The Slow Road Home
The dent in the American dream of homeownership is proving difficult to undo.
Nearly seven years after the U.S. housing market collapsed, rates of homeownership remain below their peak of 69.2 percent, recorded in the final quarter of 2004, according to data from the U.S. Census Bureau. In the third quarter of 2014, the rate was 64.4 percent, down from 65.3 percent a year earlier.
While the housing market is expected in 2015 to continue its slow rebound, economists and industry observers question how sustainable it will be in the absence of more buyers.
Many buyers, especially first-timers, have been shut out by tight underwriting standards that block access to loans. Stagnant incomes also have deterred people, economists said. Unemployment fell to 5.6 percent at the end of 2014, but incomes slipped, with the hourly rate falling 5 cents to $24.57.
If and when homebuyers return, it is not clear whether homeownership rates will climb back to their peak, or fall shy.
“The housing bust did change the landscape of the housing market,” said Daren Blomquist, vice president of RealtyTrac, an Irvine, Calif.-based real estate information company and online marketplace for foreclosed and defaulted properties. “So we’re still trying to figure out what a healthy housing market looks like.”
The risk is misjudging what counts for a healthy homeownership rate, he said. “Some players may be overestimating or underestimating what that normal rate should be.”
“The housing bust did change the landscape of the housing market … we’re still trying to figure out what a healthy housing market looks like.” — Daren Blomquist, vice president, RealtyTrac
It’s uncertain whether 2015 will produce a clear picture, considering all the factors at play in the housing market. In general, economists and industry observers expect home sales to rise in 2015 and prices to continue going up, albeit at a slower pace.
“It’s not going to be a breakout year,” said Doug Duncan, senior vice president and chief economist for Fannie Mae, based in Washington, D.C.
Pockets of Risk Remain
Fannie Mae predicts the volume of home sales to jump 5.4 percent in 2015, after declining 2.7 percent in 2014 due to a temporary spike in interest rates. Sales grew by around 10 percent in both 2012 and 2013. The median home price, meanwhile, is forecast to increase 4.9 percent, less than the 5.7 percent average appreciation in 2014.
If Americans start making more money, the numbers could go higher, Duncan said. But the income growth would have to last. According to Fannie Mae survey data, potential first-time homebuyers are concerned not so much about a lack of credit but about having their own finances in order before they sign a mortgage.
“They’re wanting to be really ready before they make that plunge,” Duncan said.
While higher interest rates later this year could suppress sales, economists remained optimistic. “If anything, the risks seem to be stacked on the upside,” said Mark Vitner, managing director and senior economist for Wells Fargo Securities, based in Charlotte, N.C. “I don’t think there’s as much downside risk as upside risk.”
One exception could be markets tied to energy production, especially in Texas. A sustained slump in gasoline prices, for example, could dampen the Houston housing market, one of the country’s largest, said Jim Gaines, a research economist at the Real Estate Center at Texas A&M University in College Station, Texas.
It’s also unclear whether the economic slowdown in Europe will spill over into the U.S., Gaines added. “We’re not immune from these things.”
In the meantime, the housing market may encounter other shocks.
One represents something of a hangover from the boom. Borrowers who took out 10-year interest-only mortgages between 2005 and 2007 face steep jumps in their monthly payments over the next three years, according to a report from Fitch Ratings.
Payment increases also could strike borrowers with adjustable-rate mortgages and those with loans modified during the bust, according to Fitch. Loans accepted into the government’s Home Affordable Modification Program, launched in 2009, typically carry a lower interest rate for five years before resetting at a higher rate.
“It’s just going to take some time for the market to completely resume its pre-2004 long-term growth rate and, frankly, I don’t know that that’s necessarily bad.” — Jim Deitch, CEO, TeraVerde Management Advisors
Roughly 1.1 million mortgages are at risk, with interest-only loans facing the greatest potential payment shock, according to Fitch, which studied first-lien mortgages backing private label residential backed mortgage securities. Interest-only loans account for about 230,000 of the total.
Thousands of borrowers with home equity lines of credit also are looking at higher payments this year as the payback period on those loans begins, experts said.
Although loan defaults and delinquencies will rise over the next three years, the fallout should be limited, according to industry observers. Thanks to the downturn, lenders have plenty of experience working with troubled borrowers and won’t foreclose at the same rate they did in 2009 and 2010.
“I don’t see this as a systemic issue right at the moment,” said Matt Hankins, a principal at Chicago-based Sterling Partners, a private equity firm whose holdings include a retail mortgage originator and a mortgage servicing company.
Borrowers have had opportunities to refinance at low fixed rates, minimizing the shock. Plus, their homes likely have increased in value over the last few years, giving them even more breathing room.
Others were less sanguine.
Keith Jurow, a real estate adviser and publisher of the Capital Preservation Real Estate Report, suspects lenders already carry large numbers of delinquent loans that have not yet been declared formally in default, especially in high-cost areas of California, New Jersey and New York. He wondered how much longer lenders can give borrowers a pass, especially if no buyers emerge.
“It looks like a recovery,” said Jurow, based in Connecticut. “But when you go underneath it, it’s not really. There’s no solid foundation.”
Recovery Depends on New Buyers
The ultimate foundation for the market is first-time homebuyers. And they remain absent, accounting for about a third of sales in 2014, down from a historical average of around 40 percent, according to data from the National Association of Realtors.
Picking up the slack have been investors purchasing single-family homes and converting them to rentals, but those buyers have largely tailed off.
“Without meaningful participation of first-time homebuyers in the homeownership ladder, the housing recovery may sputter,” emailed Allen Jones, managing director at mortgage analytics and technology company RiskSpan.
“The low volume of new originations is creating a market disruption that will begin to impact the traditional move-up buyer because the pool of candidates coming from the entry level has decreased.”
Most observers attribute the drop to tighter credit standards. While critics contend lending standards were too lax during the housing boom of the mid 2000s, others now say they are too stringent, driven in part by new regulations.
The rules, for example, spell out income-based limits on how much debt borrowers can carry, as well as how to document that income, said Jim Deitch, CEO of TeraVerde Management Advisors, a Lancaster, Pa.-based consulting firm that works with banks, mortgage lenders and other financial companies.
“Ultimately, people are afraid to make loans, particularly to first-timers, because of the legal risk and the lack of bright-line standards.”
On the positive side, he said, more nontraditional mortgage lenders, including community banks and private-equity-backed lenders, are entering the market. Falling gas prices and rising rents could also entice people into buying homes.
But the math remains daunting for many. It’s not just the prospect of debt, Deitch said. Buyers also face slower appreciation in home prices. After accounting for closing costs, they may lose money if they have to sell sooner than expected.
“I think that’s holding people back,” Deitch said. “It’s just going to take some time for the market to completely resume its pre-2004 long-term growth rate and, frankly, I don’t know that that’s necessarily bad.”
Where that growth rate ends up depends, in large part, on whether Americans continue to prize homeownership as a goal.
The government has moved to make it easier for first-time buyers. In early 2015, the Federal Housing Administration announced a cut in mortgage insurance premiums on loans from the agency, which go mostly to first-time buyers. Under an initiative from Fannie Mae, first-time buyers may qualify for down payments as low as 3 percent.
Despite the lures, many people may decide to continue renting, said Eric Sussman, a senior lecturer in the Anderson School of Management at the University of California, Los Angeles.
Down payments remain prohibitively expensive in some areas, and many young people already are carrying high levels of college debt. They will value the freedom to find a new job — and a new pad — someplace else.
“Those are really big and maybe not even temporary headwinds,” Sussman said.
Building Value With Trust
As they homed in on reasons they were spending enormous sums on workers’ compensation claims, managers at Honda of South Carolina (HSC) knew they needed to make some changes. The challenge was figuring out exactly where those changes needed to be made.
A 2007 audit of their workers’ compensation costs conducted by the company’s corporate parent, Honda of North America, helped move the ball down the field, according to managers Wendell Hughes and Lucinda Fountain.
One glaring red flag identified was the tendency of injured employees to contact attorneys right away, a move that is almost always certain to increase a claim’s cost and complexity.
“We were trying to understand what made them take that step,” said Fountain, staff administrator for associates risk management at HSC. “We felt from all the information we had gathered that we had a breakdown in our system.”
That breakdown turned out to be a fairly serious communications failure — a breakdown that started to occur immediately after an employee injury.
Company procedure up to that point had been that those who needed medical attention off-site were given rides by Honda security officers, according to Fountain and Hughes. After delivering the employee safely into the care of a medical provider, the security officer would return to the plant.
As for the claim itself, the company would let the employee know to expect a call from its third-party administrator, which would handle the follow-up from there.
Company representatives weren’t always available to attend workers’ compensation hearings, added Hughes, HSC’s environmental, health and safety manager. Those sessions were often handled by the third-party administrator as well.
Giving these practices a long, hard look made company officials realize that their level of involvement might unintentionally be sending the wrong message to employees, said Hughes. In considering potential changes, managers asked what they would expect if they were injured.
“To associates, it may have seemed as if we were putting up a defensive barrier, although that was never our intent,” Hughes said. Instead, HSC wanted procedures that reflected the company’s principles, which are rooted in a concern for employees’ well-being.
“The first 24 hours of that associate injury is going to make a big difference in how you manage that claim throughout the duration. So we try to do everything we can in that first 24 hours.” — Lucinda Fountain, staff administrator for associates risk management, Honda of South Carolina
“They’re truly an associate-centric company,” said Lynn Williams, managing director at Tennessee-based Sedgwick Claims Management Services Inc., which counts Honda as a client.
Today, Honda of South Carolina takes a personal approach from the moment an injury occurs. If employees need to leave the plant for treatment, a manager or other employee accompanies them — and stays with them until family members arrive and other needs are met, which could include bringing meals.
The company also begins educating employees about the workers’ compensation system immediately, letting them know the company will be a resource for helping them get care and navigating their return to work.
“The first 24 hours of that associate injury is going to make a big difference in how you manage that claim throughout the duration,” said Fountain. “So we try to do everything we can in that first 24 hours.”
The workers’ comp process can certainly be confusing, said Beth Osterholt, a client performance manager at Sedgwick. She serves as a liaison to Honda. Adding to the confusion sometimes is the uncertainty about the workers’ compensation system.
“If you have somebody there to support you,” she said, “it’s more comforting.”
Honda’s attention has focused not just on the first 24 hours, but also on the return-to-work process. HSC has identified numerous tasks that people can perform even if they are not ready to go back to their original positions at the plant, Hughes said.
Employees have handled administrative tasks, such as data entry for the training department, or sorting vehicle identification cards as they come off the production floor, Hughes said. “We don’t create jobs,” he said. “There’s always something somebody can do.”
Honda also began inviting doctors and other health professionals on regular tours of its facility, Hughes and Fountain said. The visits have made physicians more comfortable about allowing employees to engage in light or limited duty.
The difference is more than remarkable. The company recorded no costs for workers’ comp in the first nine months of 2014. But it’s showing up in less direct ways, too.
“We haven’t had an associate get an attorney in years,” said Hughes, noting that employees are readily cooperating with the company and returning to work more quickly.
The relatively hands-off approach that HSC used to follow is not uncommon, said Octavia Williams-Blake, associate vice president of occupational health at McLeod Health. Based in Florence, S.C., the health system works with many local employers, including Honda of South Carolina.
“We serve over 1,000 companies, and less than 10 percent actually send somebody here with the employee,” Williams-Blake said. “Very few of them stay.”
The corporate presence alongside injured employees provides several benefits, Williams-Blake said. It usually leaves employees with a better sense of what to expect from the workers’ compensation process, and they are less likely to call lawyers.
“That then helps reduce your overall costs as it relates to workers’ comp, but it also makes employees feel like you care,” she said.
There are other advantages.Company representatives hear firsthand from doctors about an employee’s injury and the expected treatment, Williams-Blake said. So employers spend less time tracking down physicians to confirm what they are hearing from employees, and less information gets lost in translation.
Still, she acknowledged, not every company has the resources to send someone along with an injured worker.
“They may see it as not productive. They’re losing somebody from the line, or they’re having to cover for somebody while they’re with the employee,” she said.
HSC has committed to the practice because they understand the value it brings for both the associate and the company. The proof is in the numbers: HSC’s claims costs have plunged by 93 percent since 2009. Medical costs are down by 87 percent.
In addition to increasing personal attention, Honda’s decision to bring doctors into its plant has made a positive impact, Williams-Blake said. Physicians tend to be conservative in their recommendations for return to work, and they often know little about working conditions beyond what employees tell them.
Knowledge of Honda’s operations allows physicians to make a more informed judgment about what a given employee will come back to in the workplace, Williams-Blake said. It’s also easier than reaching out after a doctor has made a decision a company doesn’t like.
“Have you ever tried to call an orthopedic surgeon and try to talk to them about a job? It’s tough,” Williams-Blake said.
Safety’s in the Details
Of course, the surest way to avoid those calls — and to avoid workers’ compensation claims in general — is to create a safe work environment. And that has long been a top priority for Honda of South Carolina.
Injuries are down, thanks to an aggressive approach to finding and fixing the causes of workplace accidents, Hughes said. The company recently notched 4 million hours without a lost-time injury, and six months without a recordable injury at its plant in Timmonsville, S.C., where more than 900 associates manufacture all-terrain vehicles and multi-use vehicles.
Nothing is too minor to escape attention.
About 10 years ago, for example, Hughes noticed a relatively large number of arm scrapes. He realized the preventive measure was close at hand: rolling down the long sleeves on Honda’s white uniforms.
He succeeded in implementing a policy requiring sleeves to be worn down. “You hardly ever see a first aid on arms anymore,” Hughes said.
Today, team leaders must accompany employees when they require first aid even for injuries that merit little more than a Band-Aid, Hughes said. The idea is to address the cause of the injury immediately.
“If you wait, a day later or two days later, everything changes,” Hughes said. But the conditions that triggered an accident may eventually return.
Another program, launched this year, underscores management’s commitment to a safe workplace. Every two months, managers closely examine a production process to look for anything that might cause a problem, Hughes said. The company president, meanwhile, undertakes semi-annual safety tours.
Employees also are committed to safety, a mind-set Hughes has observed from his office right off the production floor.
“I get constant foot traffic from associates coming in and wanting to understand a process or raise a concern. They’re very open about sharing their ideas,” he said, noting that he is especially happy to see employees fixing problems before he even learns of them.
“That’s when you know the safety culture is really taking root,” he said.
Read more about all of the 2014 Teddy Award winners:
Building Value with Trust: Honda of South Carolina boosted its involvement with injured worker cases, making a positive first impression on employees and health care providers.
The TLC Behind the Roar: A proactive and holistic approach to employees’ well-being has resulted in huge reductions in work-related injury claims for Harley-Davidson.
Quick to Act: Compass Group is lauded for its safety initiatives and for a return-to-work program that incorporates all of its business lines.
Healing the Healers: Teddy Award winner Cold Spring Hills Center for Nursing and Rehabilitation proved that even small organizations can make a huge difference in their employees’ lives.
Seeking Clarity for Cyber Cover
It was a black-or-white question: Do you have procedures for responding to allegations of a privacy breach?
But the answer was a shade of gray for the University of Wyoming, which was applying this year for its first cyber insurance policy.
“The answer might be yes, we have procedures, but they might be different for our two medical clinics than they would be for the accounts receivable department,” said Laura Peterson, chief risk officer for the university, in Laramie, Wyo.
Similar conundrums are confronting risk managers around the country as they apply for cyber coverage. Risk managers are finding that the cyber application process is more taxing than it is for traditional insurance — especially for organizations analyzing coverage for the first time.
It’s the difference between buying a couch for the living room, and trying to install a home wireless network that syncs with computers, televisions and stereos, said John Mullen, chair of the U.S. data privacy and network security group at the law firm Lewis Brisbois. “It’s just a whole different level of complexity.”
“From our experience, many cyber applications are not designed with the typical small to middle-market firm in mind.” — Reza Khan, executive vice president of ThinkRisk Underwriting Agency
Interest in policies has spiked over the last year, prompted by high-profile data breaches, including one that has cost retailer Target Corp. nearly $150 million to date. Insurance covered about $38 million of the total, according to the company.
When cyber insurance first emerged in the late 1990s, insurers sometimes hired third-party vendors to test the network security of organizations as part of the underwriting process. They also would schedule meetings with clients to review their cyber defenses.
Today, most insurers rely on applications boiled down as much as possible to yes-or-no questions. The forms serve as a handy checklist for cyber security efforts, according to brokers and insurers, but the answers don’t come easily.
“Many customers are very uncomfortable with that binary sort of yes-no response because it’s not 100 percent ‘yes,’ and it’s not 100 percent ‘no,’ ” said Greg Gamble, a director at Crystal & Company, a brokerage in New York City. “A lot of the time that we spend with clients is helping them pick yes or no, and then how to explain the answer.”
Companies, for example, worry about how an answer looks to the insurer, Gamble said. An application might ask whether a company outsources its information security management to a qualified firm. “What if you say, ‘no’? Is that bad?” Gamble said. “Maybe you have an employee who handles it.”
Risk managers also often have to hunt for the answers, whether from internal staff or external vendors. And colleagues in IT may perceive the application for insurance as second-guessing their efforts to protect data.
“I can understand why that would be a difficult pill to swallow,” said Anne Corona, managing director and U.S. practice leader for cyber insurance at Aon Risk Solutions. “But I think everyone understands that this isn’t a criticism, but an added level of protection, really, from a financial perspective.”
At the University of Wyoming, Peterson contacted the IT staff to lay the groundwork before she started lobbing questions. She explained that cyber coverage was not a reflection of the department’s work, but a necessary safeguard. And despite good intentions, accidents can happen, she added, just as they do in other university departments. An employee could click on the wrong link in an email, or lose a flash drive.
“We didn’t have any trouble getting them to help us complete the parts of the application that we needed their help with,” Peterson said, noting that she also needed assistance from administrators in other areas, such as finance.
One question asked for the percentage of revenue from credit card transactions, Peterson said. But revenue for a university is different than revenue for a business. Peterson put down 9 percent, and explained the sources of revenue, including state and federal funding.
Risk managers also must be alert to the ways a cyber policy could interact with their other policies and exclusions, brokers and insurers said.
“We want to give them as much information as possible,” she said.
Since their answers could come back to haunt them in a coverage dispute, risk managers and other insurance buyers need to take extra care.
“If they make a representation in an application that they have certain security measures in place and those security measures aren’t followed … or aren’t actually in place, then the insurance company could conceivably use that as a basis to avoid coverage if there is a claim,” said Brooke Yates, a partner in the litigation department at the law firm of Sherman & Howard in Denver.
Past breaches, if they’re not reported on the insurance application, also could become an issue, said Tracy Tenorio, a senior vice president and account executive at ABD, a commercial brokerage in San Mateo, Calif. Insurers bind coverage on the understanding that the client is not aware of anything that could lead to a claim, Tenorio said. Questions about that awareness are often the first place an insurer will look after a claim.
“The good thing is that the carrier will often ask the client, ‘OK, we need to talk about this because this is what I believed the risk to be; this is how you answered the question. What am I missing?’ ” she said.
Smaller companies, already worried about the perceived cost of cyber insurance, may be turned off by the application process before they even begin, said Reza Khan, executive vice president of ThinkRisk Underwriting Agency in New York City.
“From our experience, many cyber applications are not designed with the typical small to middle-market firm in mind,” Khan said.
ThinkRisk recently introduced a 21-question application for a new admitted cyber/privacy product. The questions reflect the company’s concern that many firms won’t understand typical cyber jargon.
“Quite frankly, when you’re entertaining a $10 million dental practice, how much technical underwriting information do you really need to properly assess and price their exposures?” Khan asked.
Others are seeking to streamline applications as well. Allied World North America, for example, offers an application that asks for only a few questions if companies have less than 50,000 records, according to Josh Ladeau, cyber practice leader for the insurance carrier. Policies are capped at a limit of $1 million.
Companies may not fully understand how many records they actually have, Ladeau added. But Allied World is confident it has the underwriting experience to tell if a business is undercounting. “Even smaller retailers will have more than 50,000 transactions,” he said.
Once they get through the application process, risk managers still have to sort through products that can be difficult to compare.
Approaches to notification costs are among the variables. Some insurers offer an overall sublimit, while others provide limits based on the number of people being notified, said Sheri Pastor, partner and practice leader for the insurance coverage group at the law firm McCarter & English in Newark, N.J. Some carriers require the use of prescreened vendors to deal with a breach, while others allow policyholders to choose their own.
“It is not unusual for a risk management department to take a long period of time to analyze these products, and then decide which to place,” Pastor said. “Many companies can explore them for months, if not a year or more, with their renewal cycles coming and going.”
Risk managers also must be alert to the ways a cyber policy could interact with their other policies and exclusions, brokers and insurers said.
Emerging risks are another factor to consider. Content liability is overlooked in many cyber policies, for example, but could pose a threat, said Ken Goldstein, worldwide cyber security manager for Chubb Group of Insurance Cos. Businesses could face claims if a competitor believes it is being disparaged in an online ad, or a person’s image is being misappropriated.
“There’s real claims activity in this area,” Goldstein added.
At the University of Wyoming, Peterson grappled with decisions about breach-response and credit-monitoring services. Depending on the scope of a potential breach, the university might have to notify people in every state. It has 13,000 undergraduate and graduate students, as well as thousands of alumni around the country. In addition, thousands attend concerts, football games and other events at the university.
“You can listen to other people who have had breaches, but they’re all very, very different, depending on whose information was breached and what information was breached and what state is affected,” she said. “So it’s really just hard to know.”
Brokers have helped Peterson sort through the details. But, she added,
“Ultimately, it still comes down to me trying to assess what’s most likely to happen here or, even if it’s not what’s most likely, it’s where are the places where we’re going to want the most assistance, and that’s an institution-by-institution analysis.”