- When Everything is Small: The Regulatory Challenge of Scale in the Sharing Economy, Zale
- Health Care and Housing Crisis, Gilbert & Wade
- The Rise of the Homevoters: How the Growth Machine Was Subverted by OPEC and Earth Day, Fischel
- Political Borders and Bank Lending in Post-Crisis America, Chavaz & Rose
- Wells Fargo has recently experienced a great deal of difficulty in the legal community. The bank can now add to their list of issues because state and federal prosecutors are examining their mortgage-backed security practices.
- A court in Florida edited the foreclosure rules in the state. A judge in Florida determined that the statute of limitations for foreclosure filing resets each time a mortgage payment is late.
- The Second Circuit is currently reviewing a case where the plaintiff is urging the court to mandate the “sell off roughly $542 million defaulted residential mortgage-backed securities.”
November 4, 2016
Standard & Poor’s issued a research report, What Drives the Variation Between Conforming and Jumbo Mortgage Rates? It opens,
What drives the variation between the conforming and jumbo mortgage rates for the 30-year fixed-rate mortgage (FRM) product offered in the U.S. residential housing market? While credit and interest rate risk are the main factors at play, S&P Global Ratings explores how these risks relate to capital market execution and whether this relationship translates into additional liquidity risk. In our study, we compare the historical spreads between the two average note rates over time, and we also examine the impact of certain loan credit characteristics. Our data indicate that the rate difference grows in periods for which the opportunity for securitization declines as a viable exit strategy for lenders. (1)
S&P also finds that “[r]isk-based pricing trends also appear to influence the jumbo-conforming spread” and that “[t]he currently narrow spread suggests that a combination of g-fee increases and jumbo credit migration has, to some extent, counteracted the lack of liquidity in the non-agency market.” (1)
The report offers some concise background:
The 30-year FRM is a product unique to the U.S. residential housing market. Lenders in other countries typically offer adjustable-rate or balloon mortgages, which serve as the primary debt tools for housing finance. The 30-year FRM has not been globally adopted, partially because the long-term amortization schedule can saddle a lender with substantial interest rate risk in addition to potentially prolonged credit risk. However, the structure of the mortgage financing system in the U.S. provides an exit strategy: lenders can typically sell loan pools into a reasonably deep market if they are averse to the credit, duration, or convexity risks posed by these long-term assets.
In the U.S., the majority of mortgage financing is channeled through government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which have a mandate to buy mortgages for their own portfolios and securitize loan pools, which are subsequently sold to investors. Mortgages that are not financed via the GSEs are often either securitized in the non-agency market or held in institutional portfolios. Both agency and non-agency securitizations optimize funding sources and liquidity, thereby allowing homeowners to enjoy relatively low mortgage rates across the U.S. (1)
My main takeaways from the report are that (1) the decrease in securitization since the financial crisis has contributed to a wider spread between jumbo and conforming mortgages; (2) the high guaranty fee for conforming mortgages pushes down the spread between jumbo and conforming mortgages; and (3) the credit box appears to be loosening a bit, which should mean that jumbos will become available to more than the “super-prime” slice of the market.
- A paper by Colin Caines of the Board of Governors of the Federal Reserve System, titled Can Learning Explain Boom-Bust Cycles in Asset Prices? An Application to the US Housing Boom, argues that boom-bust behavior in asset prices can be explained by a model in which boundedly rational agents learn the process for prices. The key feature of the model is that learning operates in both the demand for assets and the supply of credit.
- John C. Williams of the Federal Reserve Bank of San Francisco delivers a speech titled, Measuring the Effects of Monetary Policy on House Prices and the Economy.
- The Freddie Mac Multi-Indicator Market Index for August was up 5.4% over the same month last year, driven by its purchase component, which had an 18.6% increase. August’s Multi-Indicator Market Index was 85.7, its highest level since August 2008. This was a 1.05% increase over July. The index has continually increased on a month-to-month basis since December 2011, except for October 2013 and January 2015.
- Purchases of new U.S. homes in September stayed close to an almost nine-year high, showing residential real estate was maintaining momentum heading into the quieter selling season. Sales climbed 3.1 percent to a 593,000 annualized rate from an August pace that was weaker than initially reported, Commerce Department data showed Wednesday. The median forecast in a Bloomberg survey called for 600,000 pace in September. Purchases in June and July were revised lower.
November 3, 2016
Richard Shelby, the Chair of the Senate Committee on Banking, Housing, and Urban Affairs asked the Congressional Budget Office to prepare a report on The Effects of Increasing Fannie Mae’s and Freddie Mac’s Capital. The report acknowledges that the legislative reform of the two companies is going nowhere, but it analyzed one potential reform option that shares characteristics with some of the GSE reform bills that have been introduced over the years. The option studied by the CBO contemplates recapitalizing the two companies along the following lines:
each GSE would be allowed to retain an average of $5 billion of its profits annually and would thus increase its capital by up to $50 billion over 10 years. The government’s commitment to purchase more senior preferred stock from Fannie Mae and Freddie Mac if necessary to ensure that they maintain a positive net worth would remain in place. In addition, the GSEs would invest the profits that they retained under the option in Treasury securities, and returns on those securities would raise the GSEs’ income. Through its holdings of senior preferred stock, the government would continue to have a claim to the GSEs’ net worth ahead of other stockholders. (2, footnote omitted)
The CBO’s mandate is “to provide objective, impartial analysis,” but this report seems like it is laying the groundwork for a proposal to recapitalize Fannie and Freddie so that they can be released from conservatorship. Most policy analysts (as opposed to investors in the two companies) think that allowing the two companies to return to their prior lives as public/private hybrids is a terrible idea. It is too difficult for them to simultaneously answer to the federal regulators who set their public mission as well as to the private shareholders who would ultimately own them. And, if we were to take this path, the taxpayer would be left holding the bag once again if they were to ever need another bailout.
I think that Senator Shelby has done GSE reform a disservice by looking at this recapitalization option out of context. What we need is an analysis of a compromise plan that Congress can pass once the election is settled. Otherwise we are just leaving the two companies to limp along in conservatorship, slouching toward their next, yet unknown, crisis. Or worse, we are preparing to release them from conservatorship to go back to business as usual. Both of those options are very bad. Congress owes it to the American people to create a workable housing finance system for the 21st century that does not repeat our past mistakes.