Editor: David Reiss
Brooklyn Law School

January 19, 2016

Know How to Get a Mortgage?

By David Reiss

"Einstein blackboard" by decltype

Fannie Mae’s Economic & Strategy Research Group posted research findings titled What Do Consumers Know About The Mortgage Qualification Criteria. The findings are sobering:

When asked to identify accurate key mortgage qualification criteria (down payment, credit score, and DTI ratio), about one half of consumers were unable to provide an answer.

o The lack of understanding is more pronounced among those with less education and lower income as well as among renters (as opposed to homeowners with mortgages), African-Americans, and Hispanics.

o Regression analysis shows that education, income, and age are most highly associated with mortgage qualification understanding. Lower-income consumers, less-educated consumers, and seniors are more likely to say “don’t know.” Ethnicity accounts for 2 to 9 percent of model explanation.

o Only 23 percent are aware of the 3 percent and 5 percent down payment programs.

o Although more than eight in 10 consumers (81 percent) indicate that they have seen their credit score, when asked what their score is, nearly half consumers (49 percent) say “don’t know” or provide a number outside of the score range (300-850).

And, among those who did provide an answer, only 5 to 16 percent of them chose an answer with the correct range.

o The “over-estimate” is more pronounced among less-educated and lower-income consumers, African-Americans, and Hispanics. When asked about the maximum DTI ratio, these consumer groups are more likely to “under-estimate” the ratio.

o Their mean responses about the minimum down payment and credit score requirements are higher than Fannie Mae requirements.

Lenders are cited as the most influential source of information for getting mortgage advice (33 percent most influential; 64 percent top three most influential), followed by family and friends (20 percent most influential; 47 percent top three most influential).

Regression analysis shows that ethnicity and age are most highly associated with differences in the influence of various information sources. For example:

o Older and Caucasian consumers are more likely to cite lenders as the most influential source of information.

o African-Americans and Hispanics are more likely to cite real estate agents, government agencies, and non-profit housing counselors.

o Younger consumers and Asian-Americans are more likely to cite family and friends as the most influential source of information. (5, emphasis in the original)

The authors identify a lot of important implications that arise from this study, the main one being — “Do not take consumer confidence at face value — there is a need and opening for educational efforts surrounding primary underwriting principles (credit score, down payment/LTV, DTI ratos, and low down payment mortgage programs.” (6)

The big open question is, however, does financial education really work?

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January 19, 2016 | Permalink | No Comments

January 18, 2016

The Golden Rule of Conduct

By David Reiss

Dick DeMarsicoGandhi (1)

In honor of the Reverend Martin Luther King, Jr., a quotation from Mahatma Gandhi, one of his heroes:

The golden rule of conduct…is mutual toleration, seeing that we will never all think alike and we shall see Truth in fragments and from different angles of vision. Conscience is not the same thing for all. Whilst, therefore, it is a good guide for individual conduct, imposition of that conduct upon all will be an insufferable interference with everybody’s freedom of conscience.

Democracy is not a state in which people act like sheep.

Truth resides in every human heart, and one has to search for it there, and to be guided by truth as one see it. But no one has a right to coerce others to act according to his own truth.

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January 18, 2016 | Permalink | No Comments

Happy Martin Luther King, Jr. Day!

By Shea Cunningham

“Injustice anywhere is a threat to justice everywhere.

Martin Luther King, Jr.

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January 18, 2016 | Permalink | No Comments

January 15, 2016

Rent-to-Own Risks

By David Reiss

"Numbers 341 to 385 Lordship Lane N17" by A R Driver

Kroll Bond Rating Agency has released a CMBS Commentary, Rent-to-Own Deals Present More Risk than SFR [Single-Family Rental]. The commentary addresses the first rent-to-own securitization, one that Kroll is not rating. With rent-to-own, ” the tenant has the right to purchase the property it is currently renting in the future at a specified exercise price.” (1) With single-family rental, the tenant is currently renting a property from a large institutional investor without a right to purchase.

Kroll has identified a variety of risks that are specific to R2O deals. While some are specific to potential investors, others will also impact the tenants in these properties:

A primary concern was that the legality of purchase options associated with rent-to-own properties are largely untested and there is a possibility that these purchase options could subsequently be found to violate consumer protection and/ or predatory lending laws. If this occurred, it could result in considerable litigation costs for the securitization trust, as well as a cessation of advancing by the servicer. For example, if it was determined that the purchase option violated consumer protection laws, tenants in the applicable jurisdiction could potentially cease making rental payments under their leases, potentially causing a shortfall in the funds available for the borrower to make debt service payments under the mortgage loan and if the servicer failed to advance such amounts because it determined that advances were non-recoverable, this could result in a shortfall in the amounts available for distribution to the bondholders. Another risk present in the rent-to-own structure is a delay in the ability to foreclose on mortgaged properties that are subject to purchase options because the mortgages are subordinate to the purchase option right. As a result, the servicer may not be able to foreclose following an event of default under the loan unless the related purchase option period has expired. These risks are not applicable in standard SFR deals because the tenants do not hold purchase options with respect to the rental properties. (1)

I was somewhat skeptical that these types of securitizations would have much of a life once the housing bust worked itself out. It looks, however, like they might. Kroll is right to alert potential investors to the concerns outlined above. The CFPB and state regulators should also be looking at these cutting-edge transactions to ensure that residents of these homes are appropriately protected.

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January 15, 2016 | Permalink | No Comments

Friday’s Government Reports Roundup

By Shea Cunningham

  • The Federal Housing Finance Agency released its 2016 Scorecard outlining conservatorship priorities for Fannie Mae and Freddie Mac, and Common Securitization Solutions.
  • The Joint Center for Housing Studies released its Rental Housing Report and created an interactive map series that shows where renters are experiencing housing cost burdens.
  • The Labor Department’s latest report finds that there were 292,000 jobs created in December, particularly in temporary-help services, health care, transportation and construction.

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January 15, 2016 | Permalink | No Comments

January 14, 2016

Why Have a Complaint Window?

By David Reiss


Angela Littwin of the the University of Texas School of Law has posted Why Process Complaints? Then and Now to SSRN. The abstract reads,

The creation of the Consumer Financial Protection Bureau (CFPB) established the first comprehensive federal forum for processing consumer complaints about financial products and services. The CFPB not only handles consumers complaints; it also publishes a database that includes most complaints and their initial resolutions. For a symposium honoring the scholarship of Professor William C. Whitford, I analyze the CFPB’s complaint system and database using a framework he developed to explore the reasons why government agencies process consumer complaints and whether these reasons justify the resources that complaint processing entails. Whitford and his co-author proposed three “obvious” reasons to process consumer complaints: to settle consumer disputes; to inform the agency’s regulatory activities; and to generate good will for the agency among constituencies such as consumers, government actors, and the companies the CFPB regulates.

I find that the CFPB has mixed success in providing an alternative dispute resolution forum for consumers. I am, however, missing key information for this evaluation. The CFPB Consumer Complaint Database contains the financial institutions’ responses to consumer complaints but there is almost no information available about any follow up actions the CFPB takes. The CFPB is particularly strong on the regulatory function. It makes significant use of complaint data in its regulatory roles and evinces a commitment to ensuring that companies are handling complaints well. Last comes good will. With respect to public good will, I was unable to find much evidence one way or the other. As for good will among government actors, the CFPB appropriately appears not to apply different treatment to complaints referred by government entities or officials. Finally, the CFPB’s complaint data reveal an intriguing possibility that the process may provide some legitimization of financial institutions’ complaint resolutions. But given that consumer financial companies are pushing for the CFPB’s elimination, working to generate good will among financial institutions in this way may be entirely reasonable on the CFPB’s part. This is especially true because the CFPB has made important complaints decisions – such as publishing the database without redacting company names – despite financial companies’ vociferous objections.

I was interested by the “argument regarding bureaucratic companies . . . that a complaint process can find and resolve violations of the bureaucracy’s own rules.” (944) But Littwin also notes that the key issue is the “ineffectiveness in handling the harder cases, such as those raising issues of fact or law.” (Id.) We are still a long way off from figuring out the optimal system for addressing consumer complaints, but this article helps to frame the issue nicely.

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January 14, 2016 | Permalink | No Comments

January 13, 2016

Zoning Rules and Income Inequality

By David Reiss

Bill Fischel photo 2015

Bill Fischel

William Fischel, a preeminent land use scholar, has recently published Zoning Rules!: The Economics of Land Use Regulation. The abstract for the book reads,

Zoning has for a century enabled cities to chart their own course. It is a useful and popular institution, enabling homeowners to protect their main investment and provide safe neighborhoods. As home values have soared in recent years, however, this protection has accelerated to the degree that new housing development has become unreasonably difficult and costly. The widespread Not In My Backyard (NIMBY) syndrome is driven by voters’ excessive concern about their home values and creates barriers to growth that reach beyond individual communities. The barriers contribute to suburban sprawl, entrench income and racial segregation, retard regional immigration to the most productive cities, add to national wealth inequality, and slow the growth of the American economy. Some state, federal, and judicial interventions to control local zoning have done more harm than good. More effective approaches would moderate voters’ demand for local-land use regulation—by, for example, curtailing federal tax subsidies to owner-occupied housing.

The book engages with many other leading land use scholars like Edward Glaeser, Robert Ellickson and Vicki Been so the reader gets a good sense of what is at stake in contemporary land use debates.

I was particularly intrigued by Fischel’s discussion of the relationship between land use policies and income inequality. He writes that, “Moving to opportunity was an important source of income equalization for the first two-thirds of the twentieth century. That migration trend has nearly stopped as a result of increased land use regulation in the high-productivity areas” on the coasts. (166-67). The book carefully parses out how such changes in land use regulation had such a big effect on people’s choices.

You can find the first chapter of Zoning Rules! here if you want to give the book a test run.


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January 13, 2016 | Permalink | No Comments