Author Archives: David Reiss

Realistic Strategies for Consumer Education

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The Consumer Financial Protection Bureau has issued its latest Strategic Plan, Budget, and Performance Plan and Report. I was critical of last year’s strategic plan as it related to financial education. I felt that the CFPB was too optimistic about the efficacy of financial education, given the current state of research on this topic.

I was impressed, however, by the CFPB’s approach in this year’s strategic plan:

The CFPB believes that financial education’s primary goal is to help consumers to take the steps necessary to make choices that will improve their financial well-being and help them reach their own life goals. However, prior to the start of the CFPB’s work, very little empirical research had been conducted in the financial education field regarding what variables measure financial health in terms of real-world outcomes for consumers. By defining these variables through data-driven research, the Bureau will be able to define what knowledge and skills are associated with financial health. This research will inform the Bureau’s ongoing efforts to identify, highlight, and spread effective approaches to financial education. (64)

I am pleased that the CFPB appears to be more skeptical about the efficacy of consumer education in this strategic plan and that is reflected in its performance measure:

FY 2013: Identify variables that are likely to be key drivers of financial health

FY 2014: Develop and test metrics (questions) that accurately measure these variables

FY2015: Develop and implement framework for integration into Consumer Education and Engagement Activities; Complete testing financial health metrics

FY2016: Use metrics to establish a baseline of U.S. consumer financial well-being and begin testing hypotheses of identified success factors in consumer financial decision-making (64-65)

This performance measure does not make assumptions about the efficacy of financial education. By treating the topic like a blank slate, it is more likely that the Bureau will be able to avoid dead ends and blind alleys as it attempts to help people to navigate the world of consumer finance.

This is not to say that the Bureau will necessarily be successful.  But it does appear that the Bureau is not falling for some of the wishful thinking that some of those in the financial education field have succumbed to.

Nation of Renters

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NYU’s Furman Center and Capital One have produced an interesting graphic, Renting in America’s Largest Cities. The graphic highlights the growing trend of renting in urban communities, but also the increasing expense of doing so. The press release about this study provides some highlights:

  • In 2006, the majority of the population in just five of the largest 11 U.S. cities lived in rental housing; in 2013, that number increased to nine.
  • As demand for rental housing grew faster than available supply, rental vacancy rates declined in all but two of the 11 cities, making it harder to find units for rent.
  • Rents outpaced inflation in almost all of the 11 cities. Rents Increased most in DC, with a 21 percent increase in inflation-adjusted median gross rent, and least in Houston, where rents were stable.
  • In all 11 cities, an overwhelming majority of low-income renters were severely rent-burdened, facing rents and utility costs equal to at least half of their income.
  • Even In the most affordable cities in the study, low-income renters could afford no more than 11 percent of recently available units.
  • In five major cities, including New York, Los Angeles, San Francisco, Boston and Miami, moderate-Income renters could afford less than a third of recently available units in 2013.

Rental housing clearly has an important role to play in providing stable homes for American households, particularly in big cities. While rental housing has been the stepchild of federal housing policy for far too long, it is good that it is finally get some attention and resources.

I look forward to the Furman Center’s follow-up report, which will provide more detail than the graphic does. I am particularly curious about whether the researchers have addressed the difference between housing affordability and location affordability in the longer study. I would guess that the relative affordability of the cities in this study is greatly impacted by households’ transportation costs.

Risky Reverse Mortgages

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The Consumer Financial Protection Bureau released a report, Snapshot of Reverse Mortgage Complaints:  December 2011-December 2014. By way of background,

Reverse mortgages differ from other types of home loans in a few important ways. First, unlike traditional “forward” mortgages, reverse mortgages do not require borrower(s) to make monthly mortgage payments (though they must continue paying property taxes and homeowners’ insurance). Prospective reverse mortgage borrowers are required to undergo mandatory housing counseling before they sign for the loan. The loan proceeds are generally provided to the borrowers as lump-sum payouts, annuity-like monthly payments, or as lines of credit. The interest and fees on the mortgage are added to the loan balance each month. The total loan balance becomes due upon the death of the borrower(s), the sale of the home, or if the borrower(s) permanently move from the home. In addition, a payment deferral period may be available to some non-borrowing spouses following the borrowing spouse’s death. (3, footnotes omitted)

The CFPB concludes that

borrowers and their non-borrowing spouses who obtained reverse mortgages prior to August 4, 2014 may likely encounter difficulties in upcoming years similar to those described in this Snapshot, i.e., non-borrowing spouses seeking to retain ownership of their homes after the borrowing spouse dies. As a result, many of these consumers may need notification of and assistance in averting impending possible displacement should the non-borrowing spouse outlive his or her borrowing spouse.

For millions of older Americans, especially those without sufficient retirement reserves, tapping into accrued home equity could help them achieve economic security in later life. As the likelihood increases that older Americans will use their home equity to supplement their retirement income, it is essential that the terms, conditions and servicing of reverse mortgages be fair and transparent so that consumers can make informed decisions regarding their options. (16)
Reverse mortgages have a number of characteristics that would make them ripe for abuse: borrowers are elderly; borrowers have a hard time refinancing them; borrowers can negatively affect their spouses by entering into to them. Seems like a no brainer for the CFPB to pay close attention to this useful but risky product.

Reiss on $191B for Fannie & Freddie

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GlobeSt.com quoted me in About that $191B Profit from the GSEs. It opens,

Last week when the White House released its budget for fiscal year

2016, it included one eyebrow-raising line item: it assumed that Fannie Mae and Freddie Mac could return $191.2 billion in profits to the US Treasury over the next decade if they continue operating under federal conservatorship.

The item gave the commercial real estate industry pause for a few reasons. This number 1) assumes the GSEs will remain under federal conservatorship 2) it assumes that the lawsuits filed by GSE shareholders disgruntled by the government’s decision to sweep all profits from the GSEs back to the US Treasury will go nowhere 3) it assumes the GSEs will continue to bring in record profits.

Of all of these, the latter supposition is the least controversial.

The two GSEs have paid back more than what their received in federal aid; Fannie Mae has sent back the government $134.5 billion in payments compared to $116.1 billion it received, while Freddie Mac has sent $91 billion compared to $72.3 billion it received in rescue funds.

This cash flow is one reason why some in the industry quietly speculate that the government has little intention of cutting the GSEs loose to be privatized—despite the stated intention of the Obama Administration to do so.

Also, consider that the government can basically set the GSEs’ profit levels, David Reiss, professor of Law and research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School, tells GlobeSt.com.

“Their regulator, the Federal Housing Finance Agency, sets the amount of their guarantee fee. If the FHFA raises it, it tends to raise profits for the two companies,” he notes.

The FHFA also sets, within limits, the types of mortgages the GSEs can buy, thereby increasing the size of the total market and the market share of the two entities, Reiss continues. “For instance, the FHFA recently lowered the down payment requirements for Fannie/Freddie loans. This action will increase the total number of loans made and will also increase Fannie and Freddie’s market share because they can now operate in a part of the market that had been off limits.”

Here Comes The Housing Trust Fund

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HUD has published an interim rule in the Federal Register to governing the Housing Trust Fund (HTF). The HTF could generate about a half a billion dollars a year for affordable housing initiatives, so this is a big deal. The purpose “of the HTF is to provide grants to State governments to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families, and to increase homeownership for extremely low- and very low-income families.” (80 F.R. 5200) HUD intends to “open this interim rule for public comment to solicit comments once funding is available and the grantees gain experience administering the HTF program.” (80 F.R. 5200)

The HTF’s main focus is rental housing, which often gets short shrift in federal housing policy

States and State-designated entities are eligible grantees for HTF. Annual formula grants will be made, of which at least 80 percent must be used for rental housing; up to 10 percent for homeownership; and up to 10 percent for the grantee’s reasonable administrative and planning costs. HTF funds may be used for the production or preservation of affordable housing through the acquisition, new construction, reconstruction, and/or rehabilitation of nonluxury housing with suitable amenities. (80 F.R. 5200)

Many aspects of federal housing policy are effectively redistributions of income to upper income households. The largest of these redistributions is the mortgage interest deduction.  Households earning over $100,000 per year receive more than three quarters of the benefits of that deduction while those earning less than $50,000 receive close to none of them.

So, the HTF is a double win for a rational federal housing policy because it focuses on (i) rental housing for (ii) extremely low- and very low-income households.

While not wanting to be a downer about such a victory for affordable housing, I will note that Glaeser and Gyourko have demonstrated how local land use policies can run counter to federal affordable housing policy. Might be worth it for federal housing policy makers to pay more attention to that dynamic . . ..

Mortgage Shopping

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The Consumer Financial Protection Bureau has issued a report on Consumers’ Mortgage Shopping Experience:  A First Look at Results from the National Survey of Mortgage Borrowers. The CFPB’s key findings include

a. Almost half of consumers who take out a mortgage for home purchase fail to shop prior to application; that is, they seriously consider only a single lender or mortgage broker before choosing where to apply. The tendency to shop is somewhat higher among first-time homebuyers.

b. The primary source of information relied on by mortgage borrowers is their lender or broker, followed by a real estate agent. Fewer consumers obtain information from outside sources, such as websites, financial and housing counselors, or personal acquaintances (such as friends, relatives, or coworkers).

c. Most consumers report being “very familiar” with the types of mortgages, available interest rates, and the process of taking out a mortgage. Those who are unfamiliar with the mortgage process are less likely to shop and more likely to rely on real estate agents or personal acquaintances.

d. A sizeable share of borrowers report that factors not directly related to mortgage cost, including the lender or broker’s reputation and geographic proximity, are very important in their decision making. Borrowers who express such preferences are much less likely to shop. (10)

I had discussed the CFPB’s new mortgage shopping tool previously. It has been getting bad press from the lending industry which has been calling for its demise. Seems to me the industry is overreacting. Given the lack of comparison shopping that borrowers engage in, a tool that provides them with interest rate comparisons (even if it does not yet have an Annual Percentage Rate comparisons) seems to be a good thing. The tool is in beta, so it is likely to give more and more information over time. My bottom line:  more info is better than less.

The GSE Litigation Footnote Everyone Is Talking About

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Judge Pratt (S.D.Iowa) ruled against the plaintiffs in the GSE shareholderr litigation, Continental Western Insurance Company v. The FHFA et al. (4:14-cv-00042, Feb. 3, 2015). The Judge’s order is mostly an analysis of why this case should be dismissed because of the doctrine of issue preclusion, which bars “‘successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment . . .'” (6, quoting Supreme Court precedent). The relevant prior judgment was Judge Lamberth’s (D.D.C.) opinion in a similar case that was decided last October.

While Judge Pratt did not reach the merits because he dismissed the case, he stated in a footnote

The Court notes that even if it were to reach the merits of Continental Western’s claims, including the allegedly new claims, it would agree with the well-reasoned opinion of the very able Judge Lamberth in Perry Capital that the case must be dismissed. Specifically the Court agrees that: (1) FHFA and Treasury did not act outside the power granted to them by HERA (see Perry Capital, 2014 WL 4829559 at *8–12); (2) HERA bars Continental Western’s claims under the APA (see id. at *7); (3) Continental Western’s claims for monetary damages based on a breach of contract and breach of the implied covenant of good faith and fair dealing against FHFA must be dismissed because they are not ripe and because Continental Western’s shares of the GSEs do not contractually guarantee them a right to dividends (see id. at *15–19); and (4) Continental Western’s claim for breach of fiduciary duty by FHFA is barred by HERA because it is a derivative claim and HERA grants all shareholder rights, including the right to bring a derivative suit, to FHFA (see id. at *13–15). The Court shares in Judge Lamberth’s observation that “[i]t is understandable for the Third Amendment, which sweeps nearly all GSE profits to Treasury, to raise eyebrows, or even engender a feeling of discomfort.” Perry Capital, 2014 WL 4829559 at *24. But it is not the role of this Court to wade into the merits or motives of FHFA and Treasury’s actions—rather the Court is limited to reviewing those actions on their face and determining if they were permissible under the authority granted by HERA. (19, n.6)

As I have noted before, this is not a surprising result. What remains surprising is how so many analysts refuse to see how these cases might be decided this way.

This is not to say that the plaintiffs’ cases are dead in the water. Appeals courts may reach a different result from those of the trial courts. But so many of those writing on this topic refuse to see any result other than a win for plaintiffs. Time for a reality check.