Author Archives: David Reiss

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.

SEC To Focus on Structured Finance Ratings

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A SEC staff study looks at three ways to reform the manner in which ratings are produced for structured finance securities.

The study, required by Dodd-Frank, addresses

(1) The credit rating process for structured finance products and the conflicts of interest associated with the issuer-pay and the subscriber-pay models;

(2) The feasibility of establishing a system in which a public or private utility or a self-regulatory organization (“SRO”) assigns NRSROs to determine the credit ratings for structured finance products, including:

(a) An assessment of potential mechanisms for determining fees for NRSROs for rating structured finance products;
(b) Appropriate methods for paying fees to NRSROs to rate structured finance products;
(c) The extent to which the creation of such a system would be viewed as the creation of moral hazard by the Federal Government; and

(d) Any constitutional or other issues concerning the establishment of such a system;5

(3) The range of metrics that could be used to determine the accuracy of credit ratings for structured finance products;6 and
(4) Alternative means for compensating NRSROs that would create incentives for accurate credit ratings for structured finance products.

 

NCUA Sues JP Morgan over MBS Representations

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The National Credit Union Administration has sued J.P. Morgan Securities and Bear, Stearns & Co. for alleged securities laws violations relating to the sale of mortgage-backed securities to 4 credit unions that are now in NCUA conservatorship.  According to the complaint, Bear Stearns (now owned by JPMorgan) made misrepresentations to the purchasing credit unions as part of its underwriting and sales of the MBS.  The press release notes that NCUA has initiated eight similar suits against a variety of financial institutions.

One of the representations at issue states that “a mortgage loan will be considered to be originated in accordance with a given set of underwriting standards if, based on an overall qualitative evaluation, the loan is in substantial compliance with those underwriting standards.” (Complaint paragraph 408, page 170)

Given what we know about a lot of the securities that were issued, it is hard to imagine that reps like this were not violated for many of them.

CFPB Issues Fair Lending Report That Highlights Data Collection

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The Fair Lending Report of the Consumer Financial Protection Bureau provides an overview of the Bureau’s actions over the last year.  Some of the most interesting elements of the report relate to future HMDA and TILA rulemaking:

Section 1094 of the Dodd-Frank Act amends HMDA to require the collection and submission of additional data fields related to mortgage loans, including certain applicant, loan, and property characteristics, as well as “such other information as the Bureau may require.” The CFPB is examining what changes it may propose to Regulation C. . . .

Finally, section 1403 of the Dodd-Frank Act requires that the CFPB prescribe regulations under TILA to prohibit “abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender or age. The CFPB has begun preliminary planning with regard to this rule. (26) (emphasis added)

Data collection about borrower and mortgage characteristics is very fraught.  Lenders have typically fought against efforts to increase such data collection as it could only hurt them if others knew their business so well.  Academics and consumer advocates have complained that data about the mortgage market is very hard to come by unless one had massive financial resources to pay private providers for it.

This was especially true, given the rapid rate of change in that market.  Working with data that is twelve months old was the same as working with outdated information during the Boom years of the early 2000s.  If the CFPB collects and analyzes data in something approximating real-time, it will be far more nimble than previous regulators.  If it shares its data with outside researchers, it is likely to become even more sophisticated in its approach to the dynamic housing finance sector.

Levitin and Wachter’s New History of American Housing Finance

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Adam Levitin and Susan Wachter have released a very interesting paper on The Public Option in Housing Finance.  The paper provides a history of the development of the housing finance infrastructure in the United States.  It concludes that

[t]he experience of the U.S. housing finance market teaches us that public options can only succeed as a regulatory mode in certain circumstances. A public option that coexists with private parties in the market is only effective at shaping the market if all parties in the market have to compete based on the same rules and standards. Otherwise, the result is merely market segmentation. Moreover, without basic standards applicable to all parties, the result can quickly become a race-to-the-bottom that can damage not only private parties, but also public entities.(60)

Personally, I wish they struggled more with the trillion dollar issue that they highlight in the middle of the paper:  “It is not clear how deep of a housing market can be supported if credit risk is borne by private parties rather than by government.”  (30)  As the Obama Administration seeks to impose a new order on the housing finance market that will likely last for generations, we should seek a consensus (or as close to one as we can) among policymakers as to how much credit risk the private sector can take when it comes to mortgages secured by single and multifamily housing.  Personally, I believe it can handle a lot more than we give it credit for.

CRL Issues Report on State of Lending

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The Center for Responsible Lending has issued a new report, The State of Lending in America and its Impact on U.S. Households.  CRL, Cassandra-like, warned of an epidemic of millions of foreclosures at the height of the Subprime Boom, so they have a lot of street cred.  And while they are consumer advocates, their research is solid.

Their policy recommendations include “the following key principles to ensure a robust and secure secondary market:”

• Government Guarantee: The U.S. government should provide an explicit, actuarially sound guarantee for mortgages in a future secondary market structure. This is an appropriate role to for the government to play in the event of a housing-market crash or market disruption. Discussion about the role of private capital in sharing losses is an important part of the conversation, but a catastrophic government guarantee is essential to the future of mortgage finance.

• Duty to Serve Entire Market: Mortgage finance reform should require secondary market entities that benefit from federal guarantees to serve all qualified homeowners, rather than preferred market segments. Without a duty to serve the entire market, lenders could recreate the dual credit market that characterized lending during the subprime crisis.

• Encourage Broad Market Access by All Lenders: The future mortgage finance system should encourage competition and further broad market access to the secondary capital markets for both small and large lenders. These goals should be met by establishing a cooperative secondary market model of one non-lender entity, owned in equal shares by member-users, that is able to issue guaranteed securities. Such a model of aligned interests will correct the shortcomings of Fannie Mae and Freddie Mac’s past and also prevent a further concentrated lending marketplace in the future. (53)