Sunday, October 16, 2016

REAL ESTATE TRENDS...ARE MICRO-APARTMENTS INNOVATIVE SOLUTIONS FOR CITIES OR FUTURE SLUMS?

BY 


A resident of the Nakagin Capsule Tower, Masato Abe, sits in his room in Tokyo on September 9, 2014. Around half of the tower's 140 capsules, designed by Japanese architect Kisho Kurokawa in 1972, are currently in use as offices, art studios and second homes. Twenty of the tiny spaces are full-time homes.

Soon enough, short of some last-minute appeal on behalf of protesters, Brill Place Tower will be shooting up from a site in Somers Town, a slightly neglected district just north of St. Pancras station in central London. The 25-story building is actually a pencil-thin pair of what dRMM, its inventive young architects, call micro-towers, built on a footprint of just 3,767 square feet. It was granted planning permission this summer, as part of a £1 billion ($1.22 billion) regeneration plan backed by Sadiq Khan, London’s populist new mayor.
Historic England, a largely government-funded heritage group, is opposed to the tower, perhaps because, like a skinny catwalk model stamping on a wedding cake, it will pierce the neoclassical skyline of white stucco terraces that encircle Regent’s Park. But whatever your architectural taste, Brill Place is very much a sign of the times. It will hold 54 of what planners call “units,” a mixture of cunningly laid out one- and two-bedroom apartments. It’s a wholly commercial development, so you can bet none of them will be cheap, although, according to dRMM, the smallest of its one-bedroom units will cover just 590 square feet. (It’s not clear if the architects include the apartment’s balcony in that calculation.) These micro-towers will hold some microhomes.

Compared with some, though, they’re palatial. In Kips Bay in Manhattan, residents paying at least $2,650 a month recently moved into New York City’s first micro-apartment building—Carmel Place, nine stories of prefabricated steel and concrete studio units, sheathed in a facade of gray bricks. Designed by nArchitects, the project is the first fruit of former Mayor Michael Bloomberg’s New Housing Marketplace Plan—a scheme launched in 2004 and intended to create 165,000 affordable homes for low- and middle-income New Yorkers. Carmel Place features 55 rental units, most of them just 260 square feet in size.
The building’s floor plans are fairly ingenious, managing to squeeze in enough room for a sofa bed, a tiny table and a narrow area of storage above the shower room and kitchen. But, like shrunken versions of the old downtown railroad apartments, they’re more corridor than home. Carmel Place does feature a gym, a shared roof terrace, a lounge and a garden, storage for bicycles and a “butler service” to replenish empty fridges. But this communal, city-center style of living is really suitable only for the young and single: Few families, however close-knit, would attempt to squeeze into such limited space.

Why Carmel Place is important has less to do with its detailed design and prefabricated factory construction than the fact that it has revolutionized planning in Manhattan: Until now, local legislation prevailed against such tiny homes. In Seattle, meanwhile, developers have been building micro-apartments as small as 199 square feet.  
The philosophy, or sales pitch, behind this extreme degree of minimal living is that the city itself, with its bars, cafés and youthful culture, serves as all the other spaces a young person might need or want. It’s an inescapable truth that, as cities across the world grow exponentially, huge numbers of new homes are needed, for the young, for service-industry workers who otherwise would be forced to live ever farther afield, for downsizing retirees and for professionals seeking city-center pieds-à-terre. No wonder, then, that towers of micro-apartments are catching on with planners, developers, architects and the property-hungry public.

Micro-living Failures

We have been here before. Although very much back in vogue, experiments in micro-living have been made several times over the past 90 years, and the results, while fascinating, are not exactly encouraging. In the late 1960s, Tokyo boomed, and as it did, young people and modest “salary men” and their families sought affordable homes in sprawling new suburbs, commuting to the city center in the famously jam-packed Metro trains.
The late Kisho Kurokawa, then a radically minded 30-something architect, had an answer to the problem of this mass exodus of the young from Tokyo. This was his Nakagin Capsule Tower—although it was, like Brill Place, a pair of towers—completed in 1972 in the Shimbashi neighborhood. Prefabricated steel capsules, 140 of them, were bolted onto the two central concrete shafts. Each capsule provided a 94-square-foot space, into which was squeezed a bed, a kitchen surface, an aircraft-sized bathroom and the very latest in Japanese audio technology.
Nurtured in an era of minicars, miniskirts and the widespread belief that technological progress was wholly benevolent, Nakagin Capsule Tower was a much-feted, much-photographed revelation. Today, while the rest of Shimbashi is filled with expensive offices, the tower is in a sorry state. There has been no hot water here for some years. Rather than chic and futuristic micro-apartments, most of the capsules are boarded up or used for storage or as makeshift offices; a few capsules are available to rent through Airbnb. Residents wanted more space than Kurokawa could possibly offer, and although the plan had been for the capsules to be unbolted and replaced every 25 years, it failed: It was always going to be cheaper to demolish the towers and build anew, than go through all the palaver of replacing its intricate nest of high-tech capsules. This Japanese model of mass-produced city housing remains a custom-made novelty loved by architects, but shunned by the residential property market

 laundry, a library, a gym and a roof terrace. This was to be a model of socialist living. Feminist living too. “Petty housework crushes, strangles and degrades,” wrote Vladimir Lenin in his essay “A Great Beginning,” saying it “chains her [the housewife of the capitalist era] to the kitchen. The real emancipation of women, real communism, will begin only where and when an all-out struggle begins…against this petty housekeeping.”

Stalin, however, put a sudden end to what he called such “Trotskyite” aberrations. Almost as soon as the first residents—some of whom installed their own tiny kitchens—moved in, the Narkomfin experiment of communal living was condemned, with rooms becoming individual, disconnected family units. Now a tarnished ragbag of empty apartments, artists’ studios and various oddball enterprises, the Narkomfin Building stands in the shadow of shiny new apartments. When, in 2004, Yuri Luzhkov, the former mayor of Moscow, opened the grotesque, 100,000-square-foot Novinsky Passage Mall, he is reputed to have said, while pointing to Ginzburg and Milinis’s yellowing masterpiece, “What a joy that in our city such wonderful new shopping centers are appearing—not such junk.”

From Junk to Trash

In spite of these failed monuments to capsule living, idealistic urban planners and architects press ahead. There's a distinct echo of the Tokyo project in a new proposal from Jeff Wilson, a former associate professor of environmental studies at Huston-Tillotson University in Austin, Texas. Wilson is perhaps best known for living for parts of 2014 and 2015 in a 33-square-foot dumpster converted into the tiniest and most unlikely home of all, but his latest project is more mobile. Called Kasita—from casita, Spanish for “little house”—it’s a proposal for prefabricated, 322-square-foot steel studios that can be slotted into a steel frame like bottles into a wine rack. The idea is that, should a resident want to move, it will be easy to lift these thoroughly equipped microapartments out from the rack and, with the help of cranes and a flatbed truck, transport them to a new location equipped with an identical steel rack.
This notion of moving home—your physical home—is certainly intriguing, although you might choose, as many American retirees have done, to invest in a motor home instead. It does highlight, however, one of the major criticisms of microliving, whether in Somers Town, Manhattan, Seattle or Texas. While tiny spaces might appeal to the young and single, what happens if a young single person meets another single young person and they produce a family?
Odds are, many will leave their micro-apartments, resulting in ever-shifting urban populations. Transience is one of the enemies of enduring communities. The more micro-apartments and towers there are, the more unsettled our city centers might become.
Will the latest wave of micro-apartments get the Luzhkov treatment and become the city slums of the future? Micro-towers may well be signs of the times, yet times change, and for most people, 260 square feet will never be quite enough.

Wednesday, October 12, 2016

REAL ESTATE TOPICS...The Fed has its eye on the 'new housing crisis'

BY Bob Bryan

The Federal Reserve doesn't think the US has enough houses.
In the release of the Federal Reserve's minutes from the September meeting, the members of the Federal Open Markets Committee spoke about the various aspects of the US economy and their progression since the July meeting.
Among the items discussed were inflation, the labor market, and notably, the US housing market.
The FOMC said that the housing market looks a bit weak, saying "real residential investment spending continued to be soft in the third quarter." The reason? The Fed said that at least part of the issue is the so-called "new housing crisis."
Here's how the FOMC characterized the problem (emphasis added):
"However, the sluggishness in the housing sector appeared to have continued into the third quarter. A couple of participants pointed to limited availability of lots and a shortage of skilled labor as restraining residential construction activity in their Districts; in one District, constraints on the supply of new homes for sale were expected to boost spending on home improvements and offset some of the drag from the slowing in new construction."
Put another way, the supply of new and existing homes has declined to the point that it is not able to keep up with new demand from younger people looking for a new home. This in turn drives the price of new homes up, pricing out first-time home buyers and resulted in the sluggish recovery for the housing market.
While it is unclear what impact, if any, this had on the Fed's assessment of the US economy, at least we know the troubles facing new home buyers have made it all the way to one of the most powerful economic institutions in the world.

REAL ESTATE TOPICS...Califorina San Fernando Valley home prices hit highest level in 9 years

By Gregory J. Wilcox

Houses for sale in the San Fernando Valley. Woodland Hills, CA. August 26, 2016. (Photo by John McCoy/So Cal News Group)
Houses for sale in the San Fernando Valley. Woodland Hills, CA. August 26, 2016. (Photo by John McCoy/So Cal News Group) 

The summer home buying season in the San Fernando Valley is winding down with some price sizzle and sales fizzle.
That’s according to July market reports from the Van Nuys-based Southland Regional Association of Realtors and the San Fernando Valley Economic Research Center at Cal State University, Northridge.
“Sales are dismal,” lamented economist William W. Roberts, the center’s director.
Here is what the reports show:
•The Realtors group said the median price of a previously owned house rose 4 percent from a year earlier to $623,000, the highest level IN nine years. And it gained $23,000 from June.
The association tracks the market from Toluca Lake through Calabasas.
But while prices are up, sales are down.
•CSUN’s research center reported that sales of new and previously owned houses and condominiums fell 10 percent from a year ago to 1,556 properties and they were down from 1,565 in June.
The center tracks a market from Glendale through Calabasas.
Both reports show summer sales are sluggish and that this will likely be a tepid year.
Roberts said his records show sales falling year-over-year for the last five months.
And since the buying season began in March, sales have increased from their year-ago level just once, according the Realtor’s report.
Low inventory remains the anchor weighing down the market.
At the end of July the number of houses and condominiums for sale had dropped 7 percent from a year earlier to 1,720, according the Realtors group. That is just a 2.4 month supply at the current sales pace.
“There is just nothing out there,” said Roberts. “It’s not like the early 2000s when people would sell to buy a bigger house. They are remodeling and they seldom move up. And you don’t have an influx of people into the Valley, either.”
Jim Link, the association’s CEO, said that the soft market is not unexpected.
“Not surprisingly, rising prices combined with limited supply and falling affordability translate into fewer sales,” said Link in a statement.


REAL ESTATE NEWS...In California Home prices up for 51st straight month in LA, Inland Empire

By Jeff Collins

Mortgage interest rates near all-time lows are a key factor in the housing market upward trajectory climb.

Mortgage interest rates near all-time lows are a key factor in the housing market upward trajectory climb.

House prices continued rising in July, increasing from year-ago levels for a 51st straight month in Los Angeles County and the Inland Empire and the 50th straight month in Orange County, the CoreLogic Home Price Index showed Tuesday.
Orange County has had the lowest appreciation rate in the region, with July house prices up 4.6 percent. By comparison, prices were up 6.3 percent in the Inland Empire and 6.7 percent in L.A. County, CoreLogic numbers show.
Nationwide, the price of an existing single-family home increased 5.4 percent from July 2015 levels. Prices were up 5.9 percent statewide.
CoreLogic’s monthly price index is based on same-home comparisons, computing the average price change of all homes sold compared to each home’s previous sale price.
Mortgage interest rates hovering within a fourth of a percent of all-time lows are a key factor in the housing market’s four-year-plus upward trajectory. But resistance to Orange County’s higher prices is keeping a lid on the rate of increase.

For example, O.C.’s price gains averaged just over 5 percent for the past year, compared to 6.1 percent in the Inland Empire and 6.5 percent in L.A. County.
“If mortgage rates continue to remain relatively low and job growth continues, as most forecasters expect, then home purchases are likely to rise in the coming year,” said Frank Nothaft, CoreLogic chief economist. “The increased sales will support further price appreciation, and according to the CoreLogic Home Price Index, home prices are projected to rise about 5 percent over the next year.”

REAL ESTATE TOPICS...Think twice about changing a revocable trust to list your child as co-owner of a home

By By Ilyce Glink and Samuel J. Tamkin




I live in Broward County in Florida and own a duplex (listed in my revocable trust) to be inherited by my son. I am 85 years old. I would like to list it now in both my name and his. What is the legal process to include him as a co-owner from now on, so he can also own it outright after my passing? Is there any tax upon ownership change? Also regarding income and expenses for the duplex, who files on the tax return?
The purpose of a living trust or revocable trust is to provide for an easy method to transfer ownership of a property at the time of the death of the owner. We can’t think of too many reasons why a person of your age would want to change the terms of the living trust.
Let’s review what you have at this time. You own a duplex unit. The actual owner is your trust and you are the trustee and you are the beneficiary of the trust. You control the property, receive the benefits of ownership and for all practical purposes can call the property your own. When you die, the trust names your son as the new beneficiary under the trust.
Without probate, your son will become the owner of the duplex at the time of your death. For practical purposes, if he decides to sell the duplex at that time or up to one year after you die, he won’t have any federal income taxes to pay on the sale. He will effectively inherit the duplex at its value at the time of your death. If your estate only has this duplex and some other property that is well under $5 million or so, your estate won’t have any estate taxes to pay, so that won’t be an issue.
You may have also signed a document giving your son power of attorney for financial matters in case you become disabled or unable to handle your affairs. This too would allow your son to help out in case you are unable to take care of your finances. If this is what you are looking for, this may be enough.
Now, if you are truly looking to transfer ownership of 50 percent of the duplex to him, you will face other issues. One of the issues is that the conveyance may trigger the local tax assessor’s office to reassess the home’s value. If you gift the half interest to your son, he will own the half interest at the same value as if you owned it. If he sells it at the time of your death or shortly after and you would have had a profit, he may face taxes that will need to be paid to the Internal Revenue Service.

The tax benefits that you receive from the duplex may change. You will have one-half of the expenses you had before. If you were deducting taxes and other deductible items, you’ll only have half as much to deduct. We don’t know how it will affect your son’s federal income taxes, but he should end up with some deductions — but it depends if the other half of the duplex is rented or not. If it’s rented, he may receive some tax benefits as well. For all of these tax benefits and other tax issues, you’d want to talk to an accountant or other tax professional to go over those issues.

Tuesday, October 11, 2016

REAL ESTATE TOPICS...Race, School Ratings And Real Estate: A 'Legal Gray Area'

By KENDRA YOSHINAGA and ANYA KAMENETZ


Race, Test Scores And Real Estate
With her infant son in a sling, Monique Black strolls through a weekend open house in the gentrified Shaw neighborhood of Washington, D.C. There are lots of factors to consider when looking for a home — in this one, Monique notices, the tiny window in the second bedroom doesn't let in enough light. But for parents like Black and her husband, Jonny, there's a more important question: How good are the nearby schools?
It's well known in the real estate industry that highly rated schools translate into higher housing values. Several studies confirm this and even put a dollar figure on it: an average premium of $50 a square foot, in a 2013 national study.
In Chappaqua, N.Y., an affluent bedroom community for New York City, the town supervisor recently went so far as to declare that, "The schools are our biggest industry — whether you have kids in the school or not, that's what maintains our property values."
But some advocates for fair housing see a potential problem with the close ties between school ratings and real estate. They say the common denominator, too often, is race. And they argue that the problem has intensified in the last decade with new web platforms bringing all kinds of information directly to homebuyers.
"A school rating map mirrors a racial dot map," showing patterns of segregation and diversity, observes Sally Santangelo, the executive director of Central New York Fair Housing, a group that provides education and legal assistance to oppose housing discrimination.
That, in turn, raises some complicated questions about how factors like test scores and school ratings are used to influence homebuying decisions.
Characteristics like safety and parent involvement — the qualities Monique and Jonny say they value in a school— can be hard to quantify. Most states base their school ratings primarily on more easily measured factors, like standardized test scores and graduation rates. And these indicators, in turn, are heavily influenced by inequities of race and class.
There's a large, persistent and well-documented gap in test scores between black and Hispanic students and their white and Asian peers. There are many reasons for these disparities: income and wealth gaps, disciplinary policies that "push out" black students from school systems, less experienced teachers, the early-learning gapbetween high- and low-income children. But they all end up reflected in one number: a school rating.
"A lot of time, with schools that serve majorities of students of color, you get a negative rating because the test scores are low," says Genevieve Siegel-Hawley, an assistant professor who studies race and housing at Virginia Commonwealth University. But, she says, "most of the variation in test scores is explained by the kids' own poverty or the poverty of their school."
Housing patterns and school ratings, of course, also reinforce each other. In most places around the country, school budgets are partly linked to local property taxes. Highly rated schools beget higher housing values, which in turn beget more richly resourced schools.
It's a virtuous cycle for a town like Chappaqua, but a vicious cycle elsewhere.
What does all this mean for potential homeowners like Monique Black? Or for realtors who see school quality as a selling point?
For a realtor, directly discussing the racial composition of a neighborhood with homebuyers is against the law. In 1968, the Fair Housing Act outlawed the practice of racial "steering" by realtors. This can mean showing different properties to a white family and a black family who have the same requirements, or telling them different things about the desirability of a given property or neighborhood, in a way that tends to maintain segregation or perpetuate discrimination.
The National Fair Housing Alliance, an advocacy group, conducts "mystery shopper" sales tests, sending out people of various backgrounds to pose as house hunters and determine whether they hear different messages.


In a 2006 report, the NFHA documented some form of steering in 87 percent of these encounters. And, says Morgan Williams, the organization's general counsel, this steering included discussions of school quality.
"A striking pattern regarding schools emerged from these sales tests," the report states. "Instead of making blatant comments about the racial composition of neighborhoods, many real estate agents told whites to avoid certain areas because of the schools. It is evident from the investigation that schools have become a proxy for the racial or ethnic composition of neighborhoods."
For example, white testers reported that they were told to avoid the Tarrytown, N.Y., schools, which are predominately Hispanic. In several cases, the report says, agents there told whites that the schools were "bad," but Latinos were told that the same schools were "good."
In Philadelphia, an agent told a white tester that the schools in a particular town were very good, then added, "But don't tell anyone I told you that."
Williams says comments about schools have been included as part of the evidence in at least one case that resulted in a finding of discrimination.
He points out that the National Association of Realtors advises its members not to air their opinions about schools, and to instead direct clients to objective sources of information.
House Hunting Online
Current fair housing laws govern advertising and statements made by landlords and real estate agents. But in the last decade, the web has brought the process of house hunting closer to consumers. And this brings a new dimension to the connection between racial housing patterns and school ratings.
Realty search engines like Zillow, Homes.com and Redfin link to local school ratings prominently on every listing. The actual racial and ethnic composition of each school is a click or two away. On all three sites these ratings are color-coded: green, yellow or red.
Siegel-Hawley of VCU started using Zillow when she and her husband were looking for a "dream house" in Richmond, Va. She quickly took note of the color-coded school ratings and said they reminded her of redlining, which was a legalized and explicit practice of discrimination supported by the Federal Housing Administration between 1934 and 1968.

The FHA published maps with poor communities of color shaded red, showing where they would refuse to insure mortgages.
The question Siegel-Hawley raises is: Might school ratings on real estate sites constitute a 21st century form of racial steering?
Redfin did not respond to a request for comment in time for publication.
Test scores are "a standard metric," says Nicole Hofmeister, a product manager at Homes.com. "To my knowledge, it doesn't factor in anything about race or socioeconomic factors."
Michael P. Seng, a professor of fair housing law at John Marshall Law School in Chicago, isn't so sure. Providing school ratings oversteps the bounds of what a real estate service should be doing, he says.
But to bring an actual court case, he explains, a plaintiff would need to prove that the school ratings steer people out of communities on the basis of race. "It would take a lot of statistical studies, but I think it's possible," he says.
Morgan Williams calls the issue a "legal gray area."
Current fair housing laws focus liability on the people who are selling housing: the landlords and the real estate agents. But online platforms put information directly in the hands of consumers, so their liability is less clear.
For example, in response to questions about school ratings, Katie Curnutte, vice president of communications at Zillow, offered this statement: "These data points serve as a starting point to do further research and connect with a real estate professional."
Sally Santangelo, of Central New York Fair Housing, agrees. "If you're just providing someone with neutral information," she says. "I think it would be hard to argue that the intent is discriminatory."
She adds that a homebuyer could easily access the same information about schools through other public sources, like local government websites. Plus, Santangelo says, "someone might want to move into a diverse community," and thus be using the school information for nondiscriminatory purposes.
But the use of color coding, and the ready availability of information about demographics, she says, could still be a cause for concern. "If a realtor was to hand somebody Census stats showing the race and ethnicity of the neighborhood, it would probably be an FHA violation."
The question that has yet to be settled, says Williams, is: "Does providing this information to consumers, in a format that would allow for discrimination, constitute discrimination?"
No, says Fred Underwood, director of diversity at the National Association of Realtors. "I'm not certain that any of this rises to the level where it would be a court case." On the other hand, he acknowledges, "If you're consistently undervaluing certain communities and overvaluing others, and there's a racial correlation, then there might be a problem."

REAL ESTATE TOPICS...5 Biggest Benefits of VA Loans

By Chris Birk of Veterans United Home Loans
Mortgage VA Loans
Tight credit, tougher mortgage lending and flat-lining wages have all breathed new life into the historic VA loan program. Veterans and military families are turning to these flexible, no-down payment loans like never before.
The Department of Veterans Affairs backed a record number of loans in fiscal year 2015, with volume expected to increase 36 percent over the next five years. Created originally to help World War II veterans get a foothold in the housing market, this hard-earned benefit has evolved into one of the most powerful mortgage options on the market.
A handful of key benefits have spurred the program's emergence as a lifeline for today's military homebuyers.
Here's a look at five of the biggest.

No Down Payment

This is the signature benefit of VA home loans. Qualified buyers can purchase up to $417,000 in most parts of the country before needing to put money down. That figure is even higher in costlier housing markets.
Conventional loans often require a 5 percent down payment, while FHA loans require a minimum 3.5 percent down payment. On a $244,000 loan, which was the average VA loan amount last year, buyers would need $12,200 for a conventional down payment or $8,540 for FHA. It can take years for veterans and military families to save that upfront cost.

No Mortgage Insurance

This is another big expense that VA buyers don't face. Conventional borrowers who can't muster a 20 percent down payment often get stuck paying for private mortgage insurance. FHA buyers pay both an upfront and an annual form of mortgage insurance. These expenses can add $100 or more to your monthly mortgage payment and linger until you've built sufficient equity in the home. FHA buyers now pay mortgage insurance fees for the life of their loans.
VA buyers don't pay for mortgage insurance, but they do have an upfront funding fee that most choose to roll into the loan. The VA Funding Fee is paid to the VA and helps keep the loan program running. Buyers who receive compensation for a service-connected disability are exempt from this cost.

Flexible Credit Guidelines

This loan program's financial flexibility is matched by common-sense credit underwriting. VA loans were created to boost access to homeownership for those who serve our country, and the government urges lenders to take a more holistic look at a buyer's credit and financial profile.
In fact, the VA doesn't set a credit score requirement for these loans. But the private companies actually making these loans typically will have a score cutoff, albeit a lower one than conventional lenders often require.
Would-be buyers can also bounce back faster in the wake of a bankruptcy or foreclosure. Veterans can often obtain a VA loan just a year removed from filing a Chapter 13 bankruptcy and two years following a Chapter 7 discharge or a foreclosure.
For conventional mortgages, the "seasoning period" can be considerably longer four years following a Chapter 7 discharge, two years after a Chapter 13 discharge and seven years after a foreclosure.

Interest Rates

Veterans and military members also have access to the lowest-rate loan product out there.
VA loans have had a lower average interest rate than both conventional and FHA loans for the past 23 consecutive months and counting, according to data from mortgage software firm Ellie Mae.
That benefit helps boost buying power. Rates will ultimately vary depending on your credit, the lender you're working with and more.

Closing Costs

VA buyers can ask a seller to pay all of their loan-related closing costs and up to 4 percent of the home's value in concessions. Those concessions can cover a host of costs, from prepaid property taxes and homeowners insurance to paying a buyer's funding fee and even paying off collections or judgments at closing.
The VA also limits what costs and fees lenders can charge, and there are a few that buyers aren't actually allowed to pay.
To be sure, VA loans aren't the right fit for every military homebuyer. But these flexible government-backed loans continue to make a critical difference for millions of veterans and military families.

REAL ESTATE NEWS...Canada Banks, Insurers Rally Opposition to New Housing Rules

By Doug Alexander, Katia Dmitrieva

Canadian banks and mortgage insurers are rallying against new government housing rules that they say will lead to higher mortgage rates, hurt small real estate markets and drive borrowers toward unregulated lenders.
The flash point for the big banks, which hold their regular meetings with the finance department this week, is the risk sharing proposal that would require the industry to shoulder a burden of mortgage defaults. Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., the second and third-largest mortgage insurance providers, will lobby the department against risk sharing in coming weeks, people familiar with their plans said.
Risk sharing will most likely involve lenders paying a deductible if a loan sours, similar to what drivers pay in the event of a car crash, according to people familiar with the government plans. Other risk-sharing measures that have been reviewed by the finance department include banks paying a fee to insurers to manage the loss, or taking a portion of the loss, according to a July 2015 briefing note from the department.
The banks argue that Canadian mortgage defaults are so low that making lenders share the risk is unnecessary and not worth the costs. Delinquency rates in the C$1.4 trillion ($1.1 trillion) mortgage market, or those in arrears for 90 days or more, stand at 0.28 percent, or five times lower than those in the U.S., according to the Canadian Bankers Association.

Strong Underwriting

“We don’t understand what a deductible is intended to achieve as a policy outcome,” Darren Hannah, vice president of finance, risk and prudential policy at the Canadian Bankers Association, said by phone. “If it’s supposed to be something to improve the quality of underwriting, well the quality of underwriting is already very strong.”
The Toronto-based banking group, which represents 59 domestic lenders and foreign bank subsidiaries, highlighted a deductible as its main concern in a statement after reviewing measures announced Oct. 3 by Finance Minister Bill Morneau. Representatives of the country’s biggest banks, including Toronto-Dominion Bank, Bank of Montreal and Canadian Imperial Bank of Commerce, declined to comment. Genworth and Canada Guaranty declined to comment on meetings with the finance department.
Morneau’s move was part of a package of measures designed to stabilize the housing market after years of soaring prices in Vancouver and Toronto. The rules include a more stringent stress test for home buyers, stricter eligibility criteria for insured loans and closing a tax loophole that allowed non-residents to sell their principal homes tax-free.
Mortgage insurance is typically required by lenders when homebuyers make a down payment of less than 20 percent of the purchase price, while banks often buy so-called portfolio insurance when the down payment exceeds that level. The government backs 100 percent of the mortgage insurance obligations of Canada Mortgage & Housing Corp. and backs obligations of private mortgage insurers Genworth MI and Canada Guaranty, subject to a deductible charged to the lender equal to 10 percent of the home loan.

Stress Tests

The bank association says that the industry already does extensive stress testing on their mortgage portfolios to ensure customers can repay loans even if interest rates increase.
All mortgages currently go through a “double-underwriting” process as it is, with both lenders and the insurer underwriting the loans for safety.
The cost of risk sharing would make its way to homebuyers through higher mortgage rates or fees, industry officials said. It will also make it more difficult for non-bank lenders to operate because they don’t have the diversity of earnings to offset the costs. That would reduce competition and make it harder for first-time buyers and people in rural or single-industry towns to get a loan.
The stress tests and higher standards for mortgage insurance will be a blow to the insurers and non-bank lenders, said Dan Eisner, founder and chief executive officer of Calgary-based True North Mortgage, a brokerage that advises 300 to 400 new borrowers each month:
“The insurers will be hit twice as hard as anybody else,” he said.

Unintended Consequences

The government “should consider potential unintended consequences such as disadvantaging monoline lenders from a competitive standpoint because those lenders are less able to deal with a risk sharing model than the big banks are,” Stuart Levings, chief executive officer of Genworth MI Canada, said by phone last week.
First National Financial Corp., Canada’s largest non-bank mortgage lender, said the measures will slow their earnings growth and force them to raise fees on some products to reflect higher borrowing costs. About a quarter of the Toronto-based firm’s mortgages will no long qualify for portfolio insurance under the new measures, CEO Stephen Smith said. The stock had its biggest five-day drop in eight years last week.
“This is a solution in search of a problem,” Smith said in an Oct. 6. interview with Bloomberg TV Canada.

First National has temporarily suspended mortgages on rental properties and to some self-employed workers who can’t verify their income using traditional means, the Globe and Mail reported Monday.

Skin in Game

Among those advocating for mortgage deductibility has been Evan Siddall, president of the federal agency Canada Mortgage & Housing, who said Oct. 4 that risk sharing tackles a system where banks have “no skin in the game”.
Canada’s 100 percent backing of home mortgage insurance is “unique” in the world, the finance department said in its background paper explaining the new measures.
Morneau said last week the risk-sharing measures will be “well thought out” and gradual, and imposed only after getting feedback from industry players.
“At this stage, we haven’t identified any particular outcome because we do want to hear from people and we haven’t set out any definitive time frame,” Morneau said in Washington. The document will have “multiple ideas embedded in it,” he said.

No Surprise

The push-back from lenders shouldn’t come as a surprise to the government. Last year starting around March, the federal finance department began meeting with high-level officials at the banks, alternative lenders and mortgage insurers to float the idea of risk-sharing, according to several people in the industry.
“The Canadian housing market has operated in a very efficient manner with a strong competitive balance for several decades,” Andrew Charles, CEO of Canada Guaranty said in an Oct. 7 phone interview. “The government is seeking to reduce its overall exposure to the housing market.”