Researchers from Duke University claim that African American homeowners in Chicago missed out on billions of dollars in wealth from 1950 to 1970, due to what it says were “racist real estate policies”.
Throughout that 20-year period, African Americans living in Chicago bought 60,100 homes, of which, around 70% were sold on contracts that enabled the seller to keep hold of the property deed until the buyer had repaid their loan. As a result, those buyers were unable to accumulate any equity while paying off their mortgages. The home prices were also marked up by an average of 84% during that time, according to the report from Duke University’s Samuel DuBois Cook Center on Social Equity.
In today’s money, those buyers paid an average $71,000 more than they would have if they’d signed a conventional mortgage agreement, the researchers said.
The report goes on to say that black Chicago homebuyers in the period lost a combined $3.2 billion in wealth they should have accumulated.
The researchers say this is the first study to fix a dollar amount to the predatory lending practices that were typically reserved for black buyers in the city, starting in the 1950s.
“These contracts offered black buyers the illusion of a mortgage, without the protections of a mortgage,” the researchers said.
They also noted that the homeownership gap between blacks and whites in Chicago is still wide today. As of this year, 39% of black households in the city own their homes, compared to 74% of white households, according to data from the Urban Institute.
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]
Stocks fell Thursday as Russian troops launched a full-scale attack in Ukraine, and at least in the short-term, the turmoil could lower mortgage rates in the U.S.
During large-scale disruptions, investors often flee to safer options, such as U.S. Treasury notes, bonds and mortgage-backed securities. All things being equal, that dynamic tends to put downward pressure on mortgage rates.
“While mortgage rates trended upward in 2022, one unintended side effect of global uncertainty is that it often results in downward pressure on mortgage rates,” said Odeta Kushi, deputy chief economist of title insurance firm First American. “The 10-year Treasury yield is down today, likely in response to the worsening Russia-Ukraine conflict, and mortgage rates may follow suit.”
Kushi also drew a parallel to the weeks following the ‘Brexit’ vote in 2016, when a declining bond yield led to a decline in mortgage rates.
But the Federal Reserve was already balancing efforts to slow inflation without cooling the economy too much. Experts expect inflation will be exacerbated by the conflict, especially in light of sanctions on Russia, an oil-producing nation.
“The two forces are at odds with each other at the moment,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “Inflation will be made worse by war, not better.”
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Inflation is rising, but expectations that it will rise have not yet spun out of control, said Mark Zandi, chief economist at Moody’s Analytics.
“Inflation expectations remain anchored, but that’s the risk,” said Zandi. “Because it’s been high going on a year, if you throw Russia into the mix, with higher oil prices and higher inflation, we could hit an inflection point where those expectations become unanchored.”
How the Federal Reserve thinks about the conflict in Ukraine — how long it may last, the likelihood it will expand beyond the borders of Ukraine, and its impact on the economy — will determine how mortgage rates move in the long term. The Fed will meet again from March 15 to 16, and is expected to raise rates from 0 to 0.25%.
“If the Fed thinks the biggest impact of this disruption will be more upward inflationary pressure, then they will presumably stay the course they laid out, perhaps even accelerate it a bit,” said Jim Parrott, a non-resident fellow at the Urban Institute who was a senior economic advisor in the Obama administration. “If instead they decide that the larger impact will be to cool the economy, they might decide to move more cautiously.”
Joel Kan, an economist at the Mortgage Bankers Association, said Thursday that the trade group expects the Federal Reserve to increase rates four times this year.
“With this morning’s news on Russia, I don’t really think that that’s going to slow [The Fed] down for now,” he said. “They acknowledge that that’s a risk. But given the inflation picture, we’re going to see at least a couple of rate hikes.”
Mortgage rates fell slightly to 3.89% this week, down three basis points from the prior week, according to Freddie Mac’s weekly survey of the primary mortgage market.
The Federal Open Markets Committee said in January they expected it would “soon” be appropriate to raise the target range for the federal funds rate. It decided to keep the target range for the federal funds rate at 0 to 0.25%, but is expected to raise rates in early March.
Starting in January Fed has also tapered its monthly asset purchases. That tapering is set to conclude in March, rather than mid-year, as initially planned.
The conflict in Ukraine may have other impacts on the housing market besides potential short-term downward pressure on mortgage rates and long term inflation. Homebuilders are affected by the uncertainties brought by higher oil prices.
Stock market declines could temper homebuyer appetite for more expensive or second homes, and reduce the amount they have to make purchases.
“There are a lot more down days ahead, but it does feel like there’s no good that comes out of this from the perspective of the economy,” said Zandi. “It’s all downside. It just remains to be seen how much.”
This week, the Joint Center For Housing Studies at Harvard University released this year’s “State of the Nation’s Housing.” The report is damning for those who are trying to expand opportunities for homeownership and presents an incredible challenge for policymakers, stating, “As the cost of homeownership rises, the prospect dims for eliminating racial homeownership gaps.”
The report highlights how the lack of affordable housing supply combined with high interest rates are pricing out those on the margin, especially focusing on minorities.
The impact as highlighted in the report is stark, stating that in the past year, “millions of renters were priced out of homeownership.”
Consider this: When looking at new units being built for housing, from single-family detached, condo, 2-4, 5-20, 20+, and manufactured housing, the new supply of housing being created today is a shadow of years past. In fact, the current state of new units being created has never been this low looking all the way back to the early 1930s.
This is truly disgraceful for a nation that recognizes the value of homeownership. So far we are learning that talk is cheap, but the real work is much harder.
Vice President Kamala Harris gave a speech in Maryland in February about the importance of homeownership in which she shared her own story about growing up. “For most of my childhood, our family rented. And then there was this one afternoon where my mother — our mother — called my sister Maya and me in. We were in high school at the time. And she called us into the kitchen, and she showed us this photograph. And it was a picture of a one-story, dark grey house with a shingled roof and a beautiful lawn. And mommy, which is what we called her, was telling us that after her years of saving, she was ready to become a homeowner,” said the vice president.
The opportunity to live in their own home was a life-changing event.
The time for speech-making and haphazard pricing policies from the government lending sources needs to stop. This problem is so severe, and getting worse, that it demands presidential focus, policy leadership, and agency coordination if we are ever really going to change this retreat from opportunity that we are seeing today.
There is a desperate need to provide executive leadership and focus on housing in America today and time is running out. But we have a model for this. In 2009, when I was in the Obama administration, the “Housing Team” was formed. It consisted of “principals” and “deputies.”
The principals were all cabinet-level direct reports to the president. They included people like Larry Summers (NEC Director), Shaun Donovan (HUD Secretary), Tim Geithner (Treasury Secretary), and Austan Goolsbee (CEA), and so many others. And meetings would often be complemented with the addition of the OMB director, the chief of staff to the president, and a variety of senior staff members.
The deputies reported to the Principals and included the assistant secretaries of the respective agencies that were relevant at the time and other senior staff. I was part of this group, but it included many key government leaders today, including Michael Barr, now vice chair of the Federal Reserve for supervision, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, Jim Parrott of the Urban Institute, and so many others.
The deputies met several times per week, especially a core group of us, to discuss efforts to resolve the housing crisis that threatened the nation at that time. I remember times when a few of us would get a call from Secretary Geithner’s office that he wanted to meet. We would drop whatever we were doing and head to Treasury to discuss the current concern or issue.
Preparation of policy to determine what and how to present recommendations to the president took a great deal of time and focus. And all of this was about housing and mortgage policy. And we executed — we implemented.
My point? In the Obama administration, housing issues were a top executive priority all the way up to the president of the United States. Issues were not decided upon randomly or independently. We worked hard to decide on the best way to address housing and mortgage challenges in a macro, multi-agency environment.
Rather than what appears to be a somewhat arbitrary and likely less effective set of policy moves as we are seeing today this administration should provide the level of focus in a similar way that the housing team operated during the Obama administration.
This year’s study from Harvard is an almost indictment to the state of housing policy and its effectiveness. And yet the problems facing this nation are clear and include:
1. Setting the priority for this nation with urgency that housing is a bedrock for family security and inter-generational wealth-building in this nation that has been eroding with the wealth gap only widening and with the low housing supply and lack of implementable policy ideas to move the dial.
2. The need to rebuild neighborhoods to support new homeownership opportunities, particularly in urban centers such as those that exist in the “Rust Belt” inner cities.
3. Meaningful solutions to improve affordability with creative financing vehicles to include concepts such as equity sharing, scalable down payment assistance, and interest rate subsidies (buy-downs) to make payments affordable.
4. Making affordable housing supply a priority and transitioning from talking points in speeches to executable plans that actually build units at a record pace.
5. A national focus on financial literacy training for young people, especially those living in underserved communities to prepare them for a future of homeownership.
This lack of effectiveness of policy today is not intentional. But I strongly recommend that this administration embrace some key business leaders to join them in this effort. While we have some great policy leaders who have hovered inside the beltway of Washington D.C. for decades recommending housing policy to political leadership, it was always clear to me during my time working in D.C. that having an administration that also recruited those who understood the industry and how it operated versus only having those who had thoughtful ideas about creating change for consumers was critically important.
Between skill sets and executive focus from the top, this administration is ignoring an ever-widening dearth of opportunity for those that do not have access to homeownership today. Focus, priority, skill sets: the administration needs to show that it is serious about housing – the challenges today are as large and looming as this nation has seen in decades. This is a real crisis and the JCHS at Harvard just made this crystal clear.
David Stevens has held various positions in real estate finance, including serving as senior vice president of single family at Freddie Mac, executive vice president at Wells Fargo Home Mortgage, assistant secretary of Housing and FHA Commissioner, and CEO of the Mortgage Bankers Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Dave Stevens at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
Jobs far outnumber people in the Tennessee tourist destination of Pigeon Forge, home to the Dollywood theme park and resort. Employers tap surrounding towns for workers but still struggle to fill roles. The challenge is made all the harder by a severe shortage of affordable housing needed to draw potential employees to the area.
Finally, Dollywood decided to do what more and more employers across the country are doing: It went into the housing business.
Employers large and small are finding that providing affordable employee housing is a highly effective recruitment tool as the extreme shortage of housing has caused rents and home prices to balloon across the nation. It’s been especially helpful for drawing workers to hard-to-staff sectors such as health care, manufacturing, and hospitality and leisure.
It can be very difficult for lower-paid workers to find homes within their budgets in expensive resort towns where they’re competing with vacationers for the few units available.
The approaches of employers vary widely, from constructing tiny-home communities to leasing entire blocks of apartments. But the goal is the same: attract and hold on to workers by providing them with a reasonably priced place to live.
Providing workers with affordable housing is even more important now as the scarcity of housing has led to rental prices rising about 25% since the start of the COVID-19 pandemic, according to Realtor.com® data. On the for-sale side, median home list prices shot up 38% from May 2019 through May 2023.
Dollywood partnered with Holtz Builders, in Wisconsin, to construct a dormitory-style residence hall large enough to accommodate 750 workers on land adjacent to the park. A Holtz subsidiary manages the property and charges workers modest weekly rents of $135, including utilities.
That’s a significantly lower rent than market rates in Pigeon Forge, where Dollywood is located. There were about 50 units for rent with a median price of $1,900 a month (or about $475 a week) as of May 30 on Realtor.com. The median home list price was $690,000 in May.
The investment is paying off. After the residence hall opened, Dollywood was able to recruit twice as many college interns and foreign exchange workers to work the busy summer season. Now, more beds are coming.
“We already have Phase 2 under construction, which will take us to 1,000 residents,” says Tim Berry, Dollywood’s vice president of human resources. “And we are trying to figure out what Phase 3 will look like.”
More companies are using housing to attract workers
The trend might conjure up images of 19th-century “company towns,” where mill owners and railroad magnates provided low-cost housing for their workers—and owned all of the businesses in town as well.
The concept has come back, in scaled-back form, as the shortage of affordable housing has become increasingly acute throughout the country, says Katie Fallon, a principal policy associate at the Urban Institute.
“It’s a cost-effective way for employers to bridge the gap between housing costs and wages,” she says.
The tech giants, including Google, Meta, and Apple, are under increasing pressure to help ease the Silicon Valley housing crunch their booming industries largely created. So they are currently investing billions to develop tens of thousands of units of housing, some of which will be priced below market rate. But those units will not be reserved solely for tech workers.
In addition, billionaire Elon Musk is planning to create the utopian community of Snailbrook, TX, outside of Austin, to provide housing for employees working at his companies SpaceX, Tesla, and Boring.
Most employers dabbling in housing are focused squarely on employee retention. At Bozeman Health, a health care provider with 2,400 employees in Bozeman, MT, job candidates frequently decline an offer or back out belatedly due to the high cost of housing in the area, says Brad Ludford, the chief financial officer.
The median list price of a home in Bozeman was $1,147,500 in May, according to the latest Realtor.com data.
“We have heard so many voices telling us they’re leaving or they don’t come here in the first place,” Ludford says.
So the company is investing with a developer in a 168-unit apartment complex under construction on land near the airport in Belgrade, about 15 minutes away. Bozeman Health will lease 45 of the market-rate units from the developer—about 100 beds. They are still working out the details, but Ludford anticipates the company will reduce the rental cost for employees by giving them a rent subsidy through payroll.
The four-bedroom units are designed like college dorm suites in that each of the bedrooms can be locked for privacy and share common space. Individual workers will be able to rent just a bedroom, or a family could rent an entire apartment, Ludford says.
The big risk of employer-provided housing
However, there is a large potential pitfall for workers who secure housing through their employer, says the Urban Institute’s Fallon. If they quit or lose their jobs, that might jeopardize their housing.
“If your housing is tied to your employer, you have to think harder about leaving that job,” she says.
In Bozeman Health’s case, an employee who leaves a job for whatever reason will lose the subsidy, but not the apartment—at least not immediately, Ludford says.
Workers who purchase one of the 99 homes being built in Spencer, IN, by Cook Medical, a medical device manufacturer, will have no commitment to the company. But they will have to adhere to some covenants intended to help keep the homes affordable and available to employees, says Ron Walker, the president of workforce housing for CFC Properties, a Cook Group company.
The homes may not be converted to rentals. If an owner decides to sell within three years of buying, Cook has the option to buy it back at the original purchase price. That’s because Cook is selling the three-bedroom homes at cost—around $200,000—to make them affordable. The median home list price in Spencer was $255,000 in May, according to Realtor.com data.
And finally, owners who decide to sell in years four through eight can do so at market rate. But they must give Cook the first right of refusal, Walker says.
“If you get presented with an offer, we have seven days to match that offer or pass,” he says.
Cook’s three facilities in South Central Indiana draw employees from several, largely rural counties. Those counties have had low growth rates and, in some cases, the populations are actually declining, Walker says.
That was concerning enough that company executives decided, “Let’s build houses and market those to Cook employees first,” Walker says.
Fourteen homes are completed so far. The first buyers, selected through a lottery process, will move in this summer.
“You have to be an employee on the day you apply and on the day you close on the home, but after that, it’s yours,” Walker says. “We thought, this is worth doing because the community needs the homes.”
Fallon points out that many employers instead offer housing incentives, like help with a down payment or closing costs, rather than an actual living space. But incentives don’t bring down costs and aren’t much help in areas where supply is severely constrained, she says.
“Companies that are creating supply—that’s definitely a benefit,” she says. “It’s one of a number of solutions we need to fix the country’s problem of a lack of housing.”
The age of the young homebuyer Apart from income and education, age was also a factor. The Urban Institute’s analysis found that between 2019 and 2021, the proportion of young homebuyers started to grow across all racial and ethnic groups. Homebuyers younger than 45 increased from 51% in 2019 to 55% in 2021. This increase … [Read more…]
A potentially scary, or intriguing thought, depending on your worldview: Whether you are approved for a mortgage could hinge upon the type of yogurt you purchase.
Buying the more daring and worldly Siggi’s — a fancy imported Icelandic brand — could mean you achieve the American Dream while enjoying the more pedestrian choice of Yoplait’s whipped strawberry flavor could lead to another year of living in your parents’ basement.
Consumer habits and preferences can be used by machine learning or artificial intelligence-powered systems to build a financial profile of an applicant. In this evolving field, the data used to determine a person’s creditworthiness could include anything from subscriptions to certain streaming services to applying for a mortgage in an area with a higher rate of defaults to even a penchant for purchasing luxury products — the Siggi’s brand of yogurt, for instance.
Unlike the recent craze with AI-powered bots, such as ChatGPT, machine learning technology involved in the lending process has been around for at least half a decade. But a greater awareness of this technology in the cultural zeitgeist, and fresh scrutiny from regulators have many weighing both its potential benefits and the possible unintended — and negative — consequences.
AI-driven decision-making is advertised as a more holistic way of assessing a borrower than solely relying on traditional methods, such as credit reports, which can be disadvantageous for some socio-economic groups and result in more denials of loan applications or in higher interest rates being charged.
Companies in the financial services sector, including Churchill Mortgage, Planet Home Lending, Discover and Citibank, have started experimenting with using this technology during the underwriting process.
The AI tools could offer a fairer risk assessment of a borrower, according to Sean Kamar, vice president of data science at Zest AI, a technology company that builds software for lending.
“A more accurate risk score allows lenders to be more confident about the decision that they’re making,” he said. “This is also a solution that mitigates any kind of biases that are present.”
But despite the promise of more equitable outcomes, additional transparency about how these tools learn and make choices may be needed before broad adoption is seen across the mortgage industry. This is partially due to ongoing concerns about a proclivity for discriminatory lending practices.
AI-powered systems have been under the watchful eye of agencies responsible for enforcing consumer protection laws, such as the Consumer Financial Protection Bureau.
“Companies must take responsibility for the use of these tools,” Rohit Chopra, the CFPB’s director, warned during a recent interagency press briefing about automated systems. “Unchecked AI poses threats to fairness and our civil rights,” he added.
Stakeholders in the AI industry expect standards to be rolled out by regulators in the near future, which could require companies to disclose their secret sauce — what variables they use to make decisions.
Companies involved in building this type of technology welcome guardrails, seeing them as a necessary burden that can result in greater clarity and more future customers.
The world of automated systems
In the analog world, a handful of data points provided by one of the credit reporting agencies, such as Equifax, Experian or TransUnion, help to determine whether a borrower qualifies for a mortgage.
A summary report is issued by these agencies that outlines a borrower’s credit history, the number of credit accounts they’ve had, payment history and bankruptcies. From this information, a credit score is calculated and used in the lending decision.
Credit scores are “a two-edged sword,” explained David Dworkin, CEO of the National Housing Conference.
“On the one hand, the score is highly predictive of the likelihood of [default],” he said. “And, on the other hand, the scoring algorithm clearly skews in favor of a white traditional, upper middle class borrower.”
This pattern begins as early as young adulthood for borrowers. A report published by the Urban Institute in 2022 found that young minority groups experience “deteriorating credit scores” compared to white borrowers. From 2010 to 2021, almost 33% of Black 18-to-29-year-olds and about 26% of Hispanic people in that age group saw their credit score drop, compared with 21% of young adults in majority-white communities.
That points to “decades of systemic racism” when it comes to traditional credit scoring, the nonprofit’s analysis argues. The selling point of underwriting systems powered by machine learning is that they rely on a much broader swath of data and can analyze it in a more nuanced, nonlinear way, which can potentially minimize bias, industry stakeholders said.
“The old way of underwriting loans is relying on FICO calculations,” said Subodha Kumar, data science professor at Temple University in Philadelphia. “But the newer technologies can look at [e-commerce and purchase data], such as the yogurt you buy to help in predicting whether you’ll pay your loan or not. These algorithms can give us the optimal value of each individual so you don’t put people in a bucket anymore and the decision becomes more personalized, which is supposedly much better.”
An example of how a consumer’s purchase decisions may be used by automated systems to determine creditworthiness are displayed in a research paper published in 2021 by the University of Pennsylvania, which found a correlation between products consumers buy at a grocery store and the financial habits that shape credit behaviors.
The paper concluded that applicants who buy things such as fresh yogurt or imported snacks fall into the category of low-risk applicants. In contrast, those who add canned food and deli meats and sausages to their carts land in the more likely to default category because their purchases are “less time-intensive…to transform into consumption.”
Though technology companies interviewed denied using such data points, most do rely on a more creative approach to determine whether a borrower qualifies for a loan. According to Kamar, Zest AI’s underwriting system can distinguish between a “safe borrower” who has high utilization and a consumer whose spending habits pose risk.
“[If you have a high utilization, but you are consistently paying off your debt] you’re probably a much safer borrower than somebody who has very high utilization and is constantly opening up new lines of credit,” Kamar said. “Those are two very different borrowers, but that difference is not seen by more simpler, linear models.”
Meanwhile, TurnKey Lender, a technology company that also has an automated underwriting system that pulls standard data, such as personal information, property information and employment, but can also analyze more “out-of-the-box” data to determine a borrower’s creditworthiness. Their web platform, which handles origination, underwriting, and credit reporting, can look at algorithms that predict the future behavior of the client, according to Vit Arnautov, chief product officer at TurnKey.
The company’s technology can analyze “spending transactions on an account and what the usual balance is,” added Arnautov. This helps to analyze income and potential liabilities for lending institutions. Additionally, TurnKey’s system can create a heatmap “to see how many delinquencies and how many bad loans are in an area where a borrower lives or is trying to buy a house.”
Bias concerns
Automated systems that pull alternative information could make lending more fair, or, some worry, they could do the exact opposite.
“The challenges that typically happen in systems like these [are] from the data used to train the system,” said Jayendran GS, CEO of Prudent AI, a lending decision platform built for non-qualified mortgage lenders. “The biases typically come from the data.
“If I need to teach you how to make a cup of coffee, I will give you a set of instructions and a recipe, but if I need to teach you how to ride a bicycle, I’m going to let you try it and eventually you’ll learn,” he added. “AI systems tend to work like the bicycle model.”
If the quality of the data is “not good,” the autonomous system could make biased, or discriminatory decisions. And the opportunities to ingest potentially biased data are ample, because “your input is the entire internet and there’s a lot of crazy stuff out there,” noted Dworkin.
“I think that when we look at the whole issue, it’s if we do it right, we could really remove bias from the system completely, but we can’t do that unless we have a lot of intentionality behind it,” Dworkin added. Fear of bias is why government agencies, specifically the CFPB, have been wary of AI-powered platforms making lending decisions without proper guardrails. The government watchdog has expressed skepticism about the use of predictive analytics, algorithms, and machine learning in underwriting, warning that it can also reinforce “historical biases that have excluded too many Americans from opportunities.”
Most recently, the CFPB along with the Civil Rights Division of the Department of Justice, Federal Trade Commission, and the Equal Employment Opportunity Commission warned that automated systems may perpetuate discrimination by relying on nonrepresentative datasets. They also criticized the lack of transparency around what variables are actually used to make a lending determination.
Though no guidelines have been set in stone, stakeholders in the AI space expect regulations to be implemented soon. Future rules could require companies to disclose exactly what data is being used and explain why they are using said variables to regulators and customers, said Kumar, the Temple professor.
“Going forward maybe these systems use 17 variables instead of the 20 they were relying on because they are not sure how these other three are playing a role,” said Kumar. “We may need to have a trade-off in accuracy for fairness and explainability.”
This notion is welcomed by players in the AI space who see regulations as something that could broaden adoption.
“We’ve had very large customers that have gotten very close to a partnership deal [with us] but at the end of the day it got canceled because they didn’t want to stick their neck out because they were concerned with what might happen, not knowing how future rulings may impact this space,” said Zest AI’s Kamar. “We appreciate and invite government regulators to make even stronger positions with regard to how much is absolutely critical for credit underwriting decisioning systems to be fully transparent and fair.”
Some technology companies, such as Prudent AI, have also been cautious about including alternative data because of a lack of regulatory guidance. But once guidelines are developed around AI in lending, GS noted that he would consider expanding the capabilities of Prudent AI’s underwriting system.
“The lending decision is a complicated decision and bank statements are only a part of the decision,” said GS. “We are happy to look at extending our capabilities to solve problems, with other documents as well, but there has to be a level of data quality and we feel that until you have reliable data quality, autonomy is dangerous.”
As potential developments surrounding AI-lending evolve, one point is clear: it is better to live with these systems than without them.
“Automated underwriting, for all of its faults, is almost always going to be better than the manual underwriting of the old days when you had Betty in the back room, with her calculator and whatever biases Betty might have had,” said Dworkin, the head of NHC. “I think at the end of the day, common sense really dictates a lot of how [the future landscape of automated systems will play out] but anybody who thinks they’re going to be successful in defeating the Moore’s Law of technology is fooling themselves.”
Nursing home care can be extremely expensive. According to Genworth’s 2021 Cost of Care Survey, the median monthly cost of a private room is a nursing home is $9,034. That’s over $100,000 a year! And most people will need nursing home care or something similar in their old age: A study from the Urban Institute and the U.S. Department of Health and Human Services found that 70% of Americans who reach the age of 65 need some long-term care during their remaining years.
But there are ways to get some of these costs covered, as well as strategies that can help cover any out-of-pocket expenses. We’ll examine four ways to pay for nursing home care, some of which you can implement early in your life to ensure a financially secure retirement. Consider working with a financial advisor if you want more personalized retirement and savings advice.
What Government Programs Will Cover
There are three government programs intended to insure and help cover medical costs for Americans ages 65 and older. Let’s take a look at how each of these may be able to help you pay for nursing home care.
Medicare: Medicare typically doesn’t pay for nursing home stays because it doesn’t cover custodial care. Custodial care is defined as “non-skilled personal care, like help with activities of daily living like bathing, dressing, eating, getting in or out of a bed or chair, moving around, and using the bathroom.” Medicare will only cover nursing home care when you need more advanced medical care — like regular injections that can only be administered by a medical professional. Medicare has additional restrictions and limits, and shouldn’t be counted on as a way to pay for long-term care in a nursing home.
Medicaid: Medicaid will cover 100% of your nursing home care so long as you meet the program’s financial eligibility requirements, according to the American Council on Aging. Individuals typically must have a low enough income and few financial resources to qualify for Medicaid. States limit the amount of income you can earn while qualifying for Medicaid and also typically put a $2,000 cap on the amount of cash and other assets you can have (beyond your home’s value). Additionally, the services must be deemed medically necessary by a physician.
PACE: Some states offer a Program of All-Inclusive Care for the Elderly (PACE), which is a joint Medicare-Medicaid program that can help those who need nursing home care. If you’re eligible and there’s a PACE program in your area, you can apply for care.
What Specialized Insurance Will Cover
Long-term care insurance is a fantastic option that can help you pay for nursing home care if you don’t qualify for government programs. This product is intended to cover the exact kind of care that isn’t often covered by Medicare — custodial care — as well as any specialized care or rehabilitation therapy you need.
Long-term care insurance isn’t cheap, but it can be a lot cheaper than paying out of pocket. The American Association for Long-Term Care Insurance found in its 2023 analysis that a 55-year-old man purchasing long-term care insurance with $165,000 in immediate benefits can expect to pay $900 a year. A woman in the same situation can expect to pay between $1,500 and $3,600.
How Tax Deductions Can Help
According to the IRS, you can deduct some or all of your nursing home expenses on your tax return. A tax deduction is a provision that allows some of your income to go untaxed. For instance, if you make $40,000 in income and qualify for a $5,000 tax deduction, you’ll only pay taxes on $35,000 of your income. While these tax provisions won’t necessarily help you pay for nursing home care up front, they can save you money after the fact.
The IRS specifies that if you’re in nursing home care primarily for medical reasons rather than custodial care, you can deduct the total cost. If you’re in nursing home care primarily for non-medical reasons, you can deduct the cost of any medical care, but not the cost of services such as lodging and meals. To figure out your tax deduction amount, most taxpayers will simply need to total up all of their qualifying medical costs, then subtract 7.5% of their adjusted gross income.
How to Cover Out-of-Pocket Costs
Even if you have long-term care insurance or another plan for covering your nursing home care, you will still want to have some money on hand to finance any uncovered expenses or surprise costs. Plan ahead for these out-of-pocket expenses by setting up a tax-advantaged retirement account.
A good option is to open a Roth IRA to use for these costs. Since you fund a Roth IRA with after-tax money, you won’t be taxed when you withdraw the money as long as you have reached age 59 ½ and the account has been open for five years. And unlike a traditional IRA, you won’t be subject to required minimum distributions (RMDs) at a certain age, so that money can remain invested until you need it.
An annuity is another smart way to cover out-of-pocket expenses or anything insurance won’t cover. An annuity is an insurance product where you pay a certain amount in exchange for receiving payments at a later date. You can specify when you want the payments to start, what schedule you want them to follow and how much you want them to be. You can also purchase an annuity with a long-term care rider to help cover some specified conditions requiring medical care.
Bottom Line
Nursing home care is expensive, but there are ways to plan for it and programs that can help you cover the costs. See how much government programs can help you, look into insurance options and make sure to take advantage of medical expense tax deductions.Lastly,set aside some savings for the costs that won’t be covered by government programs or insurance.
Retirement Planning Tips
Consider talking to a financial advisor about your options for preparing for long-term care costs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three qualified financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
A related concern is how much life insurance you may need. SmartAsset’s life insurance calculator will give you an estimate of how much life insurance you should have.
Ever wonder what share of borrowers are taking out a 15-year mortgage as opposed to a standard 30-year fixed? Or an ARM instead? Well, I was, and so I went looking for the data.
Fortunately, I was able to track down some of the details thanks to the Urban Institute, which provided me with some great statistics since the year 2000.
As you might expect, the 30-year fixed is the king of mortgage originations, though its dominance has been tested over the years. And it does depend if we’re talking about all originations, or just purchases.
Mortgage product type choice definitely varies if we’re talking about a refinance as opposed to a home purchase since borrower needs change over time.
Put simply, it’s more common for a borrower to choose the 15-year fixed when refinancing a mortgage, and a lot less likely to use one to buy a home.
Why is this? Well, generally borrowers will go with a 30-year term because it increases affordability, meaning they can buy more house at the outset.
Later, once they’ve built some equity (hopefully), they can refinance into a shorter-term fixed loan, such as the 15-year fixed, to save on interest and also ensure their loan term isn’t extended from the original maturity date.
Nearly 90% of Purchase Mortgages Were 30-Year Fixed Mortgages
The 30-year fixed is easily the most popular type of home loan available
It has been for decades and probably will be for the foreseeable future
Largely because it’s the cheapest and most pitched mortgage product
Ultimately ARMs are too risky for most homeowners and the 15-year fixed is too expensive
I spoke to the dominance of the 30-year fixed, and perhaps that was an understatement. The 30-year fixed claimed nearly 90% (89.5%) of the purchase market in June 2017, per data from Corelogic, eMBS, HMDA, SIFMA and Urban Institute.
It was actually higher at many times over the past 12 months, hitting 92.6% in July 2016.
Back in January 2000, the oldest month where there is data, the 30-year fixed accounted for just 70.3% of purchase mortgages.
Its lowest share since then was in December 2004 and March 2005, when it was selected on just 48.3% of new purchases.
In those same months, the adjustable-rate mortgage share was a staggering 41%. The ARM share continued to be quite high leading up to the housing crisis that ensued a few years later.
But in June 2017, the ARM share was a measly 3% of new purchase loans, which tells you today’s home buyer has very little interest in anything other than the safety of the 30-year fixed.
And only 6.1% are interested in the 15-year fixed, or perhaps only a small handful can actually afford the higher monthly payments thanks to DTI restrictions.
30-Year Fixed Less Dominant on Refinances
While still easily number one, the 30-year fixed is less popular when we consider refinance loans
You can thank the 15-year fixed mortgage for that
It’s a common choice for those looking to avoid resetting the clock
Since you can avoid a new 30-year term and also snag a lower interest rate
When it comes to refinances, the 30-year fixed is still the product of choice for most borrowers, but less so.
Per the latest data, the 30-year fixed held a 76.7% share of ALL mortgages in June. Meanwhile, the 15-year fixed grabbed a larger 14.3% share, while ARMs still held a paltry 3.3% share.
If we go all the way back to January 2005, we see the low point for the 30-year fixed across all mortgage originations. At that time, only 44% of borrowers chose it.
During the same month, the ARM-share was 38.7%, while the 15-year fixed grabbed a 9.9% share.
Back in January 2000, the 30-year fixed share was at 59.5%, while the 15-year fixed held 10.9%, and ARMs 21.5%.
So the 30-year fixed is still very popular, though not quite as much as it was back in December 2008, when its market share across all mortgages peaked at 88.4%.
The 15-year fixed peaked at 26.8% in April 2003 across all origination types. And ARMs peaked at 42.1%.
Market Share of All Mortgage Originations Since 2000
We’ve been worrying that mortgage rates would go up for years now, but it just hasn’t happened yet. Sure, they’re up a little bit from record levels, but not by as much as expected.
The 30-year fixed still sits firmly around 4%, while the 15-year fixed is in the low 3% range. Both have been slightly lower at different points in the past five years.
This prolonged period of low rates has kept the mortgage business humming along while also propelling the housing market to record heights.
But what happens when mortgage rates start to really take off higher? Well, six main things, this according to a working paper by Laurie Goodman over at the Urban Institute.
Mortgage Volume Will Fall
This one is inevitable
If mortgage rates rise
Mortgage loan application will fall
There’s just no way around that
What goes up will cause something else to go down, and we’re talking about mortgage origination volume.
As rates rise, fewer mortgages will be made because there will be less of an incentive to refinance.
Fannie Mae, Freddie Mac, and the Mortgage Bankers Association all expect mortgage lending volume to decrease significantly from last year to this year. And they anticipate an even slower 2018.
Of course, we’ve been hearing this for years, only to see these groups revise their estimates higher. But they’ll probably be right eventually…
The Mortgage Industry Will Consolidate
Because higher rates lower application volume
Mortgage industry consolidation is also likely
With smaller players absorbed by larger ones
And some mortgage companies falling by the wayside
Because fewer loans will be made in a high-rate environment, banks and lenders will need to “right-size” their staff to ensure they remain profitable.
We’ve seen this happen already with the loss mitigation departments at banks as foreclosures and short sales become a thing of the past.
Along with that will come mergers and perhaps a return to a more consolidated group of mega mortgage lenders.
Per Goodman, the market share of the top five mortgage lenders fell from 64% in 2010 to just 29% last year, while the top 25 saw its share decrease from 89% to 56% over the same period.
However, we continue to see new entrants into the mortgage space, such as Redfin Mortgage and fintech companies like Better Mortgage. I don’t see them going anywhere, but there’s always the possibility of getting acquired.
If the old brick-and-mortar banks sense a threat, and/or the ability to innovate, perhaps they’ll just buy one of those startups.
Mortgage Prepayment Speeds Will Slow Down
As mortgage rates increase
There is less incentive to refinance an existing home loan
And so prepayment speeds slow down
As homeowners hunker down
Related to the drop in mortgage volume will be a slowdown in mortgage prepayment speeds. That’s how long a mortgage is actually held before it’s paid off or refinanced.
As mortgage rates increase, prepayment speeds tend to slow because there are fewer people who stand to benefit from a rate and term refinance.
And if rates are higher, existing homeowners will have less motivation to move out, knowing it’s more expensive. They’ll also want to hold onto their more prized low rate if it’s much lower than the going rate of the future.
CoreLogic found that when interest rates were 1.5% lower than at the point of origination, a quarter of homeowners sold within five years.
A lower rate is a good opportunity to unload your old home and get a new one with even better financing terms.
Home Prices Will Rise
While the logic might sound off
Interest rates and home prices tend to rise together
Because higher rates are often the sign of an improving economy
Which means home buyers have additional income to purchase more expensive homes
Here’s one that continues to confuse folks. If mortgage rates rise, home prices will probably increase too. This seems to counter common sense, but it’s not as simple as it looks.
The easiest way to explain this phenomenon is that a growing economy leads to inflation, which leads to higher interest rates.
But because things are going well, we can also expect higher home prices thanks to rising wages and improved consumer confidence.
That good economy means a larger pool of buyers can spend more money on homes, which despite some decreased affordability rate-wise can propel prices higher.
Banks and lenders may also be willing to loosen underwriting guidelines to facilitate more aggressive financing, which can also give home prices a bump.
Lastly, inflation can increase real assets like home prices.
Repeat Buying Will Slow
One problem with the really low rates that were available
Is the so-called “lock-in effect”
Existing homeowners with really cheap mortgages will stay put
Because they don’t want to give up their low rate for a higher one
Some say those low mortgage rates are a blessing and a curse. Sure, they make homeownership cheap, but they also make it really hard to leave your current digs.
As rates rise, the repeat buyer share is expected to fall thanks to the “lock-in effect.” That’s the staying in place to keep your low rate dilemma.
Compounding this issue is the fact that many existing homeowners haven’t built much home equity over the past decade. In fact, some remain underwater despite the massive price gains seen in recent years.
Without a sizable amount of equity, it’s pretty difficult to move out and up, especially if rates are also higher.
Second Mortgages May Return
Homeowners could turn to second mortgages instead
If they want cash and are able to tap into their equity
This way they’ll preserve the low rate on their first mortgage
But get the funds they need to cover other costs
Fortunately, there’s a solution to some of the problems discussed above. And it comes in one neat little package called a second mortgage.
For those who don’t want to lose their precious low-rate first mortgage, they can tap into their equity using a second mortgage like a HELOC.
And for those struggling with affordability due to both higher home prices and higher rates, they can extend financing and buy more house via a second lien.
Heck, maybe we’ll see the popular 80/20 loan return, allowing new buyers to get a home with nothing down. We’re not far off now, with 97% LTV lending available nationwide.
In the meantime, enjoy the low rates and don’t let them pass you by…
I referenced in my last opinion piece in Housing Wire that the Urban Institute publishes a “monthly chart book” that is packed full of relevant data. This recent publication paints a clear picture as to why any Realtor or homebuilder should always include a nonbank lender in their referrals.
Before I open myself up to attacks here, I am using macro data from Urban Institute and there are certainly some banks who serve a broader swath of the market. But let’s start with the basics as to who really is expanding credit access in the market.
When looking at the nonbank share of all loans broken down by investor (Fannie, Freddie, and Ginnie Mae) the glaring data point that stands out is that nonbanks do well over 80% of all loans being made today. More importantly, when it comes to the Ginnie Mae programs, banks contribute only 7% of all the mortgages by the FHA, VA, and USDA. Seven percent is a glaring figure, especially when you look at the dynamics shaping the housing market.
The reason why this stands out is that the distribution of loans in the Ginnie Mae programs has the highest concentration of first-time homebuyers and the largest percentage of minorities. In the FHA program alone, 46.3% of all loans are to Hispanic and Black borrowers and with over 80% of all FHA’s purchase transactions going to first-time homebuyers, the fact that banks only do 7% of these loans is extraordinary.
Why does this all matter? Because the key regulators in Washington spend a lot of their time ingratiating themselves to the banking industry and lamenting about nonbanks. As Chris Whalen articulated in his recent op-ed, “Consumer Financial Protection Bureau head Rohit Chopra said in May that ‘a major disruption or failure of a large mortgage servicer really gives me a nightmare.’ He made these intemperate comments during CBA Live 2023, a conference hosted by the Consumer Bankers Association.”
The fact that regulators spend time “biting the hand that feeds them,” my reference to the fact that it is the nonbanks providing support for the constituency that this administration should care about and certainly not the audience at a CBA conference, is pretty alarming.
As Whalen goes on to highlight, “Chopra’s focus is political rather than on any real threat. But of course, progressive solutions require problems. Three large and mismanaged depositories failed in the first quarter of 2023, yet progressive partisans like Chopra, Treasury Secretary Janet Yellen, and Federal Housing Finance Agency head Sandra Thompson ignore the public record and continue to fret about nonexistent risk of contagion from mortgage servicers.”
I have taken a lot of negative feedback from many who are connected to the current administration about my criticism of things like LLPA fee changes. But in a similar context as Whalen, I am tiring of the politics of an administration and its regulators who focus their time on trying to reign in the independent mortgage banks (IMBs) — the very set of institutions that are responsible for ensuring that access to credit remains for American families who might otherwise be shut out of the market.
One might ask, why do IMBs do so much better here in advancing credit availability? I think it comes down to a core principal: IMBs only do mortgages. Unlike banks, they don’t do auto loans, credit cards, student loans, business lending, lines of credit and more. Banks don’t need to expand their mortgage lending businesses. In fact, the trend has been to retreat from mortgages, not embrace this segment further.
Just look at the data. When it comes to credit (FICO) scores, IMBs are significantly more aggressive. And since credit scores are lower for first-time homebuyers and trend lower in most minority segments, the IMBs naturally prevail as the best option for the homebuyer.
Or look at this data on DTI (debt to income ratio). The spread between median bank DTIs versus nonbanks in the Ginnie Mae program is significant and, frankly, will affect those on the margin of access to homeownership in a significant way.
The fact that banks are only 7% of all Ginnie Mae lending is not by accident. The reality is that they have systematically walked away from any element of mortgage lending that seems to be of greater risk. It’s frankly why companies like Wells Fargo today are a shadow of the mega-market dominators that they once were.
Whalen perhaps said it best stating, “More than any real-world problem posed by IMBs, it is the government in all of its manifestations that poses a significant risk to the world of mortgage finance and the housing sector more generally. Washington regulatory agencies seek to stifle the markets, limit liquidity and impose additional capital rules, strictures that must inevitably reduce economic growth and access to affordable housing.”
We have a labyrinth of federal regulators who failed to see how the significant rise in banks’ cost of funds, driven by the actions of the Federal Reserve, might push some banks into negative basis territory. This scenario, where they were paying depositors more than they were earning on their unhedged assets, put them out of business. And the regulators missed all of this. In all of their angst and speech-making about the risks of nonbanks, they simply overlooked three of the most expensive failures in banking history.
As I write this, I know that I too was once part of the arrogance of an administration that lectured and directed more than it listened at times. But today we face too many risks. Whalen clearly articulates how the GSEs are being directed down a path that will only decrease their relevance over time if left unchecked.
But perhaps the core message here is this: If I were a Realtor or homebuilder, I would make sure that my potential buyers, especially my first-time homebuyers, were in conversation with an IMB (or mortgage broker). If that simple step isn’t being done, then the access to credit challenges will likely only loom larger.
Remember, IMBs are not risk taking entities. They pass through the credit risk into government-backed lending institutions and they get paid a fee to service the loans for these government entities. We need regulators to stop speechmaking at banking conferences about risk here and instead applaud the critical role these companies perform.
More importantly, regulators should spend more time bolstering forms of liquidity to these entities. There are solutions that can help.
But really, the more time they spend politicizing the nonbank story, we risk more bank failures, which are truly the greater risk in the sector. Let’s applaud the IMBs for keeping the doors to homeownership open. And let’s demand that our regulators stop using political platforms to distort others’ views while not focusing on their primary responsibilities.
Accountability will only exist when stakeholders demand it.
David Stevens has held various positions in real estate finance, including serving as senior vice president of single family at Freddie Mac, executive vice president at Wells Fargo Home Mortgage, assistant secretary of Housing and FHA Commissioner, and CEO of the Mortgage Bankers Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Dave Stevens at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]