Author Archives: David Reiss

The Silent Housing Crisis

Posted on by
J. Ronald Terwilliger

J. Ronald Terwilliger

The J. Ronald Terwilliger Foundation for Housing America’s Families, a new entity, has issued its first white paper on the Silent Housing Crisis: A Snapshot of Current and Future Conditions. The paper covers some of the same ground as another recent Urban Institute report that I had recently blogged about (and, indeed, it is informed by the work of those UI researchers, as can be seen in the endnotes), but it raises some interesting issues of its own.

The white paper opens with a quotation from President Truman’s Statement upon signing the Housing Act of 1949, which

establishes as a national objective the achievement as soon as feasible of a decent home and a suitable living environment for every American family, and sets forth the policies to be followed in advancing toward that goal. These policies are thoroughly consistent with American ideals and traditions. They recognize and preserve local responsibility, and the primary role of private enterprise, in meeting the Nation’s housing needs. But they also recognize clearly the necessity for appropriate Federal aid to supplement the resources of communities and private enterprise. (3)

The white paper argues that the United States

is unprepared for the tremendous challenges that a rapidly expanding renter population will pose to the already strained housing system. Absent a comprehensive and sustained policy response, it is likely that rental cost burdens will only grow in intensity and scope, undermining the stability and dampening the hopes of millions of American families. These conditions, in turn, will exacerbate income inequality, diminish the prospects of social mobility for countless individuals, make us less competitive in the global marketplace, and ultimately hinder America’s economic growth. (6)

While the white paper has a lot to offer in diagnosing problems in the American housing sector, I was surprised to find that it failed to discuss the role of restrictive zoning in increasing the cost of housing, particularly in the vibrant communities that are the main engines of job creation. Any serious effort to address the lack of decent and affordable housing has to tackle the problem of restrictive zoning.

The Terwilliger Foundation was founded in 2014 and “seeks to recalibrate federal housing policy so that it more effectively addresses our nation’s critical affordable housing challenges and meets the housing needs of future generations. The Foundation will offer a set of practical suggestions for tax, spending, and mortgage finance reform that is responsive to the ongoing crisis in housing and the profound demographic changes now transforming America. ” (2) It is good to have another voice in the mix on these important issues. The foundation’s namesake is the Chairman of Terwilliger Pappas Multifamily Properties and is the Chairman Emeritus of Trammell Crow Residential Company, the largest multifamily developer in the U.S. for many years.

CFPB Mortgage Highlights

Posted on by

Richard Cordray 2010

The Consumer Financial Protection Bureau issued its most recent Supervisory Highlights. The CFPB is “committed to transparency in its supervisory program by sharing key findings in order to help industry limit risks to consumers and comply with Federal consumer financial law.” (3)

There were a lot of interesting highlights relating to mortgage origination and servicing, including,

  • one or more instances of failure to ensure that the HUD-1 settlement statement accurately reflects the actual settlement charges paid by the borrower.
  • at least one servicer sent borrowers loss mitigation acknowledgment notices requesting documents, sometimes dozens in number, inapplicable to their circumstances and which it did not need to evaluate the borrower for loss mitigation.
  • one or more servicers failed to send any loss mitigation acknowledgment notices. At least one servicer did not send notices after a loss mitigation processing platform malfunctioned repeatedly over a significant period of time. . . . the breakdown caused delays in converting trial modifications to permanent modifications, resulting in harm to borrowers, and may have caused other harm.
  • At least one other servicer did not send loss mitigation acknowledgment notices to borrowers who had requested payment relief on their mortgage payments. One or more servicers treated certain requests as requests for short-term payment relief instead of requests for loss mitigation under Regulation X.
  • At least one servicer sent notices of intent to foreclose to borrowers already approved for a trial modification and before the trial modification’s first payment was due without verifying whether borrowers had a pending loss mitigation plan before sending its notice. As the notice could deter borrowers from carrying out trial modifications, it likely causes substantial injury . . .
  • at least one servicer sent notices warning borrowers who were current on their loans that foreclosure would be imminent. (14-18, emphasis added)

All of these highlights are interesting because they reflect the types of problems the CFPB is finding and it thus helps the industry comply with federal law. But from a public policy perspective, the CFPB’s approach is lacking. By repeating that each failure was found at “one or more” company, a reader of these Highlights cannot determine how widespread these problems are throughout the industry. And because the Highlights do not say how many borrowers were affected by each company’s failure, it is hard to say whether these problems are isolated and technical or endemic and intentional.

Future Supervisory Highlights should include more information about the number of institutions and the number of consumers who were affected by these violations.

Homeowners Heading to Pottersville?

Posted on by
Lionel_Barrymore_as_Mr._Potter

Mr. Potter from It’s A Wonderful Life

The Urban Institute has issued a report, Headship and Homeownership: What Does The Future Hold? The report opens,

Homeownership rates averaged around 64 percent until about 1990, when they began to climb dramatically, reaching 67.3 percent in 2006. The housing crisis that began in 2007 and the ensuing recession, from which the US economy is recovering slowly, resulted in a fall in the homeownership rate to 63.6 percent, according to the latest ACS numbers. Such a trajectory has generated important questions about the future of homeownership at all ages. The issues with young adults seem particularly acute. Will young adults want to own houses? Even if they do, will they be able to afford homeownership? The answers to these questions are still unclear, especially because millennials are not just slower to start their own households and purchase homes: they also are more likely to live in their parents’ homes than any generation in recent history. The rapidly changing racial and ethnic composition of the population also has profound implications for household formation and homeownership.

In this report, we dive deeply into the pace of household formation and homeownership attainment—nationally and by age groups and race/ethnicity over the past quarter-century—and project future trends. Considering the great uncertainty about household formation and homeownership, single-point forecasts of homeownership rates and housing demand could seriously mislead policymakers and obscure the potential implications of their decisions. Instead, we offer plausible competing scenarios for household formation and homeownership that generate a range of future national housing demand projections. (1)

I am not in a position to evaluate how well the report projects future trends, but some of its conclusions are worth considering together:

  • the homeownership rate will decline from 65.1 percent in 2010 to 61.3 percent in 2030; (46)
  • the rapid growth of the renter population will create significant demand for new rental housing construction and encourage shifting of owner-occupied dwellings to rentals; (47)
  • very tight credit availability standards will retard homeownership attainment and may exacerbate the growing shortage in rental housing; (48) and
  • the erosion of black homeownership needs to be addressed by more than mortgage policy. (48)

Taken together, these conclusions all point to a backsliding in the housing market: the American Dream disappearing for millions of Americans, particularly African Americans, who will end up living in overcrowded Pottersvilles straight out of It’s A Wonderful Life. Just like George Bailey, we have choices to make before that nightmare becomes a reality. But before we decide anything too hastily, we should consider the fundamental goals of housing policy.

I have argued that a “fundamental goal of housing policy is to assist Americans to live in a safe, well-maintained and affordable housing unit.” I am less convinced than most housing scholars that homeownership, given the state of today’s economy, is such a sure road to stable housing and financial well-being. So, instead of blindly focusing on increasing the homeownership rate, I would focus on increasing opportunities for sustainable homeownership. I believe the report’s authors would agree with this, but I think that housing scholars in general need to focus on policies that keep households in their housing, given how much income instability they now face.

SCOTUS Upholds Disparate Impact

Posted on by

Texas Department of Housing and Community Affairs

The United States Supreme Court held today that disparate-impact claims are cognizable under the Fair Housing Act in Texas Department of Housing and Community Affairs et al. v. The Inclusive Communities Project Inc., (No 13-1371). The conventional wisdom had been that the Court was going to hold that the Fair Housing Act “does not create disparate-impact liability”  (in the words of Justice Alito’s dissent at page 2).

I found it striking the extent to which Justice Kennedy’s opinion, which was joined by Justices Ginsburg, Breyer, Sotomayor and Kagan, relied on the history of residential segregation in the United States. For those of us steeped in the history of housing in America, this history is pretty much standard, but it takes on a lot of meaning when it is restated in a Supreme Court opinion. The opinion reads,

De jure residential segregation by race was declared unconstitutional almost a century ago, but its vestiges remain today, intertwined with the country’s economic and social life. Some segregated housing patterns can be traced to conditions that arose in the mid-20th century. Rapid urbanization, concomitant with the rise of suburban developments accessible by car, led many white families to leave the inner cities. This often left minority families concentrated in the center of the Nation’s cities. During this time, various practices were followed, sometimes with governmental support, to encourage and maintain the separation of the races: Racially restrictive covenants prevented the conveyance of property to minorities; steering by real-estate agents led potential buyers to consider homes in racially homogenous areas; and discriminatory lending practices, often referred to as redlining, precluded minority families from purchasing homes in affluent areas. By the 1960’s, these policies, practices, and prejudices had created many predominantly black inner cities surrounded by mostly white suburbs.

The mid-1960’s was a period of considerable social unrest; and, in response, President Lyndon Johnson established the National Advisory Commission on Civil Disorders, commonly known as the Kerner Commission. After extensive factfinding the Commission identified residential segregation and unequal housing and economic conditions in the inner cities as significant, underlying causes of the social unrest. The Commission found that “[n]early two-thirds of all nonwhite families living in the central cities today live in neighborhoods marked by substandard housing and general urban blight.” The Commission further found that both open and covert racial discrimination prevented black families from obtaining better housing and moving to integrated communities. The Commission concluded that “[o]ur Nation is moving toward two societies, one black, one white— separate and unequal.” To reverse “[t]his deepening racial division,” it recommended enactment of “a comprehensive and enforceable open-occupancy law making it an offense to discriminate in the sale or rental of any housing . . . on the basis of race, creed, color, or national origin.”

In April 1968, Dr. Martin Luther King, Jr., was assassinated in Memphis, Tennessee, and the Nation faced a new urgency to resolve the social unrest in the inner cities. Congress responded by adopting the Kerner Commission’s recommendation and passing the Fair Housing Act. (5-6, citations omitted)

This straightforward acknowledgment of the history of racial discrimination in America may be the most powerful part of this opinion.

High Risk at Fannie and Freddie

Posted on by

FHFA Director Watt

The Federal Housing Finance Agency released its 2014 Report to Congress. It summarizes many interim reports and press releases that were released over the previous year, many of which have been covered by REFinBlog as they came out. I was struck, however, by the passages about the operational risk that Fannie and Freddie face.  I have been concerned with operational risk at Fannie and Freddie for some time, as the two enterprises have languished in conservatorship limbo for far too long.

The Report of the Annual Examination of Fannie Mae states that

The level of operational risk remains high and largely reflects the risk posed by execution of Fannie Mae’s strategic plan to replace its existing information technology infrastructure. Management has made significant progress in stabilizing the current information technology environment, with improvements in the change management process and reductions in production outages. Further, progress was made in establishing an out-of-region data center that is a critical component for supporting information systems and providing for business continuity in the event of a disaster. As Fannie Mae implements this plan, however, the level of operational risk will remain elevated. Risks associated with the execution, deployment, and integration with the CSP [Common Securitization Platform] and the move to a Single Security, while addressing ongoing IT infrastructure issues, will also introduce a significant level of inherent operational risk to the organization. Effective project management will be critical to mitigate the operational risk arising from these efforts.(14, emphasis added)

The Report of the Annual Examination of Freddie Mac indicates that Freddie faces somewhat different operational risks:

Operational risk, including risks associated with information technology systems, remains a concern primarily because of resource requirements and operational complexities of major strategic initiatives (including integration with the CSP), developing information security and privacy protection capabilities, and heightened risk during the transition to the new risk management structure.

Information security is one of the primary operational risks Freddie Mac faces given the proliferation of cyber crimes and the high probability of new cyber attacks targeted at large organizations. Freddie Mac’s operational framework is highly complex. Information security within the Enterprise is more important than ever given the pervasiveness of cyber-related threats. In addition to external threats, Freddie Mac faces other challenges that may continue to elevate operational risk and increase the likelihood of significant operational incidents and losses. (17, emphasis added)

While neither of these passages is terrifying — as in, here-is-the-next-trigger-for-a-bailout terrifying — they do make me pause and ask whether the GSEs in their current form are up to the challenge of handling this period of “heightened risk.”

Those in Congress who are impeding GSE reform are on notice that Fannie and Freddie face high levels of operational risk. If the next crisis results from that risk, it is on them.

What’s Behind Rising Mortgage Bond Issuance?

Posted on by

GlobeSt.com quoted me in What Else Is Behind Rising Mortgage Bond Issuance, Demand?. It opens,

Investor demand for mortgage bonds, both that have agency backing and not, is quite high these days.

Last week Bloomberg reported that issuance of home-loan securities that don’t have government backing reached more than $32 billion this year, compared to $18 billion a year ago, citing data compiled by Bloomberg and Bank of America Corp. These securities include rental-home bonds, a relatively new asset class that developed after the recession.

Agency and GSE securities are also in high demand, as a recent report from the Mortgage Bankers Association indicates. The level of commercial/multifamily mortgage debt outstanding increased by $40.4 billion in the first quarter of 2015 — a 1.5% increase over the fourth quarter of 2014. Said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research with the report’s release: “Multifamily mortgages continued to grow even more quickly than the market as a whole, with banks increasing their portfolios by $8 billion and agency and GSE portfolios and MBS increasing their holdings by $10 billion.”

There are a number of economic-based drivers behind the demand for mortgage bonds of course: the fundamentals in the real estate space and the low interest rates that have driven investors to consider all manner of securities to eek out yield.

However, there is another possibility to consider as well and that is that the changing financial regulations are driving both issuance and investment.

On one hand, mortgages and private-label mortgage backed securities are much more regulated per Dodd-Frank and its Qualified Mortgage and Qualified Residential Mortgage rules, according to David Reiss, professor of Law and research director of the Center for Urban Business Entrepreneurship (CUBE) at Brooklyn Law School. On the other, post-crisis rules put in place for mortgage bonds have made these securities far more attractive for banks to hold as various news reports suggest.

For example, new rules have made ratings on mortgage bonds less crucial, allowing US lenders to use an alternative approach to calculating capital requirements, according to another recent article in Bloomberg. In essence, these rules allow lenders to reduce the amount needed for junk-rated mortgage bonds that are trading at discounts.

In addition, banks are finding that “treasury debt and MBS pass-throughs meet regulators’ standards much more easily than other assets”, according to a report by Deutsche Bank analysts Steven Abrahams and Christopher Helwig, per a third recent article in Bloomberg.

Two Opinions

With these facts in mind we turned to two experts to see how much of an impact new regulations are having. As it turned out, they are driving some of the change – but what is actually moving the needle in terms of demand is yet another trend. Read on.

For starters, there are some caveats. It can be misleading to throw the new rental home bonds in the mix in such a comparison, Reiss tells GlobeSt.com. “They are a post-crisis product when Wall Street firms saw that single-family housing prices were so low that they could make money from buying them up in bulk and then renting them out,” he says.

“They are not regulated in the same way as private-label MBS.”

Meanwhile issuers are still navigating Dodd-Frank’s Qualified Mortgage and Qualified Residential Mortgage rules, he says. They “are still trying to figure out how to operate within these rules — and outside of them, with the origination of non-QM mortgages. The market is still in transition with these products.”

As he sees it, the surge in issuance is a reflection of market players trying to understand how to operate in a new regulatory environment. They “are increasing their issuances as they get a better sense of how to do so.”

New FHA Guidelines No Biggie

Posted on by
Welcome_to_Levittown_sign

(Original Purchases in Levittown Funded in Large Part by FHA Mortgages)

Law360 quoted me in New Guidelines For Bad FHA Loans Won’t Boost Lending (behind paywall). It opens,

The federal government on Thursday provided lenders with a streamlined framework for how it determines whether the Federal Housing Administration must be paid for a loan gone bad, but experts say the new framework will have limited effect because it failed to alleviate the threat of a Justice Department lawsuit.

The U.S. Department of Housing and Urban Development provided lenders with what it called a “defect taxonomy” that it will use to determine when a lender will have to indemnify the FHA, which essentially provides insurance for mortgages taken out by first-time and low-income borrowers, for bad loans. The new framework whittled down the number of categories the FHA would review when making its decisions on loans and highlighted how it would measure the severity of those defects.

All of this was done in a bid to increase transparency and boost a sagging home loan sector. However, HUD was careful to state that its new default taxonomy does not have any bearing on potential civil or administrative liability a lender may face for making bad loans.

And because of that, lenders will still be skittish about issuing new mortgages, said Jeffrey Naimon, a partner with BuckleySandler LLP.

“What this expressly doesn’t address is what is likely the single most important thing in housing policy right now, which is how the Department of Justice is going to handle these issues,” he said.

The U.S. housing market has been slow to recover since the 2008 financial crisis due to a combination of economics, regulatory changes and, according to the industry, the threat of litigation over questionable loans from the Justice Department, the FHA and the Federal Housing Finance Agency.

In recent years, the Justice Department has reached settlements reaching into the hundreds of millions of dollars with banks and other lenders over bad loans backed by the government using the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act.

The most recent settlement came in February when MetLife Inc. agreed to a $123.5 million deal.

In April, Quicken Loans Inc. filed a preemptive suit alleging that the Justice Department and HUD were pressuring the lender to admit to faulty lending practices that they did not commit. The Justice Department sued Quicken soon after.

Policymakers at the Federal Housing Finance Agency, which serves as the conservator for Fannie Mae and Freddie Mac, and HUD have attempted to ease lenders’ fears that they will force lenders to buy back bad loans or otherwise indemnify the programs.

HUD on Thursday said that its new single-family loan quality assessment methodology — the so-called defect taxonomy — would do just that by slimming down the categories it uses to categorize mortgage defects from 99 to nine and establishing a system for categorizing the severity of those defects.

Among the nine categories that will be included in HUD’s review of loans are measures of borrowers’ income, assets and credit histories as well as loan-to-value ratios and maximum mortgage amounts.

Providing greater insight into FHA’s thinking is intended to make lending easier, Edward Golding, HUD’s principal deputy assistant secretary for housing, said in a statement.

“By enhancing our approach, lenders will have more confidence in how they interact with FHA and, we anticipate, will be more willing to lend to future homeowners who are ready to own,” he said.

However, what the new guidelines do not do is address the potential risk for lenders from the Justice Department.

“This taxonomy is not a comprehensive statement on all compliance monitoring or enforcement efforts by FHA or the federal government and does not establish standards for administrative or civil enforcement action, which are set forth in separate law. Nor does it address FHA’s response to patterns and practice of loan-level defects, or FHA’s plans to address fraud or misrepresentation in connection with any FHA-insured loan,” the FHA’s statement said.

And that could blunt the overall benefits of the new guidelines, said David Reiss, a professor at Brooklyn Law School.

“To the extent it helps people make better decisions, it will help them reduce their exposure. But it is not any kind of bulletproof vest,” he said.