March 2, 2018
I published a short article in the American College of Real Estate Lawyers (ACREL) (ACREL) News & Notes, The Regulation of Residential Real Estate Finance Under Trump. The abstract reads,
Reducing Regulation and Controlling Regulatory Costs was one of President Trump’s first Executive Orders. He signed it on January 30, 2017, just days after his inauguration. It states that it “is the policy of the executive branch to be prudent and financially responsible in the expenditure of funds, from both public and private sources. . . . [I]t is essential to manage the costs associated with the governmental imposition of private expenditures required to comply with Federal regulations.” The Reducing Regulation Executive Order outlined a broad deregulatory agenda, but was short on details other than the requirement that every new regulation be accompanied by the elimination of two existing ones.
A few days later, Trump issued another Executive Order that was focused on financial services regulation in particular, Core Principles for Regulating the United States Financial System. Pursuant to this second Executive Order, the Trump Administration’s first core principle for financial services regulation is to “empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth.” The Core Principles Executive Order was also short on details.
Since Trump signed these two broad Executive Orders, the Trump Administration has been issuing a series of reports that fill in many of the details for financial institutions. The Department of Treasury has issued three of four reports that are collectively titled A Financial System That Creates Economic Opportunities that are directly responsive to the Core Principles Executive Order. While these documents cover a broad of topics, they offer a glimpse into how the Administration intends to regulate or more properly, deregulate, residential real estate finance in particular.
March 1, 2018
CoreLogic has posted a special report on Evaluating the Housing Market Since the Great Recession. It opens,
From December 2007 to June 2009, the U.S. economy lost over 8.7 million jobs. In the months after the recession began, the unemployment rate peaked at 10 percent, reaching double digits for the first time since September 1982, and American households lost over $16 trillion in net worth.
After a number of economic stimulus measures, the economy began to grow in 2010. GDP grew 19 percent from 2010 to 2017; the economy added jobs for 88 consecutive months – the longest period on record – and as of December 2017, unemployment was down to 4 percent.
The economy has widely recovered and so, too, has the housing market. After falling 33 percent during the recession, housing prices have returned to peak levels, growing 51 percent since hitting the bottom of the market. The average house price is now 1 percent higher than it was at the peak in 2006, and the average annual equity gain was $14,888 in the third quarter of 2017.
However, in some states – including Illinois, Nevada, Arizona, and Florida – housing prices have failed to reach pre-recession levels, and today nearly 2.5 million residential properties with a mortgage are still in negative equity. (4, footnotes omitted)
By the end of 2017, ” the most populated metro areas in the U.S. remained at an almost even split between markets that are undervalued, overvalued and at value, indicating that while housing markets have recovered, many homes have surpassed the at-value [supported by local market fundamentals] price.” (10) This even split between undervalued and overvalued metro areas is hiding all sorts of ups and downs in what looks like a stable national average. You can get a sense of this by comparing the current situation to what existing at the beginning of 2000, when 87% of metro areas were at-value.
And what does this all mean for housing finance reform? I think it means that we should not get complacent about the state of our housing markets just because the national average looks okay. Congress should continue working on a bipartisan fix for a broken system.
February 28, 2018
Executives at Pimco, the world’s largest bond fund manager, have posted U.S. Housing Finance Reform: Why Fix What Isn’t Broken? I think their analysis is interesting, but seriously flawed:
The topic of housing finance reform has come in and out of focus on Capitol Hill since Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) were taken into conservatorship back in 2008. As one of the largest participants in the mortgage-backed securities (MBS) market, and given our fiduciary role as a steward of other people’s assets, we at PIMCO are devoted to a liquid and stable mortgage market. Not surprisingly, we have taken a keen interest in the various reform proposals introduced over the past several years.
Housing finance reform need not be revolutionary
While we have refrained from commenting on specific plans, we believe housing finance reform must be comprehensive, above all else. And while we agree with a focus on shrinking the government’s role in housing finance, we believe similar attention must be paid to a responsible and thoughtful rebuilding of the private mortgage market – the alternative to the government balance sheet.
When it comes to the GSEs, we think policymakers should take a “do no harm” approach to reform that contains several key elements:
- An explicit government guarantee for both future and legacy MBS
- A continuation of the national mortgage rate (e.g., a borrower in Spartanburg, SC, can access a similar mortgage rate to a borrower in San Francisco, CA)
- A guarantee fee that is counter-cyclical (versus a pro-cyclical, floating fee)
- A continuation of the GSEs’ current credit risk transfer (CRT) program
- Loan limits transitioned thoughtfully to be based on income levels, not housing prices
So far, so good. But they continue,
What you do not hear PIMCO calling for is a wholesale change or even an end to the status quo for Fannie Mae and Freddie Mac. Indeed, from our perspective as a large market participant, the delivery of mortgage credit has never been so efficient or so fair, nor has the market for MBS ever been so deep, liquid and stable as it has been during the years that Fannie and Freddie have been under conservatorship. What’s more, the Federal Housing Finance Agency (FHFA)’s heightened oversight has put an end to the pernicious activities that gave rise to the GSEs’ conservatorship – namely, buying subprime private-label securities collateralized by poor-credit-quality loans and putting them on their balance sheets – thereby mitigating the threat they pose to taxpayers.
The authors call for the formal “folding” in of Fannie and Freddie into the U.S. government. This would result in the Ginnie-fication of Fannie and Freddie, converting them to a government instrumentality that would be subject to the whims of the congressional budgetary process. That has not worked out so well for Ginnie Mae which has suffered from antediluvian technology and operational challenges for much of its history. Fannie and Freddie have historically been far more innovative and responsive to changes in market conditions than Ginnie. We should expect to lose those characteristics if the two companies were nationalized.
There is certainly an argument for keeping part of Fannie and Freddie’s existing operations within the federal government. But keeping the whole thing there will cause a new set of problems that we will likely bemoan a few years down the line. This proposal may appear to be a bright idea on first glance, but if you look at it the cracks show right away.
February 27, 2018
Mick Mulvaney’s Consumer Financial Protection Bureau has released a Request for Information Regarding Bureau Enforcement Activities (available on the upper right corner of this page), its third in a series of RFIs that seek to dramatically restrict the Bureau’s activities. The Bureau seeks
feedback on all aspects of its enforcement processes, including but not limited to:
1. Communication between the Bureau and the subjects of investigations, including the timing and frequency of those communications, and information provided by the Bureau on the status of its investigation;
2. The length of Bureau investigations;
3. The Bureau’s Notice and Opportunity to Respond and Advise process, including:
a. CFPB Bulletin 2011–04, Notice and Opportunity to Respond and Advise (NORA), issued November 7, 2011 (updated January 18, 2012) and available at http://files.consumerfinance.gov/f/2012/01/
Bulletin10.pdf, including whether invocation of the NORA process should be mandatory rather than discretionary;and
b. The information contained in the letters that the Bureau may send to subjects of potential enforcement actions pursuant to the NORA process, as exemplified by the sample letter available at http://www.consumerfinance.gov/wp-content/uploads/2012/01/NORA-Letter1.pdf;
4. Whether the Bureau should afford subjects of potential enforcement actions the right to make an in-person presentation to Bureau personnel prior to the Bureau determining whether it should initiate legal proceedings;
5. The calculation of civil money penalties, consistent with the penalty amounts and mitigating factors set out in 12 U.S.C. 5565(c), including whether the Bureau should adopt a civil money penalty matrix, and, if it does adopt such a matrix, what that matrix should include;
6. The standard provisions in Bureau consent orders, including conduct, compliance, monetary relief, and administrative provisions; and
7. The manner and extent to which the Bureau can and should coordinate its enforcement activity with other Federal and/or State agencies that may have overlapping jurisdiction. (83 F.R. 6000) (Feb. 12, 2018)
The not-so-subtext of this RFI is that Mulvaney is seeking to hamstring the Bureau’s enforcement authority which Republicans have found to be too zealous since the Bureau was first started up.
Comments are due April 13, 2018, so get crackin’.