Author Archives: David Reiss

The Regulation of Residential Real Estate Finance Under Trump

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I published a short article in the American College of Real Estate Lawyers (ACREL)  (ACREL) News & Notes, The Regulation of Residential Real Estate Finance Under Trump. The abstract reads,

Reducing Regulation and Controlling Regulatory Costs was one of President Trump’s first Executive Orders. He signed it on January 30, 2017, just days after his inauguration. It states that 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. . . . [I]t is essential to manage the costs associated with the governmental imposition of private expenditures required to comply with Federal regulations.” The Reducing Regulation Executive Order outlined a broad deregulatory agenda, but was short on details other than the 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, Core Principles for Regulating the United States Financial System. Pursuant to this second Executive Order, 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.” The Core Principles Executive Order was also short on details.

Since Trump signed these two broad Executive Orders, the Trump Administration has been issuing a series of reports that fill in many of the details for financial institutions. The Department of Treasury has issued three of four reports that are collectively titled A Financial System That Creates Economic Opportunities that are directly responsive to the Core Principles Executive Order. While these documents cover a broad of topics, they offer a glimpse into how the Administration intends to regulate or more properly, deregulate, residential real estate finance in particular.

This is a shorter version of The Trump Administration And Residential Real Estate Finance, published earlier this year in the Westlaw Journal: Derivatives.

The Housing Market Since the Great Recession

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photo by Robert J Heath

CoreLogic has posted a special report on Evaluating the Housing Market Since the Great Recession. It opens,

From December 2007 to June 2009, the U.S. economy lost over 8.7 million jobs. In the months after the recession began, the unemployment rate peaked at 10 percent, reaching double digits for the first time since September 1982, and American households lost over $16 trillion in net worth.

After a number of economic stimulus measures, the economy began to grow in 2010. GDP grew 19 percent from 2010 to 2017; the economy added jobs for 88 consecutive months – the longest period on record – and as of December 2017, unemployment was down to 4 percent.

The economy has widely recovered and so, too, has the housing market. After falling 33 percent during the recession, housing prices have returned to peak levels, growing 51 percent since hitting the bottom of the market. The average house price is now 1 percent higher than it was at the peak in 2006, and the average annual equity gain was $14,888 in the third quarter of 2017.

However, in some states – including Illinois, Nevada, Arizona, and Florida – housing prices have failed to reach pre-recession levels, and today nearly 2.5 million residential properties with a mortgage are still in negative equity. (4, footnotes omitted)

By the end of 2017, ” the most populated metro areas in the U.S. remained at an almost even split between markets that are undervalued, overvalued and at value, indicating that while housing markets have recovered, many homes have surpassed the at-value [supported by local market fundamentals] price.” (10) This even split between undervalued and overvalued metro areas is hiding all sorts of ups and downs in what looks like a stable national average.  You can get a sense of this by comparing the current situation to what existing at the beginning of 2000, when 87% of metro areas were at-value.

And what does this all mean for housing finance reform? I think it means that we should not get complacent about the state of our housing markets just because the national average looks okay. Congress should continue working on a bipartisan fix for a broken system.

 

A Fix Already in Place for Housing Finance?

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photo byy George Becker

Executives at Pimco, the world’s largest bond fund manager, have posted U.S. Housing Finance Reform: Why Fix What Isn’t Broken? I think their analysis is interesting, but seriously flawed:

The topic of housing finance reform has come in and out of focus on Capitol Hill since Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) were taken into conservatorship back in 2008. As one of the largest participants in the mortgage-backed securities (MBS) market, and given our fiduciary role as a steward of other people’s assets, we at PIMCO are devoted to a liquid and stable mortgage market. Not surprisingly, we have taken a keen interest in the various reform proposals introduced over the past several years.

Housing finance reform need not be revolutionary

While we have refrained from commenting on specific plans, we believe housing finance reform must be comprehensive, above all else. And while we agree with a focus on shrinking the government’s role in housing finance, we believe similar attention must be paid to a responsible and thoughtful rebuilding of the private mortgage market – the alternative to the government balance sheet.

When it comes to the GSEs, we think policymakers should take a “do no harm” approach to reform that contains several key elements:

  • An explicit government guarantee for both future and legacy MBS
  • A continuation of the national mortgage rate (e.g., a borrower in Spartanburg, SC, can access a similar mortgage rate to a borrower in San Francisco, CA)
  • A guarantee fee that is counter-cyclical (versus a pro-cyclical, floating fee)
  • A continuation of the GSEs’ current credit risk transfer (CRT) program
  • Loan limits transitioned thoughtfully to be based on income levels, not housing prices

So far, so good. But they continue,

What you do not hear PIMCO calling for is a wholesale change or even an end to the status quo for Fannie Mae and Freddie Mac. Indeed, from our perspective as a large market participant, the delivery of mortgage credit has never been so efficient or so fair, nor has the market for MBS ever been so deep, liquid and stable as it has been during the years that Fannie and Freddie have been under conservatorship. What’s more, the Federal Housing Finance Agency (FHFA)’s heightened oversight has put an end to the pernicious activities that gave rise to the GSEs’ conservatorship – namely, buying subprime private-label securities collateralized by poor-credit-quality loans and putting them on their balance sheets – thereby mitigating the threat they pose to taxpayers.

The authors call for the formal “folding” in of Fannie and Freddie into the U.S. government. This would result in the Ginnie-fication of Fannie and Freddie, converting them to a government instrumentality that would be subject to the whims of the congressional budgetary process. That has not worked out so well for Ginnie Mae which has suffered from antediluvian technology and operational challenges for much of its history. Fannie and Freddie have historically been far more innovative and responsive to changes in market conditions than Ginnie. We should expect to lose those characteristics if the two companies were nationalized.

There is certainly an argument for keeping part of Fannie and Freddie’s existing operations within the federal government. But keeping the whole thing there will cause a new set of problems that we will likely bemoan a few years down the line. This proposal may appear to be a bright idea on first glance, but if you look at it the cracks show right away.

Reducing Enforcement at The CFPB

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Mick Mulvaney’s Consumer Financial Protection Bureau has released a Request for Information Regarding Bureau Enforcement Activities (available on the upper right corner of this page), its third in a series of RFIs that seek to dramatically restrict the Bureau’s activities. The Bureau seeks

feedback on all aspects of its enforcement processes, including but not limited to:

1. Communication between the Bureau and the subjects of investigations, including the timing and frequency of those communications, and information provided by the Bureau on the status of its investigation;

2. The length of Bureau investigations;

3. The Bureau’s Notice and Opportunity to Respond and Advise process, including:

a. CFPB Bulletin 2011–04, Notice and Opportunity to Respond and Advise (NORA), issued November 7, 2011 (updated January 18, 2012) and available at https://files.consumerfinance.gov/f/2012/01/
Bulletin10.pdf, including whether invocation of the NORA process should be mandatory rather than discretionary;and

b. The information contained in the letters that the Bureau may send to subjects of potential enforcement actions pursuant to the NORA process, as exemplified by the sample letter available at https://www.consumerfinance.gov/wp-content/uploads/2012/01/NORA-Letter1.pdf;

4. Whether the Bureau should afford subjects of potential enforcement actions the right to make an in-person presentation to Bureau personnel prior to the Bureau determining whether it should initiate legal proceedings;

5. The calculation of civil money penalties, consistent with the penalty amounts and mitigating factors set out in 12 U.S.C. 5565(c), including whether the Bureau should adopt a civil money penalty matrix, and, if it does adopt such a matrix, what that matrix should include;

6. The standard provisions in Bureau consent orders, including conduct, compliance, monetary relief, and administrative provisions; and

7. The manner and extent to which the Bureau can and should coordinate its enforcement activity with other Federal and/or State agencies that may  have overlapping jurisdiction. (83 F.R. 6000) (Feb. 12, 2018)

The not-so-subtext of this RFI is that Mulvaney is seeking to hamstring the Bureau’s enforcement authority which Republicans have found to be too zealous since the Bureau was first started up.

Comments are due April 13, 2018, so get crackin’.

Housing Affordability and GSE Reform

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Jim Parrott and Laurie Goodman of the Urban Institute have posted Making Sure the Senate’s Access and Affordability Proposal Works. It opens,

One of the most consequential and possibly promising components of the draft bill being considered in the Senate Banking Committee is the way in which it reduces the cost of a mortgage for those who need it. In the current system, Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) deliver subsidy primarily through the level pricing of their guarantee fees, overcharging lower-risk borrowers in order to undercharge higher-risk borrowers. While providing support for homeownership through cross-subsidy makes good economic and social sense, there are a number of shortcomings to the way it is done in the current system.

First, it does not effectively target those who need the help. While Fannie Mae and Freddie Mac are both pushed to provide secondary market liquidity for the loans of low- and moderate-income (LMI) borrowers in order to comply with their affordable housing goals and duty to serve obligations, almost one in four beneficiaries of the subsidy are not LMI borrowers (Parrott et al. 2018). These borrowers receive the subsidy simply because their credit is poorer than the average GSE borrower and thus more costly than the average guarantee fee pricing covers. And LMI borrowers who pose less than average risk to the GSEs are picking up part of that tab, paying more in the average guarantee fee than their lower-than-average risk warrants.

Second, the subsidy is provided almost exclusively through lower mortgage rates, even though that is not the form of help all LMI borrowers need. For many, the size of their monthly mortgage is not the barrier to homeownership, but the lack of savings needed for a down payment and closing costs or to cover emergency expenses once the purchase is made. For those borrowers, the lower rate provided in the current system simply does not help.

And third, the opacity of the subsidy makes it difficult to determine who is benefiting, by how much, and whether it is actually helping. The GSEs are allocating more than $4 billion a year in subsidy, yet policymakers cannot tell how it has affected the homeownership rate of those who receive it, much less how the means of allocation compares with other means of support. We thus cannot adjust course to better allocate the support so that it provides more help those who need it.

The Senate proposal remedies each of these shortcomings, charging an explicit mortgage access fee to pay for the Housing Trust Fund, the Capital Magnet Fund, and a mortgage access fund that supports LMI borrowers, and only LMI borrowers, with one of five forms of subsidy: a mortgage rate buy-down, assistance with down payment and closing costs, funding for savings for housing-related expenses, housing counseling, and funding to offset the cost of servicing delinquent loans. Unlike the current system, the support is well targeted, helps address the entire range of impediments to homeownership, and is transparent. As a means of delivering subsidy to those who need it, the proposed system is likely to be more effective than what we have today.

If, that is, it can be designed in a way that overcomes two central challenges: determining who qualifies for the support and delivering the subsidy effectively to those who do. (1-2, footnote omitted)

This paper provides a clear framework for determining whether a housing finance reform proposal actually furthers housing affordability for those who need it most. It is unclear where things stand with the Senate housing finance reform bill as of now, but it seems like the current version of the bill is a step in the right direction.

The Budgetary Impact on Housing Finance

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slide by MIT Golub

The MIT Golub Center for Finance and Policy has posted some interesting infographics on The President’s 2019 Budget: Proposals Affecting Credit, Insurance and Financial Regulators:

The White House released the President’s budget proposal for fiscal year 2019 on February 12, just days after President Trump signed a bill extending spending caps for military and domestic spending and suspending the debt ceiling. While the new law has already established government-wide tax and spending levels for the coming fiscal year, the specific proposals contained in the budget request reflect Administration priorities and may still be considered by the Congress. Here, we consider how such proposals may affect the Federal Government in its role as a lender, insurer, and financial regulator.

Between its lending and insurance balances, it is apparent that the U.S. Government has more assets and insured obligations than the five largest bank holding companies combined.

Through various agencies, the US government is deeply involved in the extension of credit and the provision of insurance. It also plays an active regulatory and oversight role in the financial marketplace. While individual credit and insurance programs serve different target populations, they collectively reach into the lives of most Americans, from homeowners to small business owners to bank account holders and students. Note that this graphic does not reflect social insurance, such as Social Security and Medicare/Medicaid.

I was particularly interested, of course, in the slides that focused on housing finance, but I found this one slide about all federal loans outstanding to be eye-opening:

The overall amount is huge, $4.34 trillion, and housing finance’s share is also huge, well over half of that amount.

As we slowly proceed down the path to housing finance reform, we should try to determine a principled way to evaluate just how big of a role the federal government needs to have in the housing finance market in order to serve the broad swath of American households. Personally, I think there is a lot of room for private investors to take on more credit risk so long as underserved markets are addressed and consumers are protected.

Ditching the CFPB’s System of Adjudication

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photo by Mike Licht

Mick Mulvaney is continuing his work of dismantling the Consumer Financial Protection Bureau as we have known it. His latest is the issuance of a Request for Information Regarding Bureau Rules of Practice for Adjudication Proceedings.

Section 1053 of the Act authorizes the Bureau to conduct administrative adjudications. The Bureau in the past has brought cases in the administrative setting in accordance with applicable law. The Bureau understands, however, that the administrative adjudication process can result in undue burdens, impacts, or costs on the parties subject to these proceedings. Members of the public are likely to have useful information and perspectives on the benefits and impacts of the Bureau’s use of administrative adjudications, as well as existing administrative adjudication processes and the Rules. The Bureau is especially interested in receiving suggestions for whether it should be availing itself of the administrative adjudication process, and if so how its processes and Rules could be updated, streamlined, or revised to better achieve the Bureau’s statutory objectives; to minimize burdens, impacts, or costs on parties subject to these proceedings; to align the Bureau’s administrative adjudication Rules more closely with those of other agencies; and to better provide fair and efficient process to individuals and entities involved in the adjudication process, including ensuring that they have a full and fair opportunity to present evidence and arguments relevant to the proceeding. (83 F.R. 5055-56, Feb. 5, 2018)

The Bureau requests that comments include, first and foremost, “Specific discussion of the positive and negative aspects of the Bureau’s administrative adjudication processes, including whether a policy of proceeding in Federal court in all instances would be preferable.” (83 F.R. 5056)

This Request for Information is the second of a series. The first RFI addressed Civil Investigative Demands and Associated Processes. I will blog about the third one, the Request for Information Regarding Bureau Enforcement Processes, at a later date.

Mulvaney appears to be using these RFIs to provide the consumer financial services industry with an opportunity to provide broad direction to the Bureau as to what changes they would like to see, now that pro-consumer Director Cordray has stepped down. This would be consistent with this RFI’s focus on minimizing “burdens, impacts, or costs on parties subject to these proceedings . . .”

Comments are due April 6, 2018 so get crackin’.