Families, friends become lenders of last resort for homebuyers
The Bank of Mom and Dad is playing a growing role as lender of last resort for a housing recovery struggling to provide more traction for the nation's economy.
Last year, 27 percent of people purchasing a home for the first time used a cash gift from relatives or friends for a down payment, according to data from the National Association of Realtors. That's up from 24 percent in 2012 and matches the highest share since the group began keeping records in 2009.
Those numbers will probably keep growing as younger Americans remain constrained by student debt, difficulty entering the job market and stricter mortgage-lending rules that require more cash up front. At the same time, rising stock and property values give their baby boomer parents the ability to help their kids lock in near record-low borrowing costs.
“Without them, the recovery's not sustainable,” said Anika Khan, a senior economist at Wells Fargo Securities LLC in Charlotte. Anything that gets more money into first-time buyers' hands “just moves the housing recovery along,” she said.
The inability to come up with the down payment was the top reason for renting rather than buying property, according to the Federal Reserve's report on the 2013 economic well-being of households issued in July. The report showed 10 percent of those leasing apartments last year wanted to buy a house.
Fifty-four percent of first-time buyers in 2013 said their purchases were delayed because the burden of student loans prevented them from saving enough for a down payment, according to the NAR survey. First-time buyers accounted for 29 percent of previously-owned home purchases in July, compared with about 40 percent historically, data from the agents' group show.
Deborah Baisden, a Realtor with Prudential Towne Realty in Virginia Beach, has witnessed the pickup in cash gifts, particularly among parents assisting their children.
“We're finding more and more parents are gifting money,” Baisden said. “Because of student debt and because of kids having a tough time finding jobs, it's becoming increasingly difficult for them to be able to buy homes — we're turning into a country of renters.”
Paychecks are also shrinking for younger Americans. College graduates who are 18 to 34 and working full-time experienced a $3,300 drop in average annual earnings adjusted for inflation from 2007 to 2012, according to a Progressive Policy Institute analysis of Census Bureau data.
Gifts from family are one way the housing market is adapting to less freely flowing credit, said Stuart Miller, chief executive officer of Miami-based Lennar Corp., the second- biggest American homebuilder by stock-market value.
“The barriers are high, and over time the market adjusts to those barriers,” Miller said in a Sept. 17 earnings call. “People start saving more down payment. They find a way. They get help from family. They start focusing on credit statistics as rental rates go up.”
Younger buyers have had to compete with an influx of investors scooping up properties — often with all-cash offers. As fewer deals and less inventory prompt investors to retreat, the field might soon open up for first-time buyers as sellers look to expand the market, said Lawrence Yun, NAR's chief economist.
Baby boomers have had their retirement savings almost double since the end of the recession. They had an average $147,700 in their 401(k) accounts in June, up from $76,500 five years earlier when the economic slump ended, according to data compiled by Fidelity Investments.
Young people's “ability to save up a down payment is much more difficult today than it was in previous generations,” said David Stevens, chief executive officer of the Mortgage Bankers Association in Washington. “It's an uneven recovery because a lot of the personal wealth that's being created is by people who have homes currently or who have money in the stock market. Younger borrowers have neither, so they're not a beneficiary of this recovery as much as the boomer generation.”
With their wealth rebuilding, some of those older Americans would rather decide for themselves how it's doled out and have their offspring enjoy the benefits while they're still around.
“You have greater control over how that money's dispersed, who it goes to for what purpose,” said Greg McBride, senior financial analyst for Bankrate Inc. in North Palm Beach, Fla. “After you're gone, you don't,” he said. “The other uncertainty is, you don't know what the estate laws are going to be like when your time is up.”
Downside of sharing
The increase in such cash gifts has lenders on guard against unstable sources of down payment funds.
“The regulatory agencies are very, very specific about the paper trail requirements,” said Staci Titsworth, a regional loan officer in Pittsburgh who works in the mortgage division of PNC Financial Services Group Inc. “It truly needs to be a gift with no expectation to repay, because once expectation to repay comes into the equation, now you've got borrowed funds for down payment, which is unacceptable.”
PNC, as with other lenders such as Regions Financial Corp. and BB&T Corp., requires that the gift be from a relative by blood or marriage, with few exceptions. A “gift letter” with the mortgage application typically must include the amount of the gift, date the funds were transferred, the donor's basic identification and their relationship to the buyer, and a statement that no repayment is expected, according to representatives of the three banks.
Financial institutions are careful about determining the source of funds because, while mortgages secured with the help of gifts from family are about as sound as those without any help, gifts linked to the seller were found to have increased default rates during the housing crisis, according to data from the Federal Housing Administration. Gifts from the seller now are banned by the agency.