February 5, 2018
Judge Gardephe (SDNY) ruled against the Lower East Side People’s Federal Credit Union in their suit against President Trump and Mick Mulvaney over the control of the Consumer Financial Protection Bureau. (Case 1:17-cv-09536-PGG, filed February 1, 2018) Trump has sought to install Mulvaney, his OMB Director, as the Acting Director of the CFPB. I submitted an amicus brief on behalf of the Credit Union along with a number of other academics who write about the consumer financial services sector but the judge did not reach the merits of the case. Rather, the judge found that the Credit Union did not have standing to bring the lawsuit. Standing, for you non-lawyers out there, refers to a showing by the plaintiff that it has enough of a connection to, as well as harm from, an action that the plaintiff is challenging to be the basis for the lawsuit.
The dispute over the leadership of the CFPB is still ongoing as Leandra English, the Deputy Director appointed by former Director Cordray, is still pressing the suit that she filed in the District Court for the District of Columbia. In that suit, English claims that she is the rightful Acting Director of the CFPB. While she lost in the District Court, she has filed an appeal to the Court of Appeals for the District of Columbia. That case turns on the complex interaction between the Dodd-Frank Act and the Federal Vacancies Reform Act, so it is hard to predict what the Court of Appeals will end up doing in that case.
In the short term, it means that the CFPB is somewhat rudderless as two people claim to lead the agency. This condition will likely prevail until President Trump gets a permanent Director confirmed by the Senate.
February 2, 2018
MortgageLoan.com quoted me in Tax Reform Just Made Home Equity Loans A Lot Less Attractive. It reads, in part,
Home equity loans have long been attractive ways for homeowners to borrow money to pay for everything from major home improvements to a child’s college education. But these loans just lost a major benefit: When filing their income taxes, homeowners can no longer deduct the interest they pay on home equity loans each year.
This might make these loans less popular. The loss of the interest deduction might persuade homeowners to look for other ways to tap the money in their homes.
“From what I see, there are very limited times that home equity loans would still come in as a benefit,” said Tristan Ahumada, a real estate agent with Keller Williams Realty in Westlake Village, California.
A rush to pay off home equity loans?
And she’s not alone. Donald Daly, managing partner of REIS Group LLC in New York City and a licensed real estate appraiser, said that since January 1 he has seen a higher level of requests for appraisals from homeowners seeking to refinance their existing mortgage loans. Many of these owners are doing this as a way of paying off their Home Equity Lines of Credit, a form of home equity loan.
The reason? These lines of credit, better known as HELOCs, are not nearly as attractive to homeowners when they don’t come with the bonus of a tax deduction.
“We fully expect this trend to grow over the next weeks and months as more and more homeowners learn of the effect these changes will have on their personal finances,” Daly said.
In the past, homeowners who took out home equity loans or HELOCs could deduct the interest they paid on up to $100,000 of these loans. If you took out a home equity loan for $50,000, then, you could deduct all the interest you paid during the year on that loan. If you took out a home equity loan for $150,000, you could deduct the interest you paid on the first $100,000 of that loan.
When Congress in December of last year signed the Tax Cuts and Jobs Act into law, this all changed. The big tax reform legislation eliminates the home equity loan deduction starting in 2018. You can still claim your tax deduction when you file your income taxes in April of this year. That’s because you’re paying taxes from 2017.
But you won’t be able to claim the home equity loan deduction when you file on your 2018 taxes and beyond. Most of the tax cuts impacting taxpayers, including the home equity deduction rules, are scheduled to expire after 2025. No one knows, though, whether Congress will vote to continue them past that date once that year rolls around.
Existing loans aren’t grandfathered in, either. If you took out a home equity loan in 2016 and you’re still paying it off this year, you won’t be able to deduct any interest you pay on it in 2018, even if you’ve already deducted interest payments in the past.
* * *
Home equity loans can still work, though
Just because the tax benefits of home equity loans are disappearing, though, doesn’t mean that these loans are no longer a viable option for all homeowners.
The deduction was a benefit, but the biggest advantage of home equity loans is that they are a relatively cheap way to borrow money. The mortgage rates attached to home equity loans tend to be low. That isn’t changing.
So if you do have equity in your home and you want money to help pay, say, for your children’s college tuition, a home equity loan or HELOC might still be a smart move.
“While tax deductions are important, they are not the only reason we take out home equity loans,” said David Reiss, professor law at Brooklyn Law School in Brooklyn, New York.
Reiss said that when considering whether a home equity loan or HELOC is right for them, homeowners need to ask several important questions.
First, why do they want to take out the loan? If it’s for home improvements or to reduce high-interest-rate debt, the loan might still be worthwhile, even with the tax changes.
Next, homeowners need to look at their monthly budgets to determine if they can afford the payments that come with these loans. Finally, homeowners should consider whether they can borrow money cheaper somewhere else, taking the loss of the deduction into consideration.
“If you are comfortable with your answers, there is no reason not to consider a home equity loan as a financing option,” Reiss said.
February 1, 2018
The United States Court of Appeals for the District of Columbia, sitting en banc, upheld the constitutionality of the structure of the Consumer Financial Protection Bureau in PHH Corporation v. CFPB, No. 15-1177 (Jan. 31, 2018). There has been a lot reporting around this lengthy decision (there are 7 opinions, totaling 250 pages). And certainly, its fate in the Supreme Court is still up for grabs. Personally, I found the following passage from the majority opinion interesting:
There is nothing constitutionally suspect about the CFPB’s leadership structure. … there is no reason to assume an agency headed by an individual will be less responsive to presidential supervision than one headed by a group. It is surely more difficult to fire and replace several people than one. And, if anything, the Bureau’s consolidation of regulatory authority that had been shared among many separate independent agencies allows the President more efficiently to oversee the faithful execution of consumer protection laws. Decisional responsibility is clear now that there is one, publicly identifiable face of the CFPB who stands to account—to the President, the Congress, and the people— for all its consumer protection actions. The fact that the Director stands alone atop the agency means he cannot avoid scrutiny through finger-pointing, buck-passing, or sheer anonymity. What is more, in choosing a replacement, the President is unhampered by partisan balance or ex-officio requirements; the successor replaces the agency’s leadership wholesale. Nothing about the CFPB stands out to give us pause that it—distinct from other financial regulators or independent agencies more generally—is constitutionally defective. (35)
While this is of great consequence for the CFPB and its role in the regulation of the financial sector, it also has great consequence as a matter of separation of powers doctrine. The DC Circuit is giving Congress a lot of discretion in organizing the modern Administrative State. It is up to Congress to exercise that discretion responsibly.
January 31, 2018
Senate Staff Discussion Draft #29 of the much discussed housing finance reform bill has just seen light of day. The purpose clause of the draft gives an overview of what the drafters are trying to accomplish:
- to offer a guarantee backed by the full faith and credit of the Federal Government of the timely payment of principal and interest on eligible mortgage-backed securities in order to foster a liquid housing finance market across the United States and during changing economic conditions and to promote the continued availability of an affordable, fixed rate, pre-payable long-term mortgage loan, such as the 30-year fixed rate mortgage loan;
- to protect taxpayers against losses that might arise out of that guarantee by arranging for private sector entities to assume the risk of loss on guarantee mortgage-backed securities and to capitalize a mortgage insurance fund;
- to protect taxpayers against bailouts of any of those entities by ensuring that none becomes “too big to fail”;
- to foster a competitive secondary mortgage market;
- to promote access to affordable mortgage credit and affordable housing across the United States, including to underserved borrowers;
- to ensure that mortgage lenders of all sizes, charter types, and locations have equitable access to the secondary mortgage market; and
- to provide for a gradual and smooth transition to the housing finance system contemplated by this Act. (Sec. 2)
There are no real surprise here, but there are a couple of things worth emphasizing. The draft proposes a framework where the Common Securitization Platform currently being built to support a Single Security would be used by a half dozen or more mortgage guarantors. This would be a significant move away from the Fannie/Freddie duopoly we now have. The draft even goes so far as to forbid the use of the names Fannie and Freddie by any of the mortgage guarantors. The draft also appears to contemplate a strong affordable housing role for the actors in this new system, with its emphasis on “underserved borrowers.”
As with all important bills, though, the devil is in the details. We’ll have to wait and see how those details start to fill out before we have a real sense who the real winners and losers will be in this new system. That being said, it is great to see that Congress is making some bipartisan progress in addressing the last unresolved issue from the financial crisis — defining the scope of the government’s appropriate role in the housing finance system.
January 30, 2018
The Urban institute’s Laurie Goodman et al. have announced The Mortgage Servicing Collaborative:
All mortgage market participants share the same goal: successful homeownership. Failure to achieve that goal hurts not only consumers and neighborhoods, but investors, insurers, guarantors, and servicers. Successful homeownership hinges on several factors. Consumers need access to a range of mortgage products when buying a home and need effective mortgage servicing. Servicing is the critical work that begins after the mortgage loan is closed and includes collecting and transferring mortgage payments from borrowers to investors, managing escrow, assisting borrowers who fall behind on their payments, and administering the foreclosure process. If closing the loan is the birth of the mortgage, servicing is its day-to-day care.
Despite its importance, mortgage servicing is frequently overlooked in major policy conversations, including the housing finance reform debate. That is a mistake. The servicing industry has changed dramatically since the 2008 mortgage default and foreclosure crisis and subsequent Great Recession. Overlooking servicing while implementing changes to the housing finance system has resulted in some unintended and unwanted consequences, including significant increases in the cost of servicing, a suboptimal servicing system, reduced access to credit for consumers, and an exodus from the industry by depository servicers.
To address this policy oversight, the Urban Institute’s Housing Finance Policy Center (HFPC) has convened the Mortgage Servicing Collaborative (MSC) to elevate the mortgage servicing discussion and facilitate evidence-based policymaking by bringing more data and evidence to the table. The MSC has convened key industry stakeholders—lenders, servicers, consumer groups, civil rights leaders, researchers, and government—and tasked them with developing a common understanding of the biggest issues in mortgage servicing, their implications, and possible solutions and policy options that can advance the debate. And with the mortgage industry no longer operating in crisis mode, we believe now is the right time for this effort.
In this brief, the first in a series prepared by HFPC researchers with the collaboration of the MSC, we review how we arrived at the present state of affairs in mortgage servicing and explain why it is important to institute mortgage servicing reforms now. (1-2, footnote omitted)
The report provides a short but useful history of servicing, which at the best of times is a dark corner of the mortgage market. It also provides an overview of the risks inherent in a poorly constructed system of servicing for consumers and other players in that market. The Collaborative will certainly be taking deeper dives into these risks in future releases.
As with much of the Housing Finance Policy Center’s work, this collaborative is very forward-looking. Hopefully, it will help us prepare for the next downturn in the housing market.
January 29, 2018
The Milkin Institute have released Bringing Housing Finance Reform over the Finish Line. It opens,
The housing finance reform debate has once again gained momentum with the goal of those involved to move forward with bipartisan legislation in 2018 that results in a safe, sound, and enduring housing finance system.
While there is no shortage of content on the topic, two different conceptual approaches to reforming the secondary mortgage market structure are motivating legislative discussions. The first is a model in which multiple guarantor firms purchase mortgages from originators and aggregators and then bundle them into mortgage-backed securities (MBS) backed by a secondary federal guarantee that pays out only after private capital arranged by each guarantor takes considerable losses (the multiple-guarantor model). This approach incorporates several elements from the 2014 Johnson-Crapo Bill and a subsequent plan developed by the Mortgage Bankers Association. Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs)—would continue as guarantors, but would face new competition and would no longer enjoy a government guarantee of their corporate debt or other government privileges and protections.
The second housing finance reform plan is based on a multiple-issuer, insurance-based model originally proposed by Ed DeMarco and Michael Bright at the Milken Institute, and builds on the existing Ginnie Mae system (the DeMarco/Bright model). In this model, Ginnie Mae would provide a full faith and credit wrap on MBS issued by approved issuers and backed by loan pools that are credit-enhanced either by (i) a government program such as the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA), or (ii) Federal Housing Finance Agency (FHFA)- approved private credit enhancers that arrange for the required amounts of private capital to take on housing credit risk ahead of the government guarantee. Fannie Mae and Freddie Mac would be passed through receivership and reconstituted as credit enhancement entities mutually owned by their seller/servicers.
While the multiple guarantor and DeMarco/Bright models differ in many ways, they share important common features; both address key elements of housing finance reform that any effective legislation must embrace. In the remainder of this paper, we first identify these key reform elements. We then assess some common features of the two models that satisfy or advance these elements. The final section delves more deeply into the operational challenges of translating into legislative language specific reform elements that are shared by or unique to one of the two models. Getting housing finance reform right requires staying true to high-level critical reform elements while ensuring that technical legislative requirements make economic and operational sense. (2-3, footnotes omitted)
The report does a good job of outlining areas of broad (not universal, just broad) agreement on housing finance reform, including
- The private sector must be the primary source of mortgage credit and bear the primary burden for credit losses.
- There must be an explicit federal backstop after private capital.
- Credit must remain available in times of market stress.
- Private firms benefiting from access to a government backstop must be subject to strong oversight. (4-5)
We are still far from having a legislative fix to the housing finance system, but it is helpful to have reports like this to focus us on where there is broad agreement so that legislators can tackle the areas where the differences remain.
January 26, 2018
I have posted my article, The Trump Administration and Residential Real Estate Finance, which just came out in Westlaw Journal Derivatives to SSRN (and also to BePress). The abstract reads,
An executive order titled “Reducing Regulation and Controlling Regulatory Costs” was one of President Donald Trump’s first executive orders. He signed it Jan. 30, 2017, just days after his inauguration. It states: “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. … It is essential to manage the costs associated with the governmental imposition of private expenditures required to comply with federal regulations.” This executive order outlined a broad deregulatory agenda, but it was short on details other than setting a 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. That order is titled “Core Principles for Regulating the United States Financial System.” It says 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.” However, it is also short on details.
Since Trump signed these two broad executive orders, his administration issued two sets of documents that fill in applicable details for financial institutions. The first is a slew of documents that were released as part of the Office of Information and Regulatory Affairs’ Current Regulatory Plan and the Unified Agenda of Regulatory and Deregulatory Actions. The second is a series of Treasury reports — titled “A Financial System That Creates Economic Opportunities” — that are directly responsive to the core principles executive order. While these documents cover a broad range of topics, they offer a glimpse into how this administration intends to regulate — or more properly, deregulate — residential real estate finance in particular. What is clear from these documents is that the Trump administration intends to roll back consumer protection regulation so that the mortgage market can operate with far less government oversight.