Author Archives: David Reiss

Empirical Evidence of Predatory Steering in the Mortgage Market

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Agarwal and Evanoff have released a draft of Loan Product Steering in Mortgage Markets.  They sought to determine whether there was empirical support for the frequent anecdotes of credit steering in the literature about predatory lending.  They find such support. They find evidence

consistent with institutions steering customers to affiliated lenders that provide more-expensive loan products. Specifically, we find that steered loans have an annual percentage rate (APR) 40–60 basis points higher than that of non-steered loans after controlling for various borrower and loan characteristics. Given the average APR for the sample of loans is 6.5%, a rate 40–60 basis points differential is economically significant. We also find that the steered customers perform better on their mortgages—consistent with them being lower-risk, better-qualified borrowers than those normally associated with their eventual loan products. Specifically, we find that the probability of steered loans being delinquent is 1.4–2.0 percentage points lower than that of non-steered loans. Again, given an average delinquency rate of 5%, this differential is also an economically significant result.  (22, footnote omitted)

While I am not in a position to evaluate their empirical findings, I question the following:  “We also find that steered loans are often placed in private securitized pools—much more so than being held in portfolio or sold to the housing GSEs. This is consistent with the steering taking place in an attempt to satisfy the demands of investors looking for highly rated mortgage-back securities.” (22)  This assertion does not appear to take into the robust literature about the market for lemons which would suggest that originators would try to keep the lower risk mortgages for their own portfolios.  It also does not appear to account for how securitizers actually structure MBS in order to achieve a high rating (using techniques such as overcollateralization, subordination and insurance to do so).  In other words, securitizers do not need low risk mortgages to make low risk MBS if they can otherwise provide credit enhancements as part of the structure of the MBS.

The authors state that their results are “the first explicit evidence of systematic mortgage lending abuse during the run-up in the housing markets.” (1)  They also demonstrate the difficulty in regulating away predatory behavior from the mortgage markets as profit-seeking holding companies appear to have developed techniques to achieve net profits even while one subsidiary took actions that appeared to be inconsistent with its own quest for profits.  This should give regulators at the CFPB something to think about.

 

Federal Reserve Report on the 30 Year Fixed Rate Mortgage

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Fuster and Vickery have posted Securitization and the Fixed-Rate Mortgage, a FRB of NY Staff Report.  This paper brings some empirical research to the debate over the proper fate of the 30 year mortgage.  Commentators are sharply divided over whether the government must be intimately involved in the operations of the residential mortgage markets in order to keep the 30 year FRM available in the United States.   (Whether that is a worthy goal is another question entirely.)

Peter Wallison at the American Enterprise Institute has argued that the existence of 30 year FRMs in the jumbo market demonstrates that the government does not need to play an active role in the mortgage markets to ensure the availability of that mortgage product.  David Min, formerly of the Center for American Progress, has argued that the government must continue to play an active role in order to keep that product in the market.  My own position has been in the middle — the government can reduce its dominant role in the mortgage markets while retaining a role during financial crises.

Fuster and Vickery test whether securitization, by allowing interest rate and prepayment risk “to be pooled and diversified, increases the supply of FRMs relative to ARMs.”  (1)  They find that “lenders are averse to retaining exposure to the risks  associated with FRMs in portfolio. Securitization increases lenders’ willingness to originate FRMs by transferring these risks to a diverse international pool of MBS investors.” (2)  Unsurprisingly, they also find that “when private MBS markets are liquid and well functioning, as in the period before the onset of the financial crisis in mid-2007, private and government-backed securitization perform similarly in terms of supporting FRM supply. However, public credit guarantees may make securitization less susceptible to market disruptions, thereby improving the stability of FRM supply.” (2)  Fuster and Vickery suggest that the current GSE- centered mortgage finance system may not be necessary for FRMs to remain widely available at competitive rates, but only as long as private securitization markets are liquid.”  (30)

Fuster and Vickery do not mean to say that they have produced the last word on this topic, but their findings are intuitive to me.  This debate is central to any plan for the future of the American housing finance system, so more empirical work in this area is most welcome.

GAO Report on Challenges for Financial Regulatory Reform

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The GAO has issued a report, Financial Regulatory Reform:  Regulators Have Faced Challenges Finalizing Key Reforms and Unaddressed Areas Pose Potential Risks.  The report notes that

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A variety of challenges have affected regulators’ progress in executing rulemaking requirements intended to implement the act’s reforms. Regulators to whom we spoke indicated that the primary challenges affecting the pace of implementing the act’s reforms include the number and complexity of the rulemakings required and the time spent coordinating with regulators and others. In addition, some regulators identified additional challenges, including extensive industry involvement through comment letters and litigation resulting from rulemakings, concurrently starting up a new regulatory body and assuming oversight responsibilities, and resource constraints.  (23)

These challenges are only compounded by the recent court decision that throws CFPB rulemaking into a pit of uncertaintly.  While the decision addresses the legality of NLRB recess appointments, it clearly implicates the appointment of Richard Cordray as the Director of the CFPB.  This has serious consequences for Bureau rulemaking which cannot be occur without a Bureau Director being in place.  (See Dodd-Frank section 1022(b)(1), codified at 12 U.S.C. section 5512(b)(1))

Foreclosure = Debt Collection

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The Sixth Circuit ruled in Glazer v. Chase Home Finance LLC, __ F.3d ___ (Case No. 10-3416, Jan. 14, 2013) that “that mortgage foreclosure is debt collection under” the Fair Debt Collection Practices Act. (2) As Glazer indicates, courts have been split on this issue, but the trend seems to be in accord with Glazer.

Of particular note to lawyers:  “Lawyers who meet the general definition of a “debt collector” must comply with the FDCPA when engaged in mortgage foreclosure. And a lawyer can satisfy that definition if his principal business purpose is mortgage foreclosure or if he “regularly” performs this function.” (16)

Center on Budget and Policy Priorities Report on Rental Assistance

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The Center has issued a thought-provoking report, Renters’ Tax Credit Would Promote Equity and Advance Balanced Housing Policy.  The summary states that

Over the past several decades, the nation’s housing policy has focused predominantly on increasing homeownership.  Most federal housing expenditures now benefit families with relatively little need for assistance.  About 75 percent of federal housing expenditures support homeownership, when both direct spending and tax subsidies are counted.  The bulk of homeownership expenditures go to the top fifth of households by income, who typically could afford to purchase a home without subsidies.  Overall, more than half of federal spending on housing benefits households with incomes above $100,000.

The report makes the obvious but politically delicate point that federal housing policy should assist low-income households as opposed to upper income households.  The report proposes a well thought out renter’s tax credit that could complement existing programs like the Low Income Housing Tax Credit.

Whether a renter’s tax credit (budgeted at $5 billion in the report) is politically feasible at this time is another question entirely.

Levitin Gives Overview of CFPB

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The extraordinarily prolific Adam Levitin has posted The Consumer Financial Protection Bureau:  An Introduction.  He concludes that the

CFPB faces a constant challenge in terms of measuring and then balancing the consumer protection benefits from regulation with the costs of regulation and the potential impact of those costs on the availability and pricing of consumer financial products and services. What remains to be seen, however, is whether the CFPB will back away from more controversial rulemaking and enforcement activity because of the political threat it faces or whether the agency will pursue the policies it believes to be substantively right irrespective of the political situation. In other words, will the agency’s own interests affect guide its behavior? And are those interests best served by compromise and living to fight another day or by taking a principled stand and hoping to rally political support on that basis? The CFPB is a powerful new agency, but it is also one very much aware of its vulnerability.  (35)

The paper was posted just as the Bureau unleashed a series of major rules for the mortgage industry.  Levitin is right that the path that the Bureau will take in the long term is still unclear.  But the early reaction indicates that the Bureau has taken a middle ground that has not unleashed vicious attacks from consumer advocates nor from industry groups.  Indeed, it has garnered measured praise from both camps.  Congressional Republicans do appear, however, to be preparing for a long term fight to dismantle the Bureau (see here for instance).

 

CFPB Issues Rules on High-Cost Mortgages

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The CFPB issued rules for high-cost mortgages (those with high interest rates and/or points and fees).  Importantly, the rules now apply to most mortgages, including purchase money mortgages; refis; home equity loans; and home equity lines of credit.

High-cost loans can no longer have prepayment penalties, balloon payments (except in special circumstances), big late fees and some other miscellaneous fees.

The high-cost mortgage rules have been criticized for not reaching many mortgages as they only kick in (in most cases) when the APR on a first mortgage is more than 6.5 percentage points higher than what people with good credit would pay or if the points and fees are more than five percent of the total loan amount.  The new rule will still cover only a small number of loans, so it is not clear if the new rule will have much impact on the market, as opposed to the new Qualified Mortgage rules.