April 7, 2017
- Once per quarter the Securities and Exchange Commission surveys consumers to receive feedback regarding their access to credit. This quarter consumers reported feelings of discouragement when applying for credit; however, the agency found a decrease in credit applications and denials.
- The Board of Governors of the Federal Reserve Systems studied the “effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up.” The report found that banks use various European resources to help support an increase in their credit supply or to boost “their holdings of high-yield government bonds.”
April 6, 2017
The Hill published my latest column, Congress May Have Finally Found a Bipartisan Fix to Fannie and Freddie. It reads,
It is welcome news to hear that Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) are looking to craft a bipartisan solution to the problem of Fannie Mae and Freddie Mac. The two massive mortgage companies have been in conservatorship since 2008 when they were on the verge of failing. At that time, nobody, just nobody, believed that they would still be in conservatorship nearly a decade later.
But here we are. Resolving this situation is of great importance to the financial well-being of the nation. These two companies guarantee trillions of dollars worth of mortgages and operate like black boxes, run by employees who don’t have a clear mission from their multiple masters in government.
This is the recipe for some kind of crisis.Maybe they will not underwrite their mortgage-backed securities properly. Maybe they will undertake a risky hedging strategy. We just don’t know, but there is reason to think that gargantuan organizations that have been in limbo for ten years may have developed all sorts of operational pathologies.
There have been a couple of serious attempts in the Senate to craft a long-term solution to this problem, but it was not a high priority for the Obama Administration and does not yet appear to be a high priority for the Trump Administration. Deep ideological divisions over the appropriate role of the government in the mortgage have also stymied progress on reform.
Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, leads a faction that wants to dramatically reduce the role of the government in the mortgage market. Sen. Elizabeth Warren (D-Mass.) leads a faction that wants to ensure that the government plays an active role in making homeownership, and housing more generally, more affordable to low- and moderate-income households. At this point, it is not clear whether a sufficiently broad coalition could be cobbled together to overcome the opposition to a compromise at the two ends of the spectrum.
2017 presents an opportunity to push reform forward, however. The terms of the conservatorship were changed in 2012 to require that the Fannie and Freddie reduce their capital cushion to zero by the end of this year. That means that if Fannie or Freddie has even one bad quarter and suffers losses, something that is bound to happen sooner or later, they would technically require a bailout from Treasury.
Now, such a bailout would not be such a terrible thing from a policy perspective as Fannie and Freddie have paid tens of billions of dollars more to the Treasury than they received in the bailout. But politically, a second bailout of Fannie or Freddie would be toxic for those who authorize it.
Some are arguing that we should kick the can down the housing finance reform road once again, by allowing Fannie and Freddie to retain some of their capital to protect them from such a scenario. But Corker and Warner seem to want to use the Dec. 31, 2017 end date to focus minds in Congress. They, along with some other colleagues, have warned Fannie and Freddie’s conservator, Federal Housing Finance Agency Director Mel Watt, not to increase the capital cushion for the two companies. They claim that it is Congress’ prerogative to make this call.
The conventional wisdom is that the stars have not aligned to make housing finance reform politically viable in the short term. The conventional wisdom is probably right because the housing finance system is working well enough for now. Mortgage rates are very low and while access to credit is a bit tight, it is not so tight that it is making headlines. So perhaps Senators Corker and Warner are right to use the fear factor of future bailouts as a goad to action.
Housing finance reform requires statesmanship because there are no short-term gains that will accrue to the politicians that lead it. And the long-term gains will be very diffuse – nobody will praise them for the crises that were averted by their actions to create a housing finance system fit for the 21st century. But this work is of great importance and far-thinking leaders on both sides of the aisle should support a solution that takes Fannie and Freddie out of the limbo of conservatorship.
It will require compromise and an acceptance of the fact that the perfect is the enemy of the good. But if compromise is reached, it may help to avoid another catastrophe that will be measured in the hundreds of billions of dollars. And it will ensure that we have a mortgage market that meets the needs of America’s families.
- The CEO of one of America’s largest and most influential banks has called for significant changes to the FHA’s mortgage rules. Many of the mortgage rules now in place came after America’s financial crisis. Jamie Dimon, CEO of JPMorgan Chase names the changes as “too costly for consumers.“
- Banking giant, Wells Fargo, recently uncovered an employee scandal. Over 5,000 employees opened fake accounts in order to receive additional sales bonuses. Recently, the bank reached a 110 million dollar settlement in a class action lawsuit brought by customers affected by the scandal.
April 5, 2017
Newsday quoted me in Paying off Your Mortgage Early Might not Make Sense (behind paywall). It opens,
There are few greater feelings than making that last mortgage payment. Some people feel better still if they pay it off early. But sometimes it doesn’t make sense to pay off your mortgage early.
First things first: Be sure you have adequate emergency savings before you put extra money into paying off the mortgage early. Then consider what’s the best use of any extra money you have.
While taking a shorter-term mortgage or prepaying principal saves you tons in interest, remember that mortgage interest is typically tax deductible.
Warren Goldberg, founder of Mortgage Wealth Advisors in Melville, offers an example. If you had a 5 percent interest rate on your 30-year fixed mortgage, depending on your tax bracket, your equivalent, after-tax interest rate might only be 3.3 percent. Even in today’s tumultuous market, it’s not difficult to earn a return greater than 3.3 percent after taxes.
“By paying the minimum on your mortgage and investing the balance, your money can be working for you. Your investments can be earning more than the interest you are paying,” says Goldberg.
David Reiss, a professor at Brooklyn Law School specializing in real estate, agrees: “If you have not maxed out your retirement savings, it might make sense to direct your extra funds to tax-advantaged retirement accounts. You could end up being better off overall as those accounts grow tax-free over time.”
- Small and Medium Multifamily Housing Units: Affordability, Distribution, and Trends, An, Bostic, Jakabovics, Orlando, and Rodnyansky.
- Spillover Risks in REITs and Other Asset Markets, Chiang, Kittle, Sing, and Tsai
- Institutional Property-Type Herding in Real Estate Investment Trusts, Lantushenko and Nelling
- Out-of-Town Buyers, Mispricing and the Availability Heuristic in a Housing Market, Horenstein, Osgood, and Snir
April 4, 2017
OppLoans.com quoted me in What’s the Difference Between a Payday Loan and an Installment Loan? It opens,
If you’re looking to borrow, you may already know about payday loans—they’re fast, dangerous, and designed to take advantage of those in need. (Think of them as the jackal of the lending animal kingdom.) Is there a better option? Something just as fast, but… you know, not evil?
You bet there is.
When it comes to lending, consider the personal installment loan the noble lion, king of the lending jungle.
Payday loans are short-term, unsecured loans that target the financially vulnerable—the low income, the elderly, and those without limited financial education. Payday lenders won’t perform a credit check and, depending on the restrictions in your state, they may not even check your income first.
Fast money without a credit check? What could be wrong?
Well, a lot. Payday loans charge unfair fees and massive interest rates, meaning they have extraordinarily high annual percentage rates (APR)—the measurement that allows you to see the full cost of loans.
Certified financial educator Maggie Germano (@MaggieGermano) says, “Payday loans usually turn out very negatively for the borrower. Interest rates and fees are sky-high and many people are unable to pay them back in time. Every time you miss your payment due date, the amount owed increases significantly. This makes it impossible for people living paycheck to paycheck to pay them off. This can destroy a borrower’s credit and wipe out their bank account.”
It may be tempting to try out the fast, risky option with the short payment terms, but don’t forget: it’s a trap.
When it comes to payment terms, installment loans are the exact opposite of payday loans. Instead of having to make a massive payment in a short amount of time, installment loans offer you the chance to make regular, smaller payments over a much longer period of time.
Most installment loans will offer you a MUCH lower APR on your loan than a dangerous payday loan and also—unlike many payday loans—they won’t charge a sneaky prepayment penalty.
What’s a prepayment penalty? Law professor David Reiss (@REFinBlog) sums it up well: “Prepayment penalties come into play if the borrower repays all or part of a loan before the payment schedule that the borrower and lender had agreed upon when the loan was first made. In theory, they compensate the lender for the costs of making the loan in the first place and any decrease in interest payments that the lender would get as a result of early repayment. In practice, prepayment penalties can be a new profit center for lenders if the fees are set higher than the amounts actually lost by prepayment.”
- After studying the housing crisis of the early 2000’s, Congress created the Consumer Finance Protection Bureau to protect U.S. citizens from poor and damaging practices of the American financial institutions. In early 2017, the Trump Administration questioned the constitutionality of the bureau and is seeking to shift some of its practices at the very least. As a result, the Democrats of Congress have rallied together to save the federal agency.
- A Michigan pastor is under investigation by the Securities and Exchange Commission (SEC). The federal agency alleges the pastor created a real estate scheme to garner over 6 million dollars fraudulently. The pastor is accused of targeting Michigan’s most exposed citizens such as retirees and laid off auto-workers.