry that had existed for half a century would collapse. As interest rates rose in the late 1970s and early 1980s, the S&Ls, also known as “thrifts,” found themselves at a disadvantage, as the government-imposed limits on their interest rates meant depositors could find greater returns elsewhere. With inflation also increasing, the S&Ls’ portfolios, which were filled with fixed-rate mortgages, lost significant value as well. As a result, many S&Ls became insolvent.
Normally, this would have meant shutting the weak S&Ls down. But there was a further problem: In 1983, the cost of paying off what these firms owed depositors was estimated at about $25 billion, but FSLIC, the government entity that ensured those deposits, had only $6 billion in reserves. In the face of this shortfall, regulators decided to allow these insolvent thrifts, known as “zombies,” to remain open rather than figure out how to shut them down and repay what they owed. At the same time, legislators and regulators relaxed capital standards, allowing these firms to pay higher rates to attract funds and engage in ever-riskier projects with the hope that they would pay off in higher returns. Ultimately, when these high-risk ventures failed in the late 1980s, the cost to taxpayers, who had to cover these guaranteed deposits, was about $124 billion. But the S&Ls would not be the only actors in the mortgage industry to need a taxpayer bailout.
By the turn of the century, both Fannie and Freddie had converted to shareholder-owned, for-profit corporations, but regulations put in place by the Federal Housing Finance Agency authorized them to purchase from lenders only so-called conforming mortgages, that is, ones that satisfied certain standards with respect to the borrower’s debt-to-income ratio, the amount of the loan, and the size of the down payment. During the 1980s and 1990s, their status as GSEs fueled the perception that the government — the taxpayers — would bail them out if they ever ran into financial trouble.
Developments in the mortgage marketplace soon set the stage for exactly that trouble. The secondary mortgage market in the early 2000s saw increasing growth in private-label securities — meaning they were not issued by one of the GSEs. These securities were backed by mortgages that did not necessarily have to adhere to the same standards as those purchased by the GSEs.
Freddie and Fannie, as profit-seeking corporations, were then under pressure to increase returns for their shareholders, and while they were restricted in the securitizations that they could issue, they were not prevented from adding these riskier private-label MBS to their own investment portfolios.
At the same time, a series of technological innovations lowered the costs to the GSEs, as well as many of the lenders and secondary market participants, of assessing and pricing risk. Beginning back in 1992, Freddie had begun accessing computerized credit scores, but more extensive systems in subsequent years captured additional data on the borrowers and properties and fed that data into statistical models to produce underwriting recommendations. By early 2006, more than 90 percent of lenders were participating in an automated underwriting system, typically either Fannie’s Desktop Underwriter or Freddie’s Loan Prospector (now known as Loan Product Advisor).
Borys Grochulski of the Richmond Fed observes that these systems made a difference, as they allowed lenders to be creative in constructing mortgages for would-be homeowners who would otherwise be unable to qualify. “Many potential mortgage borrowers who didn’t have the right credit quality and were out of the mortgage market now could be brought on by these financial-information processing innovations,” he says.
Indeed, speaking in May 2007, before the full extent of the impending mortgage crisis — and Great Recession — was apparent, then-Fed Chair Ben Bernanke noted that the expansion of what was known as the subprime mortgage market was spurred mostly by these technological innovations. Subprime is just one of several categories of loan quality and risk; lenders used data to separate borrowers into risk categories, with riskier loans charged higher rates.
But Marc Gott, a former director of Fannie’s Loan Servicing Department said in a 2008 New York Times interview, “We didn’t really know what we were buying. This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”
Nonetheless, some investors still wanted to diversify their portfolios with MBS with higher yields. And the government’s implicit backing of the GSEs gave market participants the confidence to continue securitizing, buying, and selling mortgages until the bubble finally popped in 2008. (The incentive for such risk taking in response to the expectation of insurance coverage or a bailout is known as “moral hazard.”)
According to research by the Treasury Department, 8 million homes were foreclosed, 8.8 million workers lost their jobs, and $7.4 trillion in stock market wealth and $19.2 trillion in household wealth was wiped away during the Great Recession that followed the mortgage crisis. As it became clear that the GSEs had purchased loans they knew were risky, they were placed under government conservatorship that is still in place, and they ultimately cost taxpayers $190 billion. In addition, to inject liquidity into the struggling mortgage market, the Fed began purchasing the GSEs’ MBS in late 2008 and would ultimately purchase over $1 trillion in those bonds up through late 2014.
The 2008 housing crisis and the Great Recession have made it harder for some aspiring homeowners to purchase a home, as no-money-down mortgages are no longer available for most borrowers, and banks are also less willing to lend to those with less-than-ideal credit. Also, traditional commercial banks, which also suffered tremendous losses, have stepped back from their involvement in mortgage origination and servicing. Filling the gap has been increased competition among smaller mortgage companies, many of whom, according to Grochulski, sell their mortgages to the GSEs, who still package them and sell them off to the private markets.
While the market seems to be functioning well now under this structure, stresses have been a persistent presence throughout its history. And while these crises have been painful and disruptive, they have fueled innovations that have given a wide range of Americans the chance to enjoy the benefits — and burdens — of homeownership.
READINGS
Brewer, H. Peers. “Eastern Money and Western Mortgages in the 1870s.” Business History Review, Autumn 1976, vol. 50, no. 3, pp. 356-380.
Fetter, Daniel K. “The Twentieth-Century Increase in U.S. Home Ownership: Facts and Hypotheses.” In Eugene N. White, Kenneth Snowden, and Price Fishback (eds.), Housing and Mortgage Markets in Historical Perspective. Chicago: University of Chicago Press, July 2014, pp. 329-350.
McDonald, Oonagh. Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare. New York, N.Y.: Bloomsbury Publishing, 2012.
Price, David A., and John R. Walter. “It’s a Wonderful Loan: A Short History of Building and Loan Associations,” Economic Brief No. 19-01, January 2019.
Romero, Jessie. “The House Is in the Mail.” Econ Focus, Federal Reserve Bank of Richmond, Second/Third Quarter 2019.
Rose, Jonathan D., and Kenneth A. Snowden. “The New Deal and the Origins of the Modern American Real Estate Contract.” Explorations in Economic History, October 2013, vol. 50, no. 4, pp. 548-566.
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The 21 top recipients of TARP funds saw minimal increases in overall lending in February compared to a month earlier, according to data released today by the Treasury Department.
The median growth in total lending was actually negative two percent in February, with nine banks posting increases and 12 experiencing declines.
“Against a difficult economic backdrop, banks extended approximately the same level of loan originations in February as in January,” the Treasury said in a release.
“The relatively steady overall lending levels observed in February likely would have been lower absent the capital provided by Treasury through the CPP, an indication of the critical role this program has played in stabilizing markets and restoring the flow of credit to consumers and business.”
However, residential mortgage originations across the 21 banks increased by a median 35 percent, thanks to a flurry of refinance activity.
The median change in mortgage refinancing during the month was an increase of 42 percent from January, thanks in part to record low rates; home equity loan originations saw a median increase of 18 percent.
Wells Fargo was the top mortgage lender for the second month running with $34.8 billion in monthly loan originations, trailed by Bank of America with $28.6 billion and Chase with $13 billion, all substantial increases from January.
Meanwhile, loan originations for consumer loans, such as auto, student, and personal loans, decreased a median 47 percent, partially attributable to poor demand in these industries.
New credit card originations also slowed by a median three percent, while the average loan balance of credit accounts fell by a median one percent.
It appears as if the banks that received billions in TARP funds are only willing to originate low-risk, government-backed mortgages (FHA loans, VA loans), while cutting back on all other types of credit.
If you’re a U.S. homebuyer waiting for a return to super-low mortgage rates, don’t hold your breath.
The short-lived era of 3% interest rates for 30-year fixed mortgages is over, and unlikely to return anytime soon — perhaps for decades — says Lawrence Yun, chief economist at the National Association of Realtors.
“One can never truly predict the future, but I don’t see mortgage rates returning back to the 3% range in the remainder of my lifetime,” he says.
That’s because average 30-year fixed mortgage rates of 3% or less were an anomaly related to the pandemic, lasting from about July 2020 to Nov. 2022. Historically, the rates have been closer to an average of 7% over the past 50 years, according to Freddie Mac data.
Why super-low mortgage rates won’t return any time soon
Historically low mortgage rates during the pandemic were “an exceptional measure, during exceptionally uncertain times,” says Yun.
With the pandemic came economic uncertainty not seen since the 2008 financial crisis. Fearing a prolonged recession, the Federal Reserve followed the same playbook it used in 2008, pumping money into the economy to stimulate growth.
As was the case in 2008, the Fed slashed interest rates to nearly 0%, created emergency lending programs and bought government bonds and mortgage-backed securities, otherwise known as quantitative easing.
Since mortgage rates are closely linked to the Fed’s benchmark interest rate and can be driven further down by quantitative easing, the interest on mortgages subsequently hit rock bottom at 2.67% in January 2021.
Congress also passed trillions of dollars in Covid-19 relief and stimulus spending, which helped increase U.S. national debt by roughly 30% between 2020 and 2022, according to Treasury Department data.
However, unlike 2008, the economy recovered quickly and rising inflation soon became a problem. By spring 2021, the year-over-year inflation rate had accelerated beyond the Fed’s benchmark of 2%, forcing the central bank to start raising interest rates again. And with that, mortgage rates rose too.
I don’t see mortgage rates returning back to the 3% range in the remainder of my lifetime.
Lawrence Yun
Chief economist at the National Association of Realtors
As a result of inflation and current federal spending deficits, Yun doesn’t think the Fed is likely to drop interest rates down to nearly 0% again, even in the event of another financial market panic or pandemic.
Other economists who spoke to CNBC Make It agree that homebuyers shouldn’t expect a return to record-low mortgage rates in the near term.
“It’s unlikely that the Federal Reserve will respond with the same breadth and aggressiveness like it did in 2020, as the very low mortgage rates in 2020 were caused by very unique circumstances” related to the pandemic, says Abbey Omodunbi, senior economist at PNC Financial Services.
“I haven’t seen mortgages that low in over 30 years in the business,” says Dottie Herman, vice chair at Douglas Elliman. “It’s highly unlikely we’ll see rates that low anytime soon.”
Where mortgage rates are headed
The current average mortgage rate for a 30-year fixed-rate mortgage is 6.81% as of July 6, slightly lower than its November peak of 7.08%, per Freddie Mac data. (Check out this list of the best mortgage lenders here, from CNBC Select.)
However, many projections are expecting a steady decline over the next year or so.
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You probably know how to find and buy stocks, but how do bonds work?
Unfortunately, while online stock brokers have made stock investing child’s play over the last 10 years, bond investing has been slow to catch up. In fact, on many online broker sites, online bond platforms don’t even exist. That’s made the world of individual bond investing pretty murky.
You know that a certain percentage of your portfolio should be allocated to bonds (say 40% if you’re in your 40s), but you’ve probably relied on bond mutual funds to do that. And that’s not a bad thing: Bond mutual funds let you own bonds from hundreds of companies with only a small investment. They also have professional managers who can do research into bond investments for you. But bond funds also have one, significant disadvantage to owning individual bonds.
When you buy a bond, you know:
exactly what your interest payments will be,
when you’ll get them, and
when you’ll get your initial investment back as long as the company doesn’t default.
The prices of bond funds, on the other hand, move up and down just like any other mutual fund. If you need your money on a specific date, you’ll have no idea what your mutual fund will be worth. That can make investing in individual bonds preferable for people who need a specific amount of money at a specific time.
For example, you might need to make a $40,000 tuition payment for your college-bound 16-year old in exactly two years. Invest $40,000 in two-year individual bonds, and you’ll have that money back when you need it (as long as the company doesn’t go bankrupt). But invest it in a bond mutual fund, and who knows what it’ll be worth when it’s time to withdraw? Although bond funds typically don’t go down by large percentages, 2008 taught us that that isn’t always the case.
If you are saving for a time-sensitive goal (or need a stream of retirement income) and think you might be a candidate for investing in individual bonds, here’s a primer on how they work.
How Bonds Work
The Treasury department issues Treasury bonds to finance the operation of the federal government. In the same way, companies, states, and cities issue bonds to finance their own operations. Treasury bonds are considered to have no risk of defaulting. So when a company needs to raise money, investors will demand an interest rate that’s a bit higher than what Treasury bonds are offering in order to compensate the investors for the risk that the company goes bankrupt.
Let’s say a company (I’ll use GE just by way of example) needed to raise $100 million to build a new refrigerator factory and wanted to pay the money back in the year 2020. GE would look to the market to determine what interest rate it would need to offer to get investors to lend them the money. If investors demanded 6%, GE would issue $100 million in bonds with a “coupon rate” (the interest rate) of 6% that would be immediately bought by pre-agreed upon banks, funds, and sometimes, individuals. Most company bonds come in $1,000 denominations (the $1,000 is called “par value”). So for each $1,000 bond that the investor owned, he’d get $60 (6% of $1,000) per year, every year until 2020, at which time he’d get his $1,000 back.
In between the time when GE issues the bond and the time when the bond “matures” (i.e. comes due), investors can sell the bonds on the secondary market. But just like a stock price, the bond price will fluctuate.
Let’s say GE issued that bond three years ago, and since then, the company’s prospects of surviving until 2020, while still good, are decidedly gloomier. If an investor sells his bond today, the buyer will want an interest rate higher than the original 6% to compensate for the extra risk. GE will still pay the new investor $60 per year. So instead, the investor will want to buy the bond for less than par value.
If the new investor buys the bond for $900, while the coupon rate will still be 6%, the yield will be higher — both because he only has to invest $900 to get $60 a year and because he’ll get back $1,000 when the bond matures.
The same thing can happen in reverse, and sometimes investors will buy bonds for above par value, reducing the yield.
Related >> Beginners guide to investing
The Trouble with Buying Bonds
Unfortunately, small investors have a lot more trouble buying individual bonds than they do buying individual stocks. For one, there are simply a lot more bonds than there are stocks. Think about it: A single company could have a dozen times when it wanted to borrow money (meaning it’d have 12 different bonds on the market versus one common stock).
But more important, the actual process of buying a bond isn’t easy. Stock brokers most often act as intermediaries between buyers and sellers. Bond brokers, on the other hand, are often the actual investors who will buy or sell you the bond. So as an individual bond investor, unless you have multiple brokers, your investments will be limited to the bonds that your broker has in his inventory.
Bond commissions can also be confusing. Whereas you might pay a flat commission to buy and sell stocks, the commission on bonds is built into the bond’s price. So, for example, if your broker originally bought the bond for $1,000 and it yielded 7%, he might sell it to you for $1,100, in which case it would only yield 6.4% for you ($70 divided by $1,100). The spread between his buying price and his selling price is effectively his commission. Big investors, who can sink millions of dollars into a bond at once, also tend to get better prices than small investors, who might only be able to buy $10,000 worth of a bond.
For the longest time, small investors couldn’t see how much other investors were buying and selling bonds for, meaning that their broker could seriously rip them off. Fortunately, SIFMA has put together a website where you can look up the prices of recent bond transactions.
When the Hassle is Worth It
All those caveats probably beg the question: Why bother?
For investors just starting out or who have a small amount of their portfolios to devote to bonds (less than $100,000), the answer is, “Don’t!” Just stick with a no-load, low expense mutual fund until you’ve amassed more.
But investors who do meet that criteria can use bonds to create a predictable income stream — something that no bond fund can guarantee.
Going forward, government sponsored loan modifications will not adversely affect consumers’ credit scores, at least not immediately, according to a report in SF Gate.
Fair Isaac, now simply known as Fico, has applied the change on behalf of the U.S. Treasury Department so borrowers in need of a loan modification don’t hold back on fears of dented credit scores.
As of today, those who receive a loan modification via a government plan will see the phrase “loan modified under a federal government plan” (instead of “partial payment”) on their credit report next to the associated credit tradeline.
At this time, that distinction will neither hurt nor help consumers, but it could do so in the future.
Once Fico can document and predict consumer behavior for those with a government-sponsored loan mod, the data may be factored into credit scoring, potentially hurting those who elected to modify their mortgage.
Per the article, Fico doesn’t typically make changes to its scoring algorithm until it has collected data for at least a year, so we won’t know the real credit score impact for a good while.
Keep in mind that those already delinquent on a mortgage will receive the “appropriate level of delinquency,” and the new system will not simply bring the account current.
Those who already received a loan modification via a government program may be able to get the scoring change applied retroactively, but good luck working with creditors and the credit bureaus.
And there’s always the worry that a potential creditor will see that you’ve received a loan modification and deny your application for new credit, regardless of your intact credit score.
The Homeowners Assistance Fund (HAF) — a program designed to offer financial help to homeowners impacted by the COVID-19 pandemic — has kept more than 300,000 homeowners in their homes by curing defaults and keeping them out of foreclosure, according to data released this week by the U.S. Department of the Treasury.
“As of March 31, HAF programs made roughly $3.7 billion in payments to more than 318,000 homeowners at risk of foreclosure,” the Treasury Department said in an announcement. “In the first quarter of 2023 alone, HAF programs distributed $1.2 billion in assistance to households – a 50% increase over the fourth quarter of 2022 – demonstrating the program is continuing to scale rapidly as designed.”
The data also shows that 14 states and two U.S. territories have expended over 50% of their HAF funds, excluding administrative expenses. In addition, the funding has reached a greater number of economically vulnerable people than it did prior to the federal mortgage relief efforts.
“As of March 2023, 49% of HAF assistance was delivered to very low-income homeowners, defined as homeowners earning less than 50% of the area median income,” the Treasury said. “Demographically, 35% of homeowners assisted self-identified as Black, 23% self-identified as Hispanic/Latino, and 59% self-identified as female.”
The Treasury Department is committed to ensuring that the remainder of the funds will be distributed, according to Wally Adeyemo, deputy secretary of the Treasury.
“The Homeowner Assistance Fund has helped keep hundreds of thousands of families in their homes,” Adeyemo said. “As state programs assess their remaining HAF funds, the Treasury Department will continue working with recipients to ensure these funds are swiftly delivered to homeowners most in need.”
Passed as part of the American Rescue Plan Act in early 2021, the HAF program is designed to help homeowners who have been financially impacted by COVID-19 pay their mortgage or other home expenses. A $10 billion allocation was made for the program, but mortgage servicers previously stated that spreading awareness about the program has been a challenge.
The program is also available for reverse mortgage borrowers. A requirement of a government-sponsored Home Equity Conversion Mortgage (HECM) is that the homeowner keep their home in good repair while paying any applicable property taxes, homeowners insurance and homeowners association (HOA) fees.
Reverse mortgage borrowers who may have fallen behind on such payments are eligible to receive HAF funds to help cover the expenses and keep them out of foreclosure.
Malik Lee, a Georgia-based certified financial planner and managing principal of Felton & Peel Wealth Management, thinks back to being accepted to Morehouse College in 1999 and facing around $20,000 per year in college costs.
While his friends’ parents took out loans to cover education costs, Lee’s grandmother — his legal guardian — declined.
Her response may seem harsh, but looking back with his perspective as a financial professional, Lee describes it as one of the best decisions she’s ever made.
Many of those parents who took out loans for their kid’s education struggled to repay them, Lee says. In some cases, the children are covering the loan payments because the parents can no longer afford them.
Lee imagines his grandmother, now 90 years old, still paying on a loan for his education when retirement should be her priority. Her saying “no” was an amazing decision, he says.
Parent PLUS loans can be harder to repay
Federal parent PLUS loans are available to parents of dependents attending college and are intended to fund education expenses not covered by other federal student aid.
But these loans differ from federal loans taken out by student borrowers in ways that make them harder to repay:
Higher interest rates. The interest rate on parent PLUS loans is 8.05%, compared with 5.5% for federal student loans.
No grace period. Federal student loan borrowers have a six-month grace period before they begin repayment. Repayment for parent PLUS loans begins after the loan is fully paid out.
Fewer repayment options. Parent PLUS loans don’t qualify for the government’s more generous income-driven repayment programs — like Revised Pay As You Earn, Pay As You Earn and Income-Based Repayment. Parents can apply for Income-Contingent Repayment after consolidating to a Direct Loan.
When you couple the tougher loan terms — compared with federal student loans — with the racial wage and wealth disparity that impacts Black families, you get a double-edged sword that limits the economic growth of some of the most vulnerable borrowers, according to a recent brief by the Education Trust, a higher education research and advocacy group based in Washington, D.C.
On average, Black workers earn 22% less than white workers, based on March 2023 weekly earnings data from the Bureau of Labor Statistics. And, regardless of income, Black households are less likely to own financial investments, according to a January 2023 report from the Treasury Department. Black families who do invest hold significantly less value in their assets, compared with white families, the same report concludes.
Black borrowers are dipping into their retirement plans to repay parent PLUS loans, says Brittani Williams, senior policy analyst in higher education for the Education Trust. And that’s undercutting their ability to save for their own futures.
If your child is heading off to college soon, there are ways to support them without falling into a debt trap.
Dive into the financial aid process
The more you can learn about financial aid and funding options, the less likely you’ll overextend yourself and be left with debt you can’t repay.
“Immerse yourself in the financial aid process as much as you’re immersing yourself in the college choice,” says Jackie Cummings Koski, an Ohio-based certified financial planner and financial educator. Koski says financial aid offices can often show you program-specific funding or other need-based dollars available to those who ask.
Making sure your child submits the Free Application for Federal Student Aid, or FAFSA, is a great starting point. But before you or your child accept any money, be sure to visit studentaid.gov to understand the type of federal aid awarded and the terms that come with it.
Set limits on how much you borrow
You can borrow up to the cost of attendance minus any federal aid your child receives. That could mean being asked to foot a pretty hefty bill, depending on what’s awarded to your child.
But you don’t have to borrow the full amount requested.
“Consider not paying for everything,” says Angela Ribuffo, an Alaska-based certified financial planner and president and financial advisor for Raion Financial Strategies. Parents can pay for one year — ideally year four, so they have at least three years to put away money, Ribuffo says. Giving yourself time to save can minimize how much you borrow, if you choose to borrow at all.
You can set limits on how much you borrow based on your income and other financial goals. Use a parent PLUS loan calculator to see how different loan amounts can impact your monthly payment given an 8.05% interest rate.
Always prioritize your retirement savings
As hard as it might be, try not to place funding your child’s education over saving for retirement.
“We’re not saying retirement is more important than your child’s future,” Lee says. “It’s that your retirement has no fail-safe.”
If you must choose between contributing to your child’s education or saving for retirement, Lee recommends being realistic about how the two scenarios can play out. There are more options for a child who cannot pay for college than there are for a retiree who is short on income, Lee says.
Committing to your retirement savings over paying for college could mean your child must find alternative ways to fund their education, and that is OK. Helping them research how to pay for college is still supporting your child on their journey and showing them that their future is important.