Author Archives: David Reiss

The CFPB Makes Its Case

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CFPB Director Cordray

The Consumer Financial Protection Bureau released its Semi-Annual Report. Given that the Bureau is under attack by Republicans in Congress and in the Trump Administration, one can read this as a defense (a strong defense, I might editorialize) for the work that the Bureau has done on behalf of consumers. The core of the Bureau’s argument is that it levels the playing field for consumers when they deal with financial services companies:

The Bureau has continued to expand its efforts to serve and protect consumers in the financial marketplace. The Bureau seeks to serve as a resource on the macro level, by writing clear rules of the road and enforcing consumer financial protection laws in ways that improve the consumer financial marketplace, and on the micro level, by helping individual consumers get responses to their complaints about issues with financial products and services. While the various divisions of the Bureau play different roles in carrying out the Bureau’s mission, they all work together to protect and educate consumers, help level the playing field for participants, and fulfill the Bureau’s statutory obligations and mission under the Dodd-Frank Act. In all of its work, the Bureau strives to act in ways that are fair, reasonable, and transparent.

*     *     *

When Federal consumer financial protection law is violated, the Bureau’s Supervision, Enforcement, and Fair Lending Division are committed to holding the responsible parties accountable. In the six months covered by this report, our supervisory actions resulted in financial institutions providing approximately $6.2 million in redress to over 16,549 consumers. During that timeframe, we also have announced enforcement actions that resulted in orders for approximately $200 million in total relief for consumers who fell victim to various violations of consumer financial protection laws, along with over $43 million in civil money penalties. We brought numerous enforcement actions for various violations of the Dodd-Frank Act and other laws, including actions against Mastercard and UniRush for breakdowns that left tens of thousands of economically vulnerable RushCard users unable to access their own money to pay for basic necessities; two separate actions against CitiFinancial and CitiMortgage for keeping consumers in the dark about options to avoid foreclosure; and against three reverse mortgage companies for deceptive advertisements, including claiming that consumers who obtained reverse mortgages could not lose their homes. We also brought two separate actions against credit reporting agencies Equifax and TransUnion for deceiving consumers about the usefulness and actual cost of credit scores they sold to consumers, and for luring consumers into costly recurring payments for credit products; and an action against creditor reporting agency Experian for deceiving consumers about the usefulness of credit scores it sold to consumers. The Bureau also continued to develop and refine its nationwide supervisory program for depository and nondepository financial institutions, through which those institutions are examined for compliance with Federal consumer financial protection law. (10-11, footnotes omitted)

Anyone who was around during the late 1990s and early 2000s would know that consumers are much better off with the Bureau than without it. This report provides some of the reasons why that is the case.

First-Time Homebuyer Tips

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The Lenders Network quoted me in First-Time Home Buyer Tips and Advice from Top Mortgage & Real Estate Experts. It reads, in part,

If you’re in the market to purchase your first home, then you know there’s much for you to learn. First-time homebuyers often make many mistakes they wish they didn’t. You’re making the biggest financial decision in your life, you want to make sure you don’t make any mistakes. So we asked mortgage and real estate experts what advice they would give first-time homebuyers.

*     *     *

8. Look into a HomeReady HomePath Loan

“Many first-time home buyers look to Federal Housing Administration –insured mortgages which have low down payment requirements.

Fannie Mae and Freddie Mac both offer loan programs to lenders who lend to first –time homebuyers of one-unit residences.

These programs have down payment requirements that are as low as 3 percent. Fannie’s program is called HomeReady.

It defines a first-time homebuyer as “An individual is to be considered a first-time home buyer who

1. Is purchasing the security property;

2. Will reside in the security property as a principal residence; and

3.  Had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the security property.

In addition, an individual who is a displaced homemaker or single parent also will be considered a first-time home buyer if he or she had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period.”

Jefferson on Governing

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photo by Aaron Vowels

President Jefferson on Mount Rushmore

In commemoration of Independence Day, I quote from Thomas Jefferson’s First Inaugural Address as President of the United States in 1801:

About to enter, fellow-citizens, on the exercise of duties which comprehend everything dear and valuable to you, it is proper you should understand what I deem the essential principles of our Government, and consequently those which ought to shape its Administration. I will compress them within the narrowest compass they will bear, stating the general principle, but not all its limitations. Equal and exact justice to all men, of whatever state or persuasion, religious or political; peace, commerce, and honest friendship with all nations, entangling alliances with none; the support of the State governments in all their rights, as the most competent administrations for our domestic concerns and the surest bulwarks against anti-republican tendencies; the preservation of the General Government in its whole constitutional vigor, as the sheet anchor of our peace at home and safety abroad; a jealous care of the right of election by the people — a mild and safe corrective of abuses which are lopped by the sword of revolution where peaceable remedies are unprovided; absolute acquiescence in the decisions of the majority, the vital principle of republics, from which is no appeal but to force, the vital principle and immediate parent of despotism; a well-disciplined militia, our best reliance in peace and for the first moments of war till regulars may relieve them; the supremacy of the civil over the military authority; economy in the public expense, that labor may be lightly burthened; the honest payment of our debts and sacred preservation of the public faith; encouragement of agriculture, and of commerce as its handmaid; the diffusion of information and arraignment of all abuses at the bar of the public reason; freedom of religion; freedom of the press, and freedom of person under the protection of the habeas corpus, and trial by juries impartially selected. These principles form the bright constellation which has gone before us and guided our steps through an age of revolution and reformation. The wisdom of our sages and blood of our heroes have been devoted to their attainment. They should be the creed of our political faith, the text of civic instruction, the touchstone by which to try the services of those we trust; and should we wander from them in moments of error or of alarm, let us hasten to retrace our steps and to regain the road which alone leads to peace, liberty, and safety.

Let us hope that our current leaders, and we the people, rededicate ourselves to the 21st century version of these principles on this our Independence Day.

Easy Money From Fannie Mae

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The San Francisco Chronicle quoted me in Fannie Mae Making It Easier to Spend Half Your Income on Debt. It reads in part,

Fannie Mae is making it easier for some borrowers to spend up to half of their monthly pretax income on mortgage and other debt payments. But just because they can doesn’t mean they should.

“Generally, it’s a pretty poor idea,” said Holly Gillian Kindel, an adviser with Mosaic Financial Partners. “It flies in the face of common financial wisdom and best practices.”

Fannie is a government agency that can buy or insure mortgages that meet its underwriting criteria. Effective July 29, its automated underwriting software will approve loans with debt-to-income ratios as high as 50 percent without “additional compensating factors.” The current limit is 45 percent.

Fannie has been approving borrowers with ratios between 45 and 50 percent if they had compensating factors, such as a down payment of least 20 percent and at least 12 months worth of “reserves” in bank and investment accounts. Its updated software will not require those compensating factors.

Fannie made the decision after analyzing many years of payment history on loans between 45 and 50 percent. It said the change will increase the percentage of loans it approves, but it would not say by how much.

That doesn’t mean every Fannie-backed loan can go up 50 percent. Borrowers still must have the right combination of loan-to-value ratio, credit history, reserves and other factors. In a statement, Fannie said the change is “consistent with our commitment to sustainable homeownership and with the safe and sound operation of our business.”

Before the mortgage meltdown, Fannie was approving loans with even higher debt ratios. But 50 percent of pretax income is still a lot to spend on housing and other debt.

The U.S. Census Bureau says households that spend at least 30 percent of their income on housing are “cost-burdened” and those that spend 50 percent or more are “severely cost burdened.”

The Dodd-Frank Act, designed to prevent another financial crisis, authorized the creation of a “qualified mortgage.” These mortgages can’t have certain risky features, such as interest-only payments, terms longer than 30 years or debt-to-income ratios higher than 43 percent. The Consumer Financial Protection Bureau said a 43 percent limit would “protect consumers” and “generally safeguard affordability.”

However, loans that are eligible for purchase by Fannie Mae and other government agencies are deemed qualified mortgages, even if they allow ratios higher than 43 percent. Freddie Mac, Fannie’s smaller sibling, has been backing loans with ratios up to 50 percent without compensating factors since 2011. The Federal Housing Administration approves loans with ratios up to 57 percent, said Ed Pinto of the American Enterprise Institute Center on Housing Risk.

Since 2014, lenders that make qualified mortgages can’t be sued if they go bad, so most lenders have essentially stopped making non-qualified mortgages.

Lenders are reluctant to make jumbo loans with ratios higher than 43 percent because they would not get the legal protection afforded qualified mortgages. Jumbos are loans that are too big to be purchased by Fannie and Freddie. Their limit in most parts of the Bay Area is $636,150 for one-unit homes.

Fannie’s move comes at a time when consumer debt is soaring. Credit card debt surpassed $1 trillion in December for the first time since the recession and now stands behind auto loans ($1.1 trillion) and student loans ($1.4 trillion), according to the Federal Reserve.

That’s making it harder for people to get or refinance a mortgage. In April, Fannie announced three small steps it was taking to make it easier for people with education loans to get a mortgage.

Some consumer groups are happy to see Fannie raising its debt limit to 50 percent. “I think there are enough other standards built into the Fannie Mae underwriting system where this is not going to lead to predatory loans,” said Geoff Walsh, a staff attorney with the National Consumer Law Center.

Mike Calhoun, president of the Center for Responsible Lending, said, “There are households that can afford these loans, including moderate-income households.” When they are carefully underwritten and fully documented “they can perform at that level.” He pointed out that a lot of tenants are managing to pay at least 50 percent of income on rent.

A new study from the Joint Center for Housing Studies at Harvard University noted that 10 percent of homeowners and 25.5 percent of renters are spending at least 50 percent of their income on housing.

When Fannie calculates debt-to-income ratios, it starts with the monthly payment on the new loan (including principal, interest, property tax, homeowners association dues, homeowners insurance and private mortgage insurance). Then it adds the monthly payment on credit cards (minimum payment due), auto, student and other loans and alimony.

It divides this total debt by total monthly income. It will consider a wide range of income that is stable and verifiable including wages, bonuses, commissions, pensions, investments, alimony, disability, unemployment and public assistance.

Fannie figures a creditworthy borrower with $10,000 in monthly income could spend up to $5,000 on mortgage and debt payments. Not everyone agrees.

“If you have a debt ratio that high, the last thing you should be doing is buying a house. You are stretching yourself way too thin,” said Greg McBride, chief financial analyst with Bankrate.com.

*     *     *

“If this is data-driven as Fannie says, I guess it’s OK,” said David Reiss, who teaches real estate finance at Brooklyn Law School. “People can make decisions themselves. We have these rules for the median person. A lot of immigrant families have no problem spending 60 or 70 percent (of income) on housing. They have cousins living there, they rent out a room.”

Reiss added that homeownership rates are low and expanding them “seems reasonable.” But making credit looser “will probably drive up housing prices.”

The article condensed my comments, but they do reflect the fact that the credit box is too tight and that there is room to loosen it up a bit. The Qualified Mortgage and Ability-to-Repay rules promote the 43% debt-to-income ratio because they provide good guidance for “traditional” nuclear American families.  But there are American households where multigenerational living is the norm, as is the case with many families of recent immigrants. These households may have income streams which are not reflected in the mortgage application.

The Financial Meltdown and Consumer Protection

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photo by HTO

Larry Kirsch and Gregory D. Squires have published Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward. According to the promotional material,

Meltdown reveals how the Consumer Financial Protection Bureau was able to curb important unsafe and unfair practices that led to the recent financial crisis. In interviews with key government, industry, and advocacy groups along with deep archival research, Kirsch and Squires show where the CFPB was able to overcome many abusive practices, where it was less able to do so, and why.

Open for business in 2011, the CFPB was Congress’s response to the financial catastrophe that shattered millions of middle-class and lower-income households and threatened the stability of the global economy. But only a few years later, with U.S. economic conditions on a path to recovery, there are already disturbing signs of the (re)emergence of the high-risk, high-reward credit practices that the CFPB was designed to curb. This book profiles how the Bureau has attempted to stop abusive and discriminatory lending practices in the mortgage and automobile lending sectors and documents the multilayered challenges faced by an untested new regulatory agency in its efforts to transform the broken—but lucrative—business practices of the financial services industry.

Authors Kirsch and Squires raise the question of whether the consumer protection approach to financial services reform will succeed over the long term in light of political and business efforts to scuttle it. Case studies of mortgage and automobile lending reforms highlight the key contextual and structural conditions that explain the CFPB’s ability to transform financial service industry business models and practices. Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward is essential reading for a wide audience, including anyone involved in the provision of financial services, staff of financial services and consumer protection regulatory agencies, and fair lending and consumer protection advocates. Its accessible presentation of financial information will also serve students and general readers.

Features

  • Presents the first comprehensive examination of the CFPB that identifies its successes during its first five years of operation and addresses the challenges the bureau now faces
  • Exposes the alarming possibility that as the economy recovers, the Consumer Financial Protection Bureau’s efforts to protect consumers could be derailed by political and industry pressure
  • Offers provisional assessment of the effectiveness of the CFPB and consumer protection regulation
  • Gives readers unique access to insightful perspectives via on-the-record interviews with a cross-section of stakeholders, ranging from Richard Cordray (director of the CFPB) to public policy leaders, congressional staffers, advocates, scholars, and members of the press
  • Documents the historical and analytic narrative with more than 40 pages of end notes that will assist scholars, students, and practitioners

I would not describe the book as objective, given that Senator Elizabeth Warren wrote the forward and the President Obama’s point man on Dodd-Frank, Michael Barr, wrote the afterward. Indeed, it reads more like a panegyric. Nonetheless, the book has a lot to offer to scholars of the CFPB who are interested in hearing from the people who helped to stand up the Bureau.

The Hispanic Homeownership Gap

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photo by Gabriel Santana

Freddie Mac’s latest Economic & Housing Research Insight asks Will the Hispanic Homeownership Gap Persist? It opens,

This is the American story.

A wave of immigrants arrives in the U.S. Perhaps they’re escaping religious or political persecution. Perhaps a drought or famine has driven them from their homes. Perhaps they simply want to try their luck in the land of opportunity.

They face new challenges in America. Often they arrive with few resources. And everything about them sets them apart—their religions, their languages, their cultures, their foods, their appearances. They are not always welcomed. They frequently face discrimination in housing, jobs, education, and more. But over time, they plant their roots in American soil. They become part of the tapestry that is America. And they thrive.

This is the story of the Germans and Italians and many other ethnic groups that poured into the U.S. a century ago.

Today’s immigrants come, for the most part, from Latin America and Asia instead of Europe. Hispanics comprise by far the largest share of the current wave. Over the last 50 years, more than 30 million Hispanics migrated to the U.S. And these Hispanics face many of the same challenges as earlier European immigrants.

Homeownership provides a key measure of transition from a newly-arrived immigrant to an established resident. Many immigrants arrive without the financial resources needed to purchase a home. In addition, the unfamiliarity and complexity of the U.S. housing and mortgage finance systems pose obstacles to homeownership. As a result, homeownership rates start low for new immigrants but rise over time.

The homeownership rate among Hispanics in the U.S.—a population that includes new immigrants, long-standing citizens, and everything in between— stands around 45 percent, more than 20 percentage points lower than the rate among non-Hispanic whites. Much of this homeownership gap can be traced to differences in age, income, education and other factors associated with homeownership.

Will the Hispanic homeownership gap close over time, as it did for the European immigrants of a century ago? Or will a significant gap stubbornly persist, as it has for African-Americans? (1-2)

It concludes,

Census projections of future age distributions suggest that the age differences of Whites and Hispanics will be reduced by six percent (0.7 years) by 2025 and 12 percent (1.2 years) by 2035. If these projections are realized, the White/Hispanic homeownership gap is likely to narrow by 20 percent (five percentage points) by 2035. The Census projections include both current residents and future immigrants, and averaging the characteristics of these two groups of Hispanics tends to mask the relatively-rapid growth in homeownership among the current residents.

It is important to remember that about 13 percent of the White/Hispanic homeownership gap cannot be traced to population characteristics such as age and income. The explanation for this residual gap is unclear, although some of it may be due to wealth gaps and discrimination. (12)

Researchers at the Urban Institute have documented the importance of the Hispanic homeownership rate to the housing market more generally. It is worthwhile for policymakers to focus on it as well.

Addressing NYC’s Affordable Housing Crisis

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photo by Hromoslav

The NYC Rent Guidelines Board (of which I am a member) held a public hearing as part of its final vote on rent adjustments for the approximately one million dwelling units subject to the Rent Stabilization Law in New York City. My fellow board member, Hilary Botein, and I submitted the following joint statement at the hearing (also available on SSRN and BePress):

The Rent Guidelines Board determines rent increases for New York City’s 1 million rent-stabilized apartments. We must weigh the economic conditions of the residential real estate industry; current and projected cost of living; and other data made available to us. To make our decision, we reviewed reams of data and multiple analyses of those data. We also held five public hearings at which we heard hundreds of tenants speak, sing, chant, cry, and demonstrate. These hearings are among the only opportunities that tenants have to speak publicly about their housing situations, and they made clear the extremity of the housing crisis in the City, and that it will get worse without significant intervention.

Tenants who came to the RGB hearings are not a representative sample of rent-stabilized tenants in New York City. But they told us a lot about the state of housing in the City.  We felt that it was incumbent on us to respond to what we heard, even where it did not relate directly to the jurisdiction of the Board.

New York City cannot expect any meaningful housing assistance from the federal government in the near term. Our observations therefore focus on state and municipal actions that could address some of the issues that regularly cropped up at our hearings.

There is a desperate need for affordable housing that is pegged to residents’ incomes. Housing is deemed “affordable” when housing costs are 30 percent of a household’s income. There is no guarantee that rent stabilized housing remain affordable to a particular household, and there is no income eligibility for rent stabilized housing.  This aspect of rent regulation explains its durable political appeal, but makes it an imperfect vehicle for meeting the needs of low-income tenants.

Mayor de Blasio is protecting and developing hundreds of thousands of units of affordable housing through the Housing New York plan announced at the beginning of his term. More recently, his Administration announced a program to create 10,000 deeply affordable apartments and a new Elder Rent Assistance program.  But more can be done to help low-income tenants.

The Senior Citizen Rent Increase Exemption (SCRIE) and Disability Rent Increase Exemption (DRIE) programs have proven their effectiveness in “freezing” the rents of more than 60,000 low and moderate income rent-stabilized households. The state should create and fund a similar program for low-income rent stabilized tenants who pay more than 30 percent of their incomes towards housing costs.

State laws governing rent stabilization must be amended. Three elements of the law particularly penalize low-income tenants in gentrifying neighborhoods, and were behind the most distressing tenant testimonies that we heard. They are not within the RGB’s purview, but change is critical if the law is to operate as it was intended to do. The state legislature has considered bills that would make the necessary changes. First, owners can charge tenants a “preferential” rent, which is lower than the legal registered rent for the apartment. Preferential rents are granted most often in neighborhoods where the rent that the market can bear is less than the legal rent. This sounds like a good option for both tenants and owners, and perhaps that was its original intention. But now, as neighborhoods gentrify and market rates increase, the prospect of increasing a preferential rent with little notice has become a threat to tenants’ abilities to stay in their apartments. Preferential rents should be restricted to the tenancy of a particular tenant, as was the law before a 2003 amendment. Owners would then be able to increase rents for those tenants no more than the percentages approved by the Board.

Second, owners can tack on a 20 percent “vacancy increase” every time an apartment turns over. This increase incentivizes harassment, and should be limited to situations of very long tenancies, to keep owners from actively seeking to keep tenancies short.

Third, owners making what is termed a Major Capital Improvement (MCI) – a new roof, windows, or a boiler, for example – can pass this expense on to tenants via a rent increase that continues in perpetuity, after the owner has recouped her or his expenses. We also heard allegations of sketchy capital improvement applications that were intended to increase rents without improving the conditions in the building. The state legislature should review how MCIs work in order to ensure that they are properly incentivizing landlords to invest in their buildings to the benefit of both owners and tenants.

New York City needs a repair program for broken gas lines. We heard from tenants who had not had gas in their apartments for more than a year. We understand that fixing gas lines is particularly complicated and expensive, and that gas leaks raise serious safety concerns, but it is unacceptable for families to go for more than a year without gas, and we are concerned about fire safety issues resulting from people using hot plates. The city needs to step in and make the repairs.

We have a housing crisis. Low income tenants, who live disproportionately in communities of color, experience this crisis most acutely. We will not find systemic solutions within the housing market. All solutions require a lot of money, and we cannot count on anything from the federal government. But it is imperative that our state and local governments act, or New York City’s already burgeoning shelter system will be forced to take in even more people. Since the 1970s, New York City has been a leader in committing public resources to housing its low income residents, and that legacy must continue.  The Rent Guidelines Board cannot solve the housing crisis, but other arms of the New York State and City government can work together to reduce its impacts on low-income households.