Author Archives: David Reiss

CFPB Releases Ability-To-Repay and Qualified Mortgage Final Rules

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The CFPB has released the final rules relating to ability-to-repay and Qualified Mortgages.  The CFPB’s Summary is currently available.

The big news is that qualified mortgages do NOT have a minimum down payment requirement.  This was a very big bone of contention during the proposed rulemaking process (which I discussed here and here).

It is also very interesting to see that the CFPB has taken the position that a total debt-to-income ratio of 43% is the maximum that is generally sustainable for homeowners.  This was a bone of contention in the FDIC’s workout of the IndyMac mess during the early years of the crisis, which I had addressed a bit here at page 807.  43% is on the high side of earlier estimates of what is sustainable, so it will be interesting to see if future default data confirms the wisdom of this position.

The rules take effect a year from now.

 

 

S&P Is Optimistic That Residential Mortgage Market Is Rising From Bottom

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S&P’s Outlook Assumptions for the U.S. Residential Mortgage Market

support our view of loss projections on an archetypical mortgage loan pool (see description in section IV). The base-case loss projection of 0.5% for U.S. prime mortgage loan pools, incorporates our current outlook which reflects:

  • Standard & Poor’s current economic outlook, which factors slow growth over the next several years, declining unemployment rates, and a moderate increase in interest rates, as well as our cautiously optimistic view of housing fundamentals, based on price-to-rent and price-to-income ratios.
  • Our view that U.S. housing prices on a national level have seemed to have reached bottom. This view underlies our assumption that only a minor percentage of a prime RMBS pool is susceptible to a market value decline of up to 30% in select local markets experiencing a local economic downturn and accompanying distress sale discounts. (1)

S&P’s archetypal loan is “collateralized by a single-family detached primary residence with a loan-to-value ratio of 75%. For more information on the “archetypical” loan, see paragraph 24 in U.S. RMBS Criteria. Our projections for other types of newly originated products could be lower or higher depending on the characteristics of the loans, relative to the archetypical loan.” (2)

S&P notes that mortgage delinquencies have been flat and even declining.  This outlook may be one more crocus pushing through a frozen but thawing residential market.

Scheindlin Allows More Fraud Claims Against Rating Agencies To Go To Trial

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Judge Scheindlin (SDNY) has ruled that investors can proceed with their fraud claims against the big three rating agencies for giving a top rating to a SIV.  There are no surprises in this opinion as it tracks the reasoning of Judge Scheindlin’s earlier opinion in a related action (Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc. (Abu Dhabi I), No. 08 Civ. 7508, WL 3584278 (S.D.N.Y. Aug. 17, 2012).)

loan application fees

I think this quotation from the King County opinion puts the issue nicely:

While ratings are not objectively measurable statements of fact, neither are they mere puffery or unsupportable statements of belief akin to the opinion that one type of cuisine is preferable to another. Ratings should best be understood as fact-based opinions. When a rating agency issues a rating, it is not merely a statement of that agency’s unsupported belief, but rather a statement that the rating agency has analyzed data, conducted an assessment, and reached a fact-based conclusion as to creditworthiness. If a rating agency knowingly issues a rating that is either unsupported by reasoned analysis or without a factual foundation, it is stating a fact-based opinion that it does not believe to be true.41

I subsequently held that the rating agency defendants could “only be liable for fraud if the ratings both misstated the opinions or beliefs held by the Rating Agencies and were false or misleading with respect to the underlying subject matter they address.” To sustain a fraud claim against each rating agency, then, plaintiffs must provide evidence that the rating agency issued a rating that it knew was unsupported by facts or analysis — that the rating agency did the equivalent of issuing a restaurant review despite never having dined at the restaurant. (12-13, footnote omitted)

Judge Scheindlin has now made it clear that rating agencies may face liability for their opinions under certain circumstances.  Time will tell whether the 2nd Circuit (which has favored the rating agencies in other cases) will agree.

I can only find the King County opinion and the Abu Dhabi opinion behind the NYLJ paywall for now.

FIRREA as a Mortgage Lending Enforcement Tool

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William Johnson of the Fried, Frank law firm has an interesting analysis of enforcement cases that invoke the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) which is unfortunately behind the NYLJ paywall.

Johnson discusses the history of FIRREA which arose from the ashes of the S&L Crisis of the 1980s.  He notes that FIRREA extended the statute of limitations to 10 years for mail and wire fraud statutes (18 U.S.C. sections 1341 and 1343) where the crime “affected” a financial institution.

The government is turning to FIRREA at this point because of its ten year  statute of limitations which doubles the statute of limitations that would apply to many other causes of action.  Given that we are now about five years out from the crisis, he says that this development is not surprising.

He identifies five cases where the Department of Justice has brought FIRREA causes of action arising from alleged conduct relating to mortgages:

  • United States v. Buy-a-Home, No. 1:10-cv-09280 (S.D.N.Y.) (PKC) (filed Dec. 13, 2010)
  • United States v. Allied Home Mortgage, No. 1:11-cv-05443 (S.D.N.Y.) (VM)
  • United States v. CitiMortgage, No. 1:11-cv-05473 (S.D.N.Y.) (VM)
  • U.S. v. Wells Fargo Bank, No. 1:12-cv-07527 (S.D.N.Y.) (JMF) (JCF) (filed Oct. 9. 2012)
  • U.S. v. Bank of America, No.1:12-cv 1422 (S.D.N.Y.) (JSR)

He concludes that the government has “turned FIRREA on its head” by stretching its provisions to encompass alleged wrongs against entities such as Fannie and Freddie as well as HUD as well as “financial institutions” as that term is defined in FIRREA.

I don’t know enough to have a position on whether  the government has turned FIRREA on its head, but its ten year statute of limitations must look very tempting to prosecutors and regulators as the events that were at the root of the crisis receded further and further from the present.

SEC Staff Report on Rating Agencies Goes Through The Motions

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The SEC staff report required by Dodd Frank section 939F looks like it is just going through the motions.  It is poorly organized and marred by poor analysis.  It is unclear what it is trying to achieve, other than complying with the requirements of 939F.

 

Republicans Issue Report Critical of CFPB’s Regulation of Mortgage Markets

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The staff of the House’s Committee on Oversight and Government Reform issued a report that argues that the CFPB is “predisposed to limit access to credit;”  “will increase regulatory burdens and reduce credit availability;” and has inadequate mechanisms to “detect access to credit impediments.”  As to mortgage markets in particular, it argues that

Lenders are reportedly requiring the highest credit scores in a decade to approve home mortgages, with an average credit score of 737 for borrowers approved for a home loan in 2011.22. The international capital guidelines outlined in the Basel III capital accords have also made mortgage loans less worthwhile for banks. An April 2012 Federal Reserve survey found that 83 percent of banks were less likely to originate a GSE-eligible 30-year fixed-rate mortgage for a borrower with a credit score of 620 and a 10 percent down payment than they were in 2006. Roughly 70 percent of those banks surveyed blamed regulatory and legislative changes for restricting lending. (3-4, footnotes omitted)

It continues,

youth4media.eu/lists/files/

the CFPB is currently considering a mortgage rule that would require a lender to verify a borrower’s ability to repay a mortgage unless the loan satisfies the definition of a “qualified mortgage.” According to Frank Keating, CEO of the American Bankers Association, the rule could “make borrowing more expensive and credit less available. Some lenders may leave the market altogether.” The rule could also increase the cost of mortgage lending, reduce consumer choice, and make it harder for consumers to compare mortgage options. If the CFPB is not careful, these rules could make it more difficult – if not impossible – for millions of Americans to purchase homes. (11, footnotes omitted)

The analysis in this staff report strikes me as fundamentally unsophisticated as it does not draw a distinction between sustainable credit and unsustainable credit.  The last bubble was driven by credit that was extended to people who could not repay it.  There is no reason we would want to see a return to those practices.

The question should be — what regulations allow for a healthy mortgage market where careful lenders make loans to creditworthy borrowers?

S&P Predicts Residential Mortgage Finance To Improve in 2013

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S&P’s report has a couple of interesting predictions:

  • Although the GSEs (government-sponsored entities, such as Fannie Mae and Freddie Mac) have been vital players in the U.S. mortgage finance market, 2012 was a strong year for mortgage banking, largely because of refinancing activity. This trend will likely continue in 2013, but banks may struggle to duplicate strong performance next year.  .  .  .
  • We expect the federal agencies to continue to dominate the residential mortgage-backed securities (RMBS) market in 2013, but the private-label market will see some growth from a low base.