Tag Archives: 2014 Conservatorship Scorecard

Best Time to Sign a Lease

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photo by Beth Kanter

The Allstate Blog quoted me in What’s the Best Time of Year to Sign a Lease? It opens,

There is no way around it — apartment hunting can be stressful. And the cost of rent can be quite expensive — even outpacing average U.S. salary increases. According to the National Association of Realtors, the cost of rent rose an average of 15 percent while renters’ income only rose 11 percent from 2009 to 2014. However with some planning and negotiating, you may be able to have some more money in your pocket at the end of each month.

Similar to how you can pay more for a winter jacket in October than May, rental rates often vary throughout the year. By planning your move and signing lease terms to help position your next move during the lower rental rate season, you may end up saving some money. 

Research the Demand in Your Area

Just like most things, supply and demand determines prices in the rental market. Not surprisingly, you may get a better deal on renting when demand for condos or apartments are at their lowest. However, if you live in a tight rental market, your choices could be very limited. “In most areas the slow rental season is typically late fall through winter since less people move during this time,” says Scot J. Haislip, vice president, national lease program at the National Apartment Association (NAA).

It is important to understand the rental market you’re looking to move into since rental patterns can vary based on where you live. David Reiss, director of Community Development Clinic in New York City and professor at Brooklyn Law School, specializing in real estate and community development recommends contacting several local brokers to get their perspective on the slower rental periods in your area of interest. He also cautions that some high demand areas, such as New York City or Chicago, currently do not have a slower period for rentals.

Smart Negotiation

Even during the winter months, most landlords are not going to simply hand over a discount — you have to work for it by negotiating with your prospective landlord. Before you broach the subject of price, do your homework by picking up the phone or researching online to compare similar units at the current time. Reiss suggests that you consider asking for a decrease in your monthly rent or a period of free rent.

Transferring Risk from Fannie & Freddie

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The Federal Housing Finance Agency has posted its FHFA Progress Report on the Implementation of FHFA’s Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac. As its name suggests, it provides a progress report on a range of topics, but I was particularly interested in its section on credit risk transfers for single-family credit guarantees:

The 2014 Conservatorship Strategic Plan’s goal of reducing taxpayer risk builds on the Enterprises’ previous risk transfer efforts. Under the 2013 Conservatorship Scorecard, FHFA expressed the expectation that each Enterprise would conduct risk transfer transactions involving single-family loans with an unpaid principal balance (UPB) of at least $30 billion. The 2014 Conservatorship Scorecard tripled the required risk transfer amount, with the expectation that each Enterprise would transfer a substantial portion of the credit risk on $90 billion in UPB of new mortgage-backed securitizations. FHFA also expected each Enterprise to execute a minimum of two different types of credit risk transfer transactions. FHFA required the Enterprises to conduct all activities undertaken in fulfillment of these objectives in a manner consistent with safety and soundness. During 2014, the two Enterprises executed credit risk transfers on single-family mortgages with a UPB of over $340 billion, which is well above the required amounts. (14)

Risk transfer is an important tool to reduce the risks that taxpayers will be on the hook for future bailouts. The mechanism for these risk transfer deals are not well understood because they are pretty new. The Progress Report describes how they work in relatively clear terms:

The primary way that the Enterprises have executed single-family credit risk transfers to date has been through debt-issuance programs. Freddie Mac transactions are called Structured Agency Credit Risk (STACR) notes, and Fannie Mae transactions are called Connecticut Avenue Securities (CAS). Following the release of historical credit performance data in 2012, each Enterprise has issued either STACR or CAS notes that transfer a portion of the credit risk from large reference pools of single-family mortgages to private investors. These reference pools are comprised of loans that the Enterprises had previously securitized to sell the interest rate risk of the loans to private investors. The STACR and CAS transactions take the next step of transferring a portion of the credit risk for these loans to investors as well. Each subsequent credit risk transfer transaction is intended to provide credit protection to the issuing Enterprise on the mortgages in the relevant reference pool. (14)

The Progress Report provides more detail for those who are interested. For the rest of us, we may just want to think through the policy implications. How much credit risk can Fannie and Freddie offload? Is it sufficient to make a real dent in the overall risk that the two companies pose to taxpayers? It would be helpful if the FHFA answered those questions in future reports.

CFPB Mortgage Supervision Highlights

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The Consumer Financial Protection Bureau issued its Supervisory Highlights for Winter 2015. The highlights include a section on Mortgage Origination and “largely focuses on Supervision’s examination findings and observations from July 2014 to December 2014.” (9)

The headings of this section give a sense of the CFPB’s work in this area:

  • Loan originators cannot receive compensation based on a term of a transaction
  • Improper use of lender credit absent changed circumstances
  • Failing to provide the Good Faith Estimate in a timely manner
  • Improperly using advertisements with triggering terms without the required additional disclosures
  • Adverse action notice deficiencies and failure to provide the notice in a timely manner
  • Deficiencies in compliance management systems

For good or for ill, these are pretty modest examination findings. They certainly don’t reveal the fire-breathing regulator that some had prophesied. I was particularly interested in the last finding:

an effective compliance management system includes board and management oversight, a compliance program, a consumer complaint management program, and a compliance audit program. The board of directors and senior management should, among other things, adopt clear policy statements concerning consumer compliance, establish a compliance function to set policies and procedures, and assign resources to the compliance function commensurate with the size and complexity of the supervised entity’s practices and operations. A compliance program should include policies and procedures, training, and monitoring and corrective action processes. A compliance audit program should assist the board of directors or board committees in determining whether policies and standards adopted by the board are being implemented, and should also identify any significant gaps in board policies and standards. (13)

Compliance management systems are intended to create a culture of compliance within an organization, from top to bottom. The CFPB found that one or more financial institutions had weak compliance management systems that would allow for numerous violations of federal regulations governing mortgage lending. It is important for the CFPB to focus on these compliance issues now, before the mortgage market really froths up and carries mortgage professionals away from appropriate underwriting and servicing.

Watt’s up with Fannie and Freddie

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There has been a lot of press coverage of FHFA Director Watt’s first public speech since taking on his job. Watt emphasized that

we must ensure that Fannie Mae and Freddie Mac operate in a safe and sound manner.  It means that we’ll work to preserve and conserve Fannie Mae and Freddie Mac’s assets.  And it means that we’ll work to ensure a liquid and efficient national housing finance market.  Our job at FHFA is to balance these obligations . . ..

He also set forth three goals for his FHFA:

Strategic Goal 1: MAINTAIN, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets. 

Strategic Goal 2: REDUCE taxpayer risk through increasing the role of private capital in the mortgage market.

Strategic Goal 3: BUILD a new single-family securitization infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the future.

These goals are all totally reasonable for the FHFA to pursue. But it is also clear that Director Watt is taking the FHFA in a direction that is quite different than the one pursued by his predecessor, Acting Director DeMarco.  DeMarco had taken the position that the best way to protect taxpayers was to be pretty tough on everyone else. “Everyone else” included defaulting and underwater homeowners as well as originating lenders who had sold Fannie and Freddie tons of mortgages that did not comply with the reps and warranties that the parties had agreed to about the quality of those mortgages. DeMarco’s strategy was much criticized but also quite coherent.

Watt has made it clear that he is going to be more flexible with homeowners. He highlighted a pilot program in Detroit that will include “deeper loan modifications.”  He has also made it clear that he is going to be more flexible with lenders, relaxing rep and warranty standards for mortgages that Fannie and Freddie purchase from lenders. These may be very good policies to pursue, but it would be helpful if he set forth a clearer vision of how safety and soundness is best balanced with liquidity and efficiency. Federal housing finance policy typically goes off the rails when its goals get all mixed up. Director Watt should ensure that FHFA’s safety and soundness goals are clearly set forth and that other goals for Fannie and Freddie are designed to work in harmony with them.