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Since 2008, the number of private secondary mortgage providers has reduced dramatically, and those that remain in the market generally purchase jumbo loans from more affluent borrowers.

Fannie Mae and Freddie Mac have been under government conservatorship since the beginning of 2008. Ginnie Mae is wholly owned by the federal government. This is important to note because most people believe that the government has no business competing with private enterprises unless it is there to serve segments of the market that are not being adequately served by the private sector.

While banks also have the capacity to make loans and hold them on their balance sheets, the majority sell most or all of their loans to secondary providers. They do this to reduce their risk and to free up their capital to process more loans. Independent mortgage bankers use lines of credit to fund all of their loans and therefore must sell them promptly on the secondary mortgage market. The bottom line is that the secondary mortgage market is the platform that powers the entire mortgage ecosystem in the U.S.

The benefit of a system with a robust secondary mortgage market is that borrowers can access competitively priced mortgages in almost every market in the country, and because the secondary market is limited to a handful of providers, the mortgage approval process is widely standardized. In other words, the process and criteria to qualify for a mortgage are very much the same throughout the country.

Without a strong secondary mortgage market supported by the federal government, lenders would be able to fund far fewer loans, and would likely flock to the most affluent areas in the country, leaving less-affluent markets with fewer options to finance a home. The drawback to having a uniform secondary mortgage market is that there isn’t much differentiation in the market. Because mortgage lenders need to underwrite their loans to satisfy either Fannie Mae, Freddie Mac or Ginnie Mae guidelines, every mortgage lender in every market offers much the same products and follows the same underwriting guidelines, making it difficult for mortgage lenders to serve borrowers who fall outside the narrow underwriting box.

Incentivize lenders to service more minority borrowers

Because Hispanic and Black borrowers typically have less wealth and are primarily first-time homebuyers, processing loans for minority borrowers can require more time and work.

Additionally, loans made to first-time buyers with small down payments are considered riskier and have higher rates and fees to compensate for the additional risk. Loans made to minority borrowers also tend to be smaller, so the commissions are lower. Essentially, loans made to Hispanic and Black borrowers frequently make less money, cost more to produce and carry more risk. The financial incentives are simply not there for mortgage companies that want to do more minority lending; therefore, it shouldn’t be a surprise that most banks and mortgage lenders do just enough minority lending to stay out of regulatory trouble but secretly have no desire to do much beyond that.

Fannie Mae and Freddie Mac have had affordable lending goals for years, but the impact of closing the minority homeownership gap has not been that significant. If the federal government was serious about closing the minority homeownership gap, they would require Fannie, Freddie and Ginnie Mae to provide financial incentives to lenders that outperform the market in lending to minority, first-time buyers. Today, a handful of companies make a disproportionate percentage of loans to minorities.

They do it despite the financial sacrifices, but their success proves that it can be done. Minority lending goals without financial incentives will continue to have modest outcomes, but if the financial incentives are aligned with the goals, lenders will respond accordingly and the impact on minority lending would be substantial.

How to safely qualify more minority borrowers

The U.S. is one of the few places in the world where you can get a fixed-rate mortgage amortized over 30 years. It is also a great product that would not be possible without our secondary market. Fixed-rate mortgages provide stability and predictability. The criteria to qualify for a fixed-rate mortgage has not changed much in the last 60 years.

Lenders use systems called automated underwriting systems (AUS) that are accessed by Fannie Mae and Freddie Mac. Income and credit information are inputted into the AUS. Then, it makes a decision based on three primary factors: debt-to-income ratio (DTI), credit score and loan-to-value ratio (LTV). Credit and loan-to-value ratios are fairly easy to determine for most people, but evaluating income is where judgment is sometimes involved. Today, for borrowers who do not get all of their income from fixed wages, their income is averaged over the most recent two-year span, making it more difficult for self-employed and part-time workers to qualify for a mortgage.

Latinos and other minorities are almost twice as likely to have self-employment or part-time income as the overall population. The emergence of the “gig economy,” where more people earn their money by working multiple part-time or temporary jobs, presents challenges for underwriters who are bound by a process that was designed when 90% of the population earned a standard paycheck. A borrower’s income should always be evaluated as part of the underwriting process, but closing the minority homeownership gap will require more innovation in determining income and the ability of a borrower to repay a mortgage.

Thin credit, when a borrower does not have enough established credit to generate a dependable credit score, is also an issue that tends to affect minority borrowers more frequently. Recently, Fannie Mae and Freddie Mac have allowed lenders to use rental history to build a credit profile. This is an important development because the data shows that a borrower’s history of paying rent or a previous mortgage is the single best indicator of a borrower’s ability to repay.

The consequences of risk-based pricing for mortgages

For the most part, interest rates for mortgages are determined by market forces; however, risk is also a factor. Ironically, higher interest rates and fees are assigned to the borrowers that can least afford them. This practice is called risk-based pricing. Borrowers with high loan-to-value ratios and lower credit scores are required to pay higher rates and fees for mortgages. This practice disproportionately affects minority first-time homebuyers. The most prominent exceptions to this practice are FHA and VA loans, in which everyone pays the same price and fees regardless of LTV or credit score.

Recently, the Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, made adjustments to their policies that reduced the pricing for loans that were previously deemed riskier. The policy initially received criticism from people who believed it penalized people with good credit. However, FHFA understands that homeownership rates, especially for minorities, won’t improve without addressing mortgage affordability for first-time buyers.

Diversity in the industry

If the industry was given one silver bullet to reduce the minority homeownership gap, it might be to substantially improve diversity in the mortgage industry. The process of purchasing a home is complicated and intimidating, especially for someone who has no experience with it. Having a mortgage professional who comes from your community, understands the cultural nuances and speaks your preferred language makes a huge difference. The mortgage companies that service the highest percentage of minority borrowers also have the most diverse teams — up and down their organization, from the C-suite to their operations and sales teams. Every year NAHREP surveys the top Latino mortgage originators in the nation. When asked why they chose the company for which they currently work, the No. 1 answer has been, “They understand my borrowers and know how to close my loans.”

Translation: my company employs people who look and sound like my clients and me.

Final words on access to mortgage credit

As our nation becomes a majority-minority country, our long-term prosperity depends on our ability to close ethnic wealth and prosperity gaps. Because home equity is the primary source of wealth for most Americans, closing the minority homeownership gap is the first step toward that goal. Closing the homeownership gap will require improving housing affordability, closing knowledge gaps, increasing diversity in the housing industry, and improving access to affordable mortgage credit. The latter can be accomplished by 1) Incentivizing mortgage lenders who originate a high percentage of their loans to minority borrowers, 2) Developing new metrics to determine the ability to repay, 3) Continuing to find solutions for borrowers with thin credit files, 4) Improve loan pricing for first-time homebuyers with average credit scores and small down payments, and 5) Dramatically improving diversity in the mortgage industry.

Gary Acosta is the co-founder and CEO of NAHREP.

This piece was originally published in the August/September 2023 issue of HousingWire Magazine. To read the full issue, click here.

Source: housingwire.com

Apache is functioning normally

Christmas is over. You received some thoughtful presents, but also got some duds. That collection of cooking spices from your Aunt Madge? You hate to cook! Here’s some sage advice from Marie, a self-confessed re-gifting addict.

Regifting has a tarnished reputation in today’s consumer-driven society. Perhaps it’s driven by businesses hoping to convince us to spend more money, or by a misguided quest to shower our loved ones with extravagances we can’t really afford, or simply by a fear of seeming cheap. Regifting can not only be appropriate, but frugal and fun. Regifting is recycling elevated to an art form. Here are a couple points to keep in mind before you put away this year’s Christmas presents.

The number one rule of regifting is: Mark who gave it to you and when you received it. While regifting in itself is nothing to be ashamed of, shame on you if you give it back to the person who originally gave it to you! I usually try to avoid regifting within the same social circle. If I got scented potpourri from someone at work, I may regift it to someone in my book group, but not to another co-worker. Marking items is crucial because you probably won’t remember who gave you the gift six months later. Nothing kills a regifting possibility faster than forgetting the giver — that potpourri is going to sit there until I meet someone from another continent who couldn’t have possibly given it to me in the first place.

Once an item is accurately labeled, it may be regifted as:

  • The Gag Gift. Do you do a group white elephant or yankee swap for Christmas? Know someone that has everything (including a sense of humor)? Sometimes the gift you got is so bad it’s hilarious. Instead of tossing it, save it as a gag gift. After all, laughter is one of the best presents around. My gag gift drawer seems to be a popular destination for gifts from one particular relative of mine. They are purchased in earnest, but boy are they bad. So, give them a second life. If you find yourself with an inordinate amount of bad gifts, perhaps it’s time to suggest to your family/friends that the gift exchange stops, or to name a charity to which they could donate in your name instead.
  • The ‘Thank You’ Gift. Many gifts around the holidays are non-descript gifts meant to show a little appreciation or affection. It’s not the money; it’s the thought. You probably got some this year: mugs, generic stationary, candles, holiday ornaments, humorous little books, knick-knacks. And you probably will give some next year. Do you really need another mug, or can you repurpose it? I always give something to our wonderful mail carrier (who makes sure the packages are under the porch roof where they won’t get rained on), to the support staff where I work (these type of employees are chronically under-appreciated), to our fabulous neighbors, and to other people who help me during the year. Often these gifts are cookies or candies that I make myself, but I like to tuck them into a regifted mug, or to adorn with a regifted ornament. This costs me nothing extra, but makes the gift more complete. (Reminder: For some services, an actual cash bonus is more appropriate and welcome. Housekeepers or live-in nurses, for example, deserve more than a plate of cookies at the end of the year.)
  • The Specialty Item. You hate it, but someone you know will love it. There’s nothing wrong with saying as much — nicely. Snowman cookie jar? Give it to the snowman collector. Or cookie jar collector. Or the person who is famous for their holiday baking.

Regifting can also be applied for free/bonus items, such as those you receive when placing an online order. For example, if you order often from an online cosmetics retailer such as AVON or Garden Botanika, you can accumulate a nice assortment of free samples: lipstick, lotion, perfume, etc. Tuck a few of these into a pretty basket or a cosmetics pouch for a quick gift for a teenage girl or for somebody going on a romantic getaway weekend.

Here are some other tips:

  • Regift someone else’s gift. Think garage sales/tag sales. Just because it’s used doesn’t mean someone on your list won’t love it. Vintage dishware? Antique tools? Decorative bottles? But be selective; don’t just buy it because it’s a bargain — have a giftee in mind and be confident that they will like the gift. You may score great gifts with “online garage sales” like eBay or craigslist, too, if you’re willing to budget for postage or do a bit of driving. Be a savvy shopper and read descriptions well so you won’t be disappointed.
  • Regift those containers. Save those baskets, giftbags, wine wrappers, etc. They’re too nice to throw away after just one use! Encourage others to reuse by labeling them in such a way that they aren’t destroyed. (I know someone who writes the recipient’s name in permanent marker across the entire side of a beautiful giftbag; a better choice would be to dangle a small giftcard from the handle with ribbon. The card can easily be removed so the bag can be reused.) Americans spend a lot of cash on wrappings that are admired once and then trashed.
  • Regifting don’ts.
    • Food. No one wants stale chocolates, flavorless coffeebeans or expired canned goods next December. Either pass it on quickly or dispose of it.
    • Crap. Try to avoid regifting things that you yourself think are tacky, poorly made, etc. Put these in the garage sale pile, or donate them to charity. Someone may buy them, but at least they don’t have to write you a thank you note.
    • Know when to stop. Don’t regift just to have something to give. Your gift should still be well-chosen for the recipient and show that you put some thought into it. Otherwise, don’t be surprised if that gift is regifted once again! If nothing is appropriate, make or purchase a gift. Or, if you need to be especially thrifty, a sincere and warmly written letter expressing your love/appreciation/gratitude can be the best present.
  • Keep track of your gifting. I use a spreadsheet to organize the year’s gifts. I can see at a glance for whom I still need a gift (or recipient). All the gifts are stored in a central location, out of the way. My spreadsheet also allows me to take advantage of sales. If I see something in January that’s perfect for my sister-in-law, I know if I already have her covered for her August birthday and next year’s Christmas. This is also handy if a last-minute gift-giving situation arises — I know what I have on hand and if anything fits the occasion.

You can combine this spreadsheet with your budget for the next year, or start now and keep notes on what you spend in 2007. Gifts can be a huge expenditure, often unplanned for. Knowing what you spend in a year will help you make adjustments if your gifting line item is more than you’d like. And, if you save each year’s gift list, you won’t accidentally give Uncle Bob the same CD twice.

Beware — one downfall of purchasing gifts year-round is the inevitable urge to buy more in December. The carols are playing, the stores are beckoning, the tree could certainly use just one more present beneath it… Resist, resist! A gift is a message from you to the recipient. Keep in mind that the message should be about thoughtfulness rather than about how much you charged to your credit cards.

Look for more frugal tips from guest authors later today.

Source: getrichslowly.org

Apache is functioning normally

You just walked out of an interview, and it’s time to reflect: Are you worried it went badly?

“Badly” can mean a lot of things. You might have a strong sense that you screwed up the interview, or the hiring team seemed unimpressed. Or you might’ve walked away feeling less enamored with the role than you expected because the interviewer didn’t dazzle you or the way the interview was conducted felt like a waste of your time.

First, consider that there are any number of reasons you might’ve left with a bad impression, but they’re not all trustworthy, according to Diane Farrell, career services director with the University of North Georgia. An unfriendly interviewer could just be having a bad day, or they could be at the mercy of a restrictive process that makes them come across as disinterested (more on that below).

“I have left an interview and thought I blew it and then they offered me the job,” Farrell says. “We’re not always the best judge of how it went.”

Still, it’s valuable to reflect on your experience, according to Amy Yandell, a North Carolina-based career specialist with coaching firm Ama La Vida. She recommends taking a few minutes right after your interview to write down the questions you received and how you answered them, as well as your overall impressions.

It is possible it was a bad interview — either because you blew it (sorry), or they did. But note that this is a chance for you to judge their suitability while they’re judging yours. As you evaluate those first impressions, here are some signs an interview might have gone badly.

1. The interview was cut short. This would need to be a significant reduction in meeting time — not just a few minutes, Farrell says.

2. You didn’t get many details about the job. Instead, they focused on your resume and a set of interview questions. Maybe they dwelled on a weak point like they were trying to get you to prove something.

3. They didn’t ask follow-up questions. This could signify a lack of interest in you as a candidate. However, some companies have interview protocols that prevent them from straying from a prescribed list of questions, so don’t rely on this one too heavily, Yandell says.

4. You lost eye contact with the interviewer. Body language isn’t the most reliable sign, especially if you’re in a Zoom interview. But when the interviewer is not physically engaged in the conversation, it’s easy to come away feeling like it was a bad interview.

5. You didn’t meet other people. If an interview went well, you might be introduced around to other people you’d work with, Farrell says.

6. They didn’t ask about your availability. If they’re not gauging when you could start in the role, it may be a sign they aren’t interested. But it could also mean they’re not yet at that point in the interview process.

7. They didn’t tell you about the next steps. If they don’t offer to lay out the next steps in the interview process, it could mean they don’t expect you to move forward.

8. The job sounds different than described. They may have given you details that don’t match the job description that piqued your interest when you applied.

9. You don’t feel excited about a potential job offer. Sometimes the vibes are just off. If you walk away from an interview feeling less enthusiastic about the role or the company, something went wrong. You may want to reflect on what exactly got you deflated.

10. You didn’t connect with the people you met. These are people you’ll have to work with, so consider whether you liked them enough to spend every day with them.

11. The process felt irksome. There are plenty of things that could go wrong in the interview process, like slow communication or scheduling hiccups. The interview process can offer context clues about how the company functions, Yandell says.

If you’re worried you left a bad impression, then it’s more important than ever to follow up with a gracious thank-you email to end on a positive note. That email also could be an opportunity to revisit a question that you wish you’d answered differently, Farrell says.

But if the interview left you feeling uninterested in the role or the employer, reflect on why that is. That information could help you identify more fitting opportunities in the future.

Source: nerdwallet.com

Apache is functioning normally

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Recently, a younger business owner client of mine was inquiring about purchasing a term life insurance policy.

A term life policy makes total sense for his situation, but what he also wanted to give it a twist.  In addition to a 30-year term life policy, he wanted to add what’s called a return of premium rider.

For those that are not familiar, the return of premium rider allows the policyholder to get a full refund of all the premiums paid at the end of the contract.

At first, it sounds like a pretty good deal.  The most common complaint that consumers have with life insurance is that if you don’t die, all the money goes directly to the life insurance company.  If this is the case, then purchasing the return of premium rider seems totally worth it.

Cost of Return of Premium Rider

At first glance, the return of premium rider seems like a no-brainer.  One piece of information that you need to know is that the rider comes with a price.  The ROP rider on average will run 20%-40% higher than purchase a policy without it.  In addition, you have to keep the policy for the entire contract period to get a full refund of your premium.  So then the question remains, does it make sense to pay more for the rider since you know you’re getting all your premiums back?  Let’s take a closer look….

ROP Rider vs. Regular Term Insurance

To illustrate the cost difference between purchasing regular term insurance vs. one with the ROP ride, here are some life insurance quotes that I ran. In our scenario, I am using a 30-year-old male, assuming he is in excellent health. We are going to get a quote on a 30-year term life policy with a $1,000,000 face value.   Without the ROP rider, the annual premium will cost approximately, $720 per year for a total of $21,6000 premiums paid over the 30 year period. By adding the ROP rider, the premium jumps to $1,180 per year, for a total outlay of $35,400. That’s a total difference of $13,800 premiums paid ($460 per year) or a 63.88% increase.

Invest the Difference

Since I’m a firm believer of long term investing, my initial argument would say, go without the ROP rider and invest the difference.  Let’s see how my theory holds up.   If we take the difference of $460 per year and invest it and average 6% over the 30 year period, it looks something like this:

By averaging 6% return, you will have accumulated $36,366 over the 30 year period.  Subtract the $21,600 you paid in premiums over that period and your net amount is $14,766.  As you can see in this example, purchasing the ROP rider seems to make sense.  Hmmm…..Gets you thinking, right?  Now let’s see if we average 8% return:

If we are able to average 8% return over that same period, we accumulate a total of $52,110 and after subtracting the premiums were left with $30,500.   Compare that to the $35,400 we would get back with the ROP rider, and we’re still in the red.   If we can average closer to 10% return, then we have a greater chance for the normal policy to be more economically viable.

One major thing to consider is that the money returned to you with the ROP is not inflated for inflation.  As you can imagine, $35,400 today will not get you as far 30 years from now.

Few More Considerations

I have to admit that the outcome of the scenarios I ran were different than what I predicted.  What we have to keep in mind is that when I analyzed the cost differential, we are relying on a few big assumptions:

  1. That the person can afford to pay the higher premium.
  2. The person will keep the policy for the entire 30 year period.
  3. The cost of insurance won’t decrease.

This and other variables would have a dramatic impact on the long term results of this scenario.

When Does Purchasing ROP Rider Make Sense?

Typically, you wouldn’t purchase ROP on such a long term policy.  Where it is more common is term polices 10 to 15 year in length.   You usually see this being used in buy/sell agreements between business partners where each partner buys insurance on the other’s life.   With such a shorter time horizon, the ROP makes more economic sense.

Disclaimer: I have purchased 3 term life policies and never have opted for the return of premium rider.

What about you?  Have you purchased a term life policy with a ROP rider?

For more information, check out other types of life insurance.

About the Author

Jeff Rose, CFP® is a Certified Financial Planner™, founder of Good Financial Cents, and author of the personal finance book Soldier of Finance. He was a financial planner for 16+ years having founded, Alliance Wealth Management, a SEC Registered Investment Advisory firm, before selling it to focus on his passion – educating the masses on the importance of financial freedom through this blog, his podcast, and YouTube channel.

Jeff holds a Bachelors in Science in Finance and minor in Accounting from Southern Illinois University – Carbondale. In addition to his CFP® designation, he also earned the marks of AAMS® – Accredited Asset Management Specialist – and CRPC® – Chartered Retirement Planning Counselor.

While a practicing financial advisor, Jeff was named to Investopedia’s distinguished list of Top 100 advisors (as high as #6) multiple times and CNBC’s Digital Advisory Council.

Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.

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