REFinBlog

Editor: David Reiss
Brooklyn Law School

April 27, 2016

The State of Mortgage Lending

By David Reiss

AmericanBankersAssociation-1950

The American Bankers Association has issued its 23rd Annual ABA Residential Real Estate Survey Report for 2016. There is a lot to unpack in its findings. The key ones are

  • About 86 percent of loans originated by banks were QM [Qualified Mortgage] compliant compared to 90 percent in 2014, likely because more banks are adjusting underwriting criteria to target selected non-QM loan opportunities
  • Despite increased non-QM lending, approximately 72 percent of respondents expect the current ATR [Ability to Repay]/QM regulations will continue to reduce credit availability – down from nearly 80 percent in 2014
  • Relatedly, the percentage of banks restricting lending to QM segments dropped from 33 percent to 26 percent, and those providing targeted non-QM lending rose to 54 percent from 48 percent
  • High debt-to-income levels continue to be the most likely reason why a non-QM loan did not meet QM standards
  • The percentage of single family mortgage loans made to first time home buyers continues to climb to a new all-time high as it represented 15 percent of loans underwritten in 2015 – up from 13 percent in 2013 and 14 percent in 2014
  • Approximately half of the respondents state that regulations have a moderate negative impact on business, while nearly a quarter report the impact as extremely negative (4)

The most important finding is that banks are becoming more and more comfortable with non-QM loans. I had thought that this would happen more quickly than it has, but it now seems that the industry has become comfortable with the ATR/QM regs.

There are good non-QM loans — for good borrowers with quirky circumstances. And there are bad non-QM loans — for bad borrowers generally. As a result, the finding that “High debt-to-income levels continue to be the most likely reason why a non-QM loan did not meet QM standards” could cut both ways. There are some non-QM borrowers with high debt-to-income [DTI] ratios who are good credit risks.  Think of the doctor about to finish a residency and enter private practice. And there are some non-QM borrowers with high DTI who are bad credit risks. Think of the borrower with lots of student loan, credit card and auto debt. Unfortunately this survey does not provide any insight into what types of non-QM loans are being originated. That is a big limitation of this survey.

The finding that about “half of the respondents state that regulations have a moderate negative impact on business, while nearly a quarter report the impact as extremely negative” is also ambiguous. Is a negative impact a reduction in the number of loan originations? But what if those loans were likely to be unsustainable because of the high DTI ratios of bad borrowers? Is it so bad for the ATR/QM regulations to have kept those loans from having been made in the first place? I don’t think so. It is hard to tell what is meant by this survey question as well. Perhaps the ABA could tighten up its questions for next year’s survey.

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April 27, 2016 | Permalink | No Comments

April 26, 2016

Preserving Affordable Housing

By David Reiss

photo by Rgkleit

Alexander von Hoffman of the Harvard Joint Center for Housing Studies has posted an interesting working paper, To Preserve Affordable Housing in the United States. It opens,

Most Americans who have any idea about low-income housing policy in the United States think of it as composed of programs that either build and manage residences – such as public housing – or help pay the rent – such as rental vouchers. Few people realize that much, perhaps most, of the government’s effort to house poor families and individuals is now devoted to supporting privately owned buildings that, courtesy of government subsidies, already provide low-income housing. Similarly, few know of the national movement to prevent these rental homes from being converted to market-rate housing or demolished and to keep them affordable and available to low-income households.

The problem of “preservation of affordable housing” generally refers to privately owned but government-subsidized dwellings developed under a particular set of federal subsidy programs. Although the first of these programs was enacted in 1959, their heyday – when they produced the bulk of government-subsidized low-income housing – lasted from the late 1960s until the mid-1980s. Before these programs were adopted, the government’s chief low-income housing program had been public housing, in which government agencies funded, developed, owned, leased, and managed apartments for people of limited incomes on a permanent basis.

Starting about 1960, however, the government shifted to a new policy in which it provided subsidies limited to a specific length of time to private developers of low-income rental housing. These private developers could be nonprofit organizations or for-profit companies operating through entities that earned limited dividends. In the low-income rental programs of the 1960s the government subsidized the rents of poor tenants by providing low-interest mortgage loans (through mortgage insurance and/or direct payments) to the projects’ developers. In 1974, Congress added another program, Section 8, in which the government signed a contract to pay a portion of the tenants’ rents for up to twenty years, which was as long as the mortgage subsidies had been.

After the low-income rental projects were completed, a number of circumstances threatened to displace the projects’ low-income occupants from their homes. In the early years especially, some owners faced financial difficulties, including foreclosures. Starting in the boom years of the 1980s, others desired to pay back their subsidized mortgages early (or “prepay”) to rent or sell the apartments at lucrative market rates. And eventually all owners reached the end of the time limit of their original subsidies. To keep low-income tenants in the subsidized apartments, housing advocates fought to keep the subsidized projects livable and within the means of poor people. The cause they rallied to was the “preservation of affordable housing.”

*    *    *

Since the late 1980s a wide array of interests – including for-profit owners and investors, non-profit developers and managers, and tenants – have organized their interest-group associations and entered into coalitions with one another to shape government policies. They have worked with sympathetic members of Congress and their aides to preserve the subsidized housing stock for low-income Americans. The road has been rough at times. The Reagan administration was indifferent at best to the issue. Legislation in 1987 and 1990 for all practical purposes banned prepayments, angering the owners’ representatives who opposed these laws. After prepayments were again allowed, advocates and owners joined together again to push for affordable housing preservation programs and procedures. The government programs that they attained in the 1990s became a major component of low-income housing policy in the United States.

Until relatively recently, the interest groups focused on shaping federal policy. They worked to pass – or repeal – national legislation and to influence program rules set by the Department of Housing and Urban Development (HUD). Although the federal government continues to be essential to housing policy, the growing political opposition to large federal spending programs has led advocates of affordable housing preservation to press state governments for financial support. (3-5)

This working paper clearly identifies the problems with “[p]oorly thought out programs” that “encouraged bad underwriting and long-term management” and how they played out in affordable housing projects that were not intended to provide for permanent affordability. (73) It also provides a good foundation for a discussion of where affordable housing policy should be heading now.

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April 26, 2016 | Permalink | No Comments

April 25, 2016

TRID Trials

By David Reiss

compliance definition

The Consumer Financial Protection Bureau issued the TILA-RESPA Integrated Disclosure (TRID) Rule which went into effect more than six months ago. The TRID Rule were designed to enhance consumer protections in the mortgage application process.  The mortgage industry has been very concerned about its ability to comply with the rule and has also highlighted the fact that borrowers now face longer waits to close as a result of the new regulatory regime. Many in the industry are calling for changes to TRID, but they are not yet in the offing. As far as I can tell, the main problems with TRID are just transition issues as the massive mortgage industry has to change in many ways, large and small, to comply with the new regime.

Kroll Bond Rating Agency has issued an RMBS Commentary which expects TRID to have only a limited impact on residential mortgage-backed securities enhancement levels. Kroll seems to be taking a reasonable position regarding the industry’s failure to consistently comply with the TRID Rule.

The commentary provides some useful information to those who follow TRID developments. Kroll believes that it “is possible many TRID-Eligible Loans originated in the near term will contain at least one technical error under TRID. Such violations, even if corrected in good faith, may carry assignee liability.” (1) At the same time, Kroll “believes the potential assignee liability stemming from TRID violations is both limited and quantifiable.” (1) It is worth contrasting this measured assessment with the histrionics that the credit rating industry displayed with the assignee liability provisions of many of the state anti-predatory lending laws that were enacted in the early 2000s.

Kroll does draw a distinction between the many TRID errors that are cropping up during this transition time and those that might occur over and over again without correction. The latter, of course, could be a magnet for class actions. That seems to me like a good outcome, particularly where the lender has been made aware of the violations by third parties.

While the mortgage industry has reasonably requested clarification of some aspects of the TRID Rule, the industry itself should be seeking to modernize and automate its processes to address not only TRID-induced changes but also the industry’s 20th century mindset. The modern mortgage closing is far from a paragon of technological efficiency.

 

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April 25, 2016 | Permalink | No Comments

April 22, 2016

Nonbank Mortgage Servicers and the Foreclosure Crisis

By David Reiss

photo by kafka4prez

The United States Government Accountability Office has issued a report, Nonbank Mortgage Servicers: Existing Regulatory Oversight Could Be Strengthened. The GAO found that

The share of home mortgages serviced by nonbanks increased from approximately 6.8 percent in 2012 to approximately 24.2 percent in 2015 (as measured by unpaid principal balance). However, banks continued to service the remainder (about 75.8 percent). Some market participants GAO interviewed said nonbank servicers’ growth increased the capacity for servicing delinquent loans, but they also noted challenges. For example, rapid growth of some nonbank servicers did not always coincide with their use of more advanced operating systems or effective internal controls to handle their larger portfolios—an issue identified by the Consumer Financial Protection Bureau (CFPB) and others.

Nonbank servicers are generally subject to oversight by federal and state regulators and monitoring by market participants, such as Fannie Mae and Freddie Mac (the enterprises). In particular, CFPB directly oversees nonbank servicers as part of its responsibility to help ensure compliance with federal laws governing mortgage lending and consumer financial protection. However, CFPB does not have a mechanism to develop a comprehensive list of nonbank servicers and, therefore, does not have a full record of entities under its purview. As a result, CFPB may not be able to comprehensively enforce compliance with consumer financial laws. In addition, the Federal Housing Finance Agency (FHFA) is the safety and soundness regulator of the enterprises. As such, it has indirect oversight of third parties that do business with the enterprises, including nonbanks that service loans on the enterprises’ behalf. However, in contrast to bank regulators, FHFA lacks statutory authority to examine these third parties to identify and address deficiencies that could affect the enterprises. GAO has previously determined that a regulatory system should ensure that similar risks and services are subject to consistent regulation and that a regulator should have sufficient authority to carry out its mission. Without such authority, FHFA may lack a supervisory tool to help it more effectively monitor third parties’ operations and the enterprises’ actions to manage any associated risks.

As with many GAO reports, this one provides a lot of information about a very obscure, but important, subject. In this case, the report provides a good overview of the servicing industry since the financial crisis. The report also highlights the risks to consumers and the financial industry that result from the rapid expansion of the servicing market share of nonbanks.

One of the disturbing aspects of the foreclosure crisis was the sense that the servicing sector couldn’t do a better job of assisting borrowers, even if it wanted to, because it did not have the resources to meet the challenge. Changes implemented since then, driven in large part by the CFPB, may make things better during the next such crisis. But this report does not give one the sense that they will be all that much better. The GAO report rightly calls for further work to be done to ensure that the industry is prepared to meet the challenges that are sure to come its way.

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April 22, 2016 | Permalink | No Comments

Friday’s Government Reports Roundup

By Shea Cunningham

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April 22, 2016 | Permalink | No Comments

April 21, 2016

Couples Leave Money on Closing Table

By David Reiss

photo by Dustin Moore

Geng Li, Weifeng Wu and Vincent Yao, three Fed economists, have posted a research note, Do People Leave Money on the Table? Evidence from Joint Mortgage Applications and the Minimum FICO Rule. The authors state that there “is mounting evidence that households make suboptimal savings and investment decisions” and find that

many mortgage borrowers appear to have failed to apply for mortgages that give the lowest interest rates. Specifically, we find that nearly 10 percent of prime borrowers who applied for their loans jointly could have lowered their mortgage interest rate at least one eighth of 1 percentage point if the mortgage was applied for by the applicant with a higher credit score and an income high enough to qualify for the mortgage. Furthermore, among the joint applicants with a lower credit score below 740, for whom mortgage interest rates are most sensitive to credit scores, more than 25 percent could have significantly reduced their borrowing cost by having the individual with a higher credit score apply. This is due to the fact that when lenders price mortgages with joint applications, the interest rates are determined by the lower score of the two–often known as the minimum FICO rule. We estimate that such borrowers could reduce their annual interest payment by between $220 and $1,400. Consistent with the existing literature, we find that couples who appeared to have left money on the table tend to have lower credit scores and be much younger and less financially sophisticated. (1, emphasis added)

This note provides an example of just how complicated the mortgage underwriting process is, particularly for less financially sophisticated borrowers.

One wonders if the CFPB should take a look at this. Should lenders be required to evaluate if joint mortgage applicants would get a better rate if only one of them ended up taking out the mortgage? And when the answer is yes, should lenders be required to share that information with the applicants? I can think of a variety of reasons why that should not be the case (not the least of which is that it could leave just one member of the family holding the bag if things go south), but it might be worth exploring this question more systematically.

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April 21, 2016 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Roundup

By Shea Cunningham

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April 21, 2016 | Permalink | No Comments