Author Archives: David Reiss

Reiss in CSM on Rental Policy

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The Christian Science Monitor quoted me in Census Outlines ‘Poverty Areas’: Which States Hit Hardest? It reads in part,

The number of US residents living in “poverty areas” has jumped significantly since 2000, according to a Census Bureau report released Monday.

According the 2000 Census, less than 1 in 5 people lived in poverty areas. But more recently, 1 in 4 residents have lived in these areas, according to census data collected from 2008 to 2012.

The Census Bureau defines a poverty area as any census tract with a poverty rate of 20 percent of more.

Sociologists and other analysts point to the Great Recession, in particular housing and job challenges, as well as slow and uneven growth since the recession.

“With the advent of the financial crisis and the bursting of the housing bubble, many people lost their homes and thus needed to rent or move in with relatives,” says Cheryl Carleton, an economics professor at Villanova University near Philadelphia. “[I]ndividuals need to move where they can afford to live … which is going to be in areas where public housing is available or housing prices and rental rates are low, which is more likely to be in a ‘poverty area.’ ” Professor Carleton made her comments via e-mail.

*     *     *

Law professor David Reiss suggests that changes to homeownership policies could help.
“Federal and state housing programs could do more to support a market for well-maintained rental units for low-income households,” e-mails Professor Reiss, who teaches at Brooklyn Law School. “Many low-income households have difficulty maintaining homeownership because of irregular incomes and low wealth.”

Mortgage Market Trending in the Right Direction, but . . .

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The Office of the Comptroller of the Currency (OCC) released its OCC Mortgage Metrics Report, First Quarter 2014. the report is a “Disclosure of National Bank and Federal Savings Association Mortgage Loan Data,” and it “presents data on first-lien residential mortgages serviced by seven national banks and a federal savings association with the largest mortgage-servicing portfolios. The data represent 48 percent of all first-lien residential mortgages outstanding in the country and focus on credit performance, loss mitigation efforts, and foreclosures.” (8, footnote omitted) As a result, this data set is not representative of all mortgages, but it does cover nearly half the market.

The report found that

93.1 percent of mortgages serviced by the reporting servicers were current and performing, compared with 91.8 percent at the end of the previous quarter and 90.2 percent a year earlier. The percentage of mortgages that were 30 to 59 days past due decreased 20.9 percent from the previous quarter to 2.1 percent of the portfolio, a 19.8 percent decrease from a year earlier and the lowest since the OCC began reporting mortgage performance data in the first quarter of 2008. The percentage of mortgages included in this report that were seriously delinquent—60 or more days past due or held by bankrupt borrowers whose payments were 30 or more days past due — decreased to 3.1 percent of the portfolio compared with 3.5 percent at the end of the previous quarter and 4.0 percent a year earlier. The percentage of mortgages that were seriously delinquent has decreased 22.4 percent from a year earlier and is at its lowest level since the end of June 2008.

At the end of the first quarter of 2014, the number of mortgages in the process of foreclosure fell to 432,832, a decrease of 52.3 percent from a year earlier. The percentage of mortgages that were in the process of foreclosure at the end of the first quarter of 2014 was 1.8 percent, the lowest level since September 2008. During the quarter, servicers initiated 90,852 new foreclosures — a decrease of 49.1 percent from a year earlier. Factors contributing to the decline include improved economic conditions, aggressive foreclosure prevention assistance, and the transfer of loans to servicers outside the reporting banks and thrift. The number of completed foreclosures decreased to 56,185, a decrease of 7.5 percent from the previous quarter and 33.9 percent from a year earlier. (4)

These trends are all very good of course, but it is worth remembering how far we have to go to get back to historical averages, particularly for prime mortgages.  Pre-Financial Crisis prime mortgages typically have done much better than these numbers, with delinquency rates in the very low single digits.

Urban Reviewer: NYC’s Neighborhood Plans

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NYC land use geeks will want to check out the Urban Reviewer. From its website,

The City of New York has adopted over 150 master plans for our neighborhoods. You can see which areas have been affected and what those grand plans were here.

Neighborhood master plans – often called “urban renewal plans” – were adopted to get federal funding for acquiring land, relocating the people living there, demolishing the structures and making way for new public and private development. Plan adoptions started in 1949 and many plans remain active today. Development in the plan areas sometimes happened, like Lincoln Center, and sometimes didn’t, like many still-vacant lots in East New York and Bushwick. Areas were selected for renewal because they were considered blighted or obsolete. The “blight” designation always came from outside the communities that got that label – from inspectors working for the mayor’s Committee on Slum Clearance in the early period and Housing Preservation and Development (HPD) employees in the later period.

This is one of those resources that seem pretty obviously useful once someone has gone to the trouble (and great trouble I am sure it was) to construct it. One can imagine urban historians and planners making good use of it as well as community activists. It also provides a great model for other communities to follow.

Kudos to 596 Acres, Partner & Partners and SmartSign for building this resource.

State of the Nation’s Housing Finance

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The Joint Center for Housing Studies of Harvard University has released the 2014 edition of The State of the Nation’s Housing. As to the nation’s housing finance system, the report finds that

The government still had an outsized footprint in the mortgage market in 2013, purchasing or guaranteeing 80.3 percent of all mortgages originated. The FHA/VA share of first liens, at 19.7 percent, was well above the average 6.1 percent share in 2002–03, let alone the 3.2 percent share at the market peak in 2005–06. Origination shares of Fannie Mae and Freddie Mac were also higher than before the mortgage market crisis, but less so than that of FHA. According to the Urban Institute’s Housing Finance Policy Center, the GSEs purchased or guaranteed 61 percent of originations in 2012 and 2013, up from 49 percent in 2002 and 2003.

Portfolio lending, however, has begun to bounce back, rising 8 percentage points from post-crisis lows and accounting for 19 percent of originations last year. While improving, this share is far from the nearly 30 percent a decade earlier. In contrast, private-label securitizations have been stuck below 1 percent of originations since 2008. Continued healing in the housing market and further clarity in the regulatory environment should set the stage for further increases in private market activity. (11)

As usual, this report is chock full of good information about the single-family and multi-family sectors. I did find that some of its characterizations of the housing market were lacking. For instance, the report states

Many factors have played a role in the sluggish recovery of the home purchase loan market in recent years, including falling household incomes and uncertainty about the direction of the economy and home prices. But the limited availability of mortgage credit for borrowers with less than stellar credit has also contributed. According to information from CoreLogic, home purchase lending to borrowers with credit scores below 620 all but ended after 2009. Since then, access to credit among borrowers with scores in the 620–659 range has become increasingly constrained, with their share of loans falling by 6 percentage points. At the same time, the share of home purchase loans to borrowers with scores above 740 rose by 8 percentage points.

Meanwhile, the government sponsored enterprises (GSEs) have also concentrated both their purchase and refinancing activity on applicants with higher credit scores. At Fannie Mae, only 15 percent of loans acquired in 2013 were to borrowers with credit scores below 700—a dramatic drop from the 35 percent share averaged in 2001–04. Moreover, just 2 percent of originations were to borrowers with credit scores below 620. The percentage of Freddie Mac lending to this group has remained negligible.

Yet another drag on the mortgage market recovery is the high cost of credit. For borrowers who are able to access credit, loan costs have increased steadily. To start, interest rates climbed from 3.35 percent at the end of 2012 to 4.46 percent at the end of 2013. This increase was tempered somewhat by a slight retreat in early 2014. In addition, the GSEs and FHA raised the fees required to insure their loans after the mortgage market meltdown, and many of these charges remain in place or have risen. The average guarantee fee charged by Fannie Mae and Freddie Mac jumped from 22 basis points in 2009 to 38 basis points in 2012. In 2008, the GSEs also introduced loan level price adjustments (LLPAs) or additional upfront fees paid by lenders based on loan-to-value (LTV) ratios, credit scores, and other risk factors. LLPAs total up to 3.25 percent of the loan value for riskier borrowers and are paid for through higher interest rates on their loans. (20)

Implicit in this analysis is the view that lending should return in some way to its pre-bust levels. But, in fact, much of the boom lending was unsustainable for many borrowers. The analysis fails to identify the importance of promoting sustainable homeownership and instead relies on one dimensional metrics like credit denials for those with low credit scores. Until we are confident that borrowers with those scores can sustain homeownership in large numbers, we should not be so quick to bemoan credit constraints for people with a history of losing their homes to foreclosure.

The Center’s analysis also takes a simplistic view about guarantee fees.  The relevant metric is not the absolute size of the g-fee. Rather, the issue should be whether the g-fee level achieves its goals. At a minimum, those goals include appropriately measuring the risk of having to make good on the guarantee.

Finally, the Center demonstrates symptoms of historical amnesia when it characterizes an interest rate of 4.46% as “high.” This is an incredibly low rate of interest and one would expect that rates would rise as we exit from the bust years.

I have made the point before that the Center’s work seems to reflect the views of its funders. The funders of this report (not identified in the report by the way) include the National Association of Home Builders; National Association of Realtors; National Housing Conference; National Multifamily Housing Council; and a whole host of lenders, builders and companies in related fields that make up the Center’s Policy Advisory Board. These organizations benefit from a growing housing sector. This report seems to reflect an unthinking pro-growth perspective. It would have benefited from a parallel focus on sustainable homeownership.

S&P on Risky Reps and Warranties

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Standard & Poor’s posted New Players In The RMBS Market Could Present Unique Representations And Warranties Risks. It opens, S&P

believes that new entrants into the residential mortgage-backed securitization (RMBS) market that make loan-level representations and warranties (R&Ws) may present additional risks not present with more established market players. Many of these new entrants not only lack historical loan performance data, but have not yet established track records for remedying any R&W breaches. This can call into question their ability or willingness to repurchase under R&W provisions. In light of this, mitigating factors may exist that could alleviate the risk of a potential R&W breach. (1)

This all sounds pretty serious, but I am not so sure that it is.

S&P explains its concerns further:

We believe it is important for investors and other market participants to evaluate the quality and depth of various factors that mitigate the risk of R&W breaches occurring in U.S. RMBS transactions, including those that would be remedied by new entities with limited histories and the risk that comes with their willingness or ability to do so. Specifically, we believe the quality and scale of third-party due diligence, the depth of operational reviews, and a transaction’s overall expected losses, are critical for assessing the risk of a breach and if a new entity would be remedying it. We consider all of these aspects in our assessment of the credit characteristics of loans that are securitized in U.S. RMBS deals. (1)

One assumes that every party to every transaction would consider the counterparty risk — the risk that the other side of a deal won’t or can’t make good on its obligations. Regular readers of this blog also know that many well-known companies have attempted to avoid their responsibilities pursuant to reps and warranties clauses. So, when S&P states that “the quality and scale of third-party due diligence, the depth of operational reviews, and a transaction’s overall expected losses, are critical for assessing the risk of a breach and if a new entity would be remedying it,” one wonders why this is more true for new players than it is for existing ones.

Further undercutting itself, this report notes that “post-2008 issuers have been addressing many of these potential R&W risks, including newer players. The level of third-party due diligence in recently issued U.S. RMBS for example has been more comprehensive from a historical (pre-2008) perspective in terms of the number of loans reviewed and the scope of the reviews.” (1)

So I am left wondering what S&P is trying to achieve with this report. Are they really worried about new entrants to the market? Are they signalling that they will take a tough stance on lowering due diligence standards as the market heats up? Are they favoring the big players in the market over the upstarts? I don’t think that this analysis stands up on its own legs, so I am guessing that there is something else going on.  If anyone has a inkling as to what it is, please share it with the rest of us.

Borrowers Have “Been Through Hell”

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The Maine Supreme Judicial Court issued an opinion, U.S. Bank, N.A. v. David Sawyer et al., 2014 ME 81 (June 24, 2014), that makes you question the sanity of the servicing industry and the efficacy of the rule of law. If you are a reader of this blog, you know this story.

This particular version of the story is taken from the unrebutted testimony of the homeowners, David and Debra Sawyer. They received a loan modification, which was later raised to a level above the predelinquency level; the servicers (which changed from time to time) then demanded various documents which were provided numerous times over the course of four court-ordered mediations; the servicers made numerous promises about modifications that they did not keep; the dysfunction goes on and on.

The trial court ultimately dismissed the foreclosure proceeding with prejudice. Like other jurisdictions, Maine requires that parties to a foreclosure “make a good faith effort to mediate all issues.” (6, quoting 14 M.R.S. section 6321-A(12) (2013); M.R. Civ. P. 93(j)).  Given this factual record, the Supreme Judicial Court found that the trial court “did not abuse its discretion in imposing” that sanction. (6-7) The sanction is obviously severe and creates a windfall for the borrowers. But the Supreme Judicial Court noted that U.S. Bank’s “repeated failures to cooperate and participate meaningfully in the mediation process” meant that the borrowers accrued “significant additional fees, interest, costs, and a reduction in the net value of the borrower’s [sic] equity in the property.” (8)

The Supreme Judicial Court concludes that if “banks and servicers intend to do business in Maine and use our courts to foreclose on delinquent borrowers, they must respect and follow our rules and procedures . . .” (9) So, a state supreme court metes out justice in an individual case and sends a warning that failure to abide by the law exposes “a litigant to significant sanctions, including the prospect of dismissal with prejudice.” (9)

But I am left with a bad taste in my mouth — can the rule of law exist where such behavior by private parties is so prevalent? How can servicers with names like J.P. Morgan Chase and U.S. Bank be this incompetent? What are the incentives within those firms that result in such behavior? Have the recent settlements and regulatory enforcement actions done enough to make such cases anomalies instead of all-too-frequent occurrences? U.S. Bank conceded in court that these borrowers have “been through hell.” (9, n. 5) The question is, have we reached the other side?

 

HT April Charney

Kroll: Non-Banks A Non-Systemic Risk

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Kroll Bond Rating Agency released a Commentary on Capital Requirements for Non-Bank Mortgage Companies. I may be missing something, but this just seems to be a love letter to the securitization industry. The Commentary opens,

Federal and state regulators are currently considering the imposition of capital requirements and other prudential rules on various classes of non-bank financial institutions, including insurers and mortgage servicers. This report examines some of the issues involving non-bank financial companies with a focus on non-bank loan mortgage originators and/or servicers (“seller/servicers”) in the context of the evolving discussion among regulators and researchers toward developing “appropriate” regulation and supervision like that traditionally applied to insured depository institutions (IDIs).

We believe that regulatory efforts to impose capital requirements on non-bank financial institutions such as mortgage loan seller/servicers need to consider the following factors:

• First, most non-bank financial companies operating in the mortgage space have significantly higher levels of tangible capital and lower risk-weighted assets than do IDIs, especially when considering that much of the asset base of a seller/servicer is collateralized and that the mortgages which they service typically are owned by third parties, in most cases institutional investors. The chief sources of risk for seller/servicers are operational and legal, not credit or market risk.

• Second, the recent call by state and federal regulators for capital requirements for non-bank mortgage companies somewhat ignores the real point of the 2007-2009 financial crisis, namely the vulnerability of IDIs and non-banks which perform bank-like functions to a sudden decline in investor confidence and a related drop in market liquidity.

• Third, since non-banks in the US are already dependent upon the commercial banking system for short-term funding and are effectively prohibited from capitalizing their asset and maturity transformation activities in the short-term debt capital markets (e.g., commercial paper), it is unclear why capital requirements for non-banks are appropriate.

We believe that large non-bank companies and particularly seller/servicers in the mortgage sector do not require formal capital requirements and other types of prudential regulation. In our view, the real issue behind the 2007-2009 financial crisis involved securities fraud and the resulting withdrawal of investor liquidity behind various classes of securities issued by off balance sheet vehicles, not a lack of capital in either IDIs or non-bank firms. (1, footnotes omitted)

First of all, it is not clear to me why Kroll is conflating mortgage originators with seller/servicers in this analysis. I think that Kroll is right that seller/servicers predominantly face operational risk, and whatever credit risk they might face (unless they own mortgages that they service) is quite low. But mortgage originators are a different story completely. If they fund themselves from the short-term commercial paper market they are subject to runs much like an uninsured bank would be. See generally Gary Gorton, Slapped by the Invisible Hand (2009). One would expect that regulators would prescribe different capital levels for different types of non-banks — and could conceivably exempt some seller/servicers completely.

Second, Kroll writes that the financial crisis was caused by “the vulnerability of IDIs and non-banks which perform bank-like functions to a sudden decline in investor confidence and a related drop in market liquidity.” But capital requirements go directly to investor confidence in individual firms as well as in an entire sector.

Third, Kroll’s analysis is heavily dependent on describing the troubles of IDIs. Yes, big banks were at the heart of the problems of the financial crisis, but that does not mean that non-banks should get a free pass on regulation, one that will allow them to grow to be the 800 pound gorillas of the next crisis.

Finally, Kroll writes,

One of the most widely held views espoused by US regulators is that non-bank financial firms caused the subprime crisis. A better way to state the reality is that the non-bank firms were involved in subprime mortgage origination and sales because the largest commercial banks and their partners such as Fannie Mae and Freddie Mac had a monopoly position in the prime mortgage space. Large banks and the GSEs made the whole subprime market work by being willing to buy the senior tranches of subprime deals. (7)

I am not sure how to best characterize that argument, but it is of the ilk of “The Devil made me do it” or “Everyone else was doing it” or “I was just a small fry — much bigger companies than mine were doing it.” This is really not an argument against regulation — if anything it is a call for regulation. If appropriate incentives do not align without regulation, then that is just when the government should step in.