Author Archives: David Reiss

What Is An Origination Fee?

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Realtor.com quoted me in What Is an Origination Fee, and How Much Does It Cost? It opens,

In the seemingly never-ending mortgage lexicon of home buying and selling, one term in particular stands out as a source of confusion: the origination fee. What is an origination fee? It’s something every homeowner needs to understand. And the good news is that it’s not actually that complicated.

In basic terms, an origination fee—sometimes referred to as a discount fee—is money that a lender or bank charges a client to complete a loan transaction. An origination fee can encompass a variety of different fees added together, says Mark Ventrone, owner and broker with ABLEnding, based in California and Arizona. It can include underwriting fees, administrative fees, processing fees, discount fees (also known as points), and any other fee charged by the lender and/or broker to the borrower.

Origination fee vs. points

Lenders generally speak about the money associated with origination fees as points. The term “point” is slang for 1% of the loan amount; 1 point = 1%. And points are part of those aforementioned closing costs charged by your lender, calculated as a percentage of the principal, says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”

If your loan is for $300,000, one point equals 1%, or $3,000, and two points equals 2%, or $6,000.

Because “points” is not an official term, you won’t see the term on disclosures, but you will see it in marketing materials and hear the term from lenders.

What does the origination fee cover?

Lenders charge an origination fee in part because they have upfront costs in originating a loan (origination fee—get it?), so they try to recoup that money with a fee, says David Reiss, a law professor and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.

If a lender doesn’t do this, it risks the borrower paying off the mortgage early and before the lender fully recoups the cost of generating the mortgage. And let’s face it—lenders might also charge an origination fee because it can be a profit center for them just like the interest rate.

Another way to think of an origination fee, according to Fleming: It’s the cost a borrower pays a bank for the chosen interest rate.

What does an origination fee cost?

Putting an exact dollar amount on origination fees can be a bit difficult because they are expressed as a percentage of the loan amount. But a standard origination fee for a conventional loan—or a loan amount up to $424,100—typically runs between $750 to $1,200, says Ventrone.

To see the breakdown of your origination fee, check out Page 2 of the loan estimate your lender provides.

“Each fee will be itemized separately in Box A so you will know exactly what you are paying for,” says Ventrone.

If a loan is $200,000 and the lender is charging a half-point (0.5%) to originate the loan, the borrower will need to pay an additional $1,000 in closing costs, says Reiss. If the lender is charging one point (1%), the fee would rise to $2,000. The origination fee generally ranges from 0.5% or 1% of the loan amount, but it can change depending on the bank and the client.

 

Banks v. Cities

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The Supreme Court issued a decision in Bank of America Corp. v. Miami, 581 U.S. __ (2017). The decision was a mixed result for the parties.  On the one hand, the Court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending. Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. On the other hand, the Court held that Miami had not shown that the banks’ actions were directly related to injuries asserted by Miami. As a result, the Court remanded the case to the Eleventh Circuit to determine whether that in fact was the case. This case could have big consequences for how lenders and others and other big players in the housing industry develop their business plans.

For the purposes of this post, I want to focus on the banks’ activities of the banks that Miami alleged they engaged in during the early 2000s. It is important to remember the kinds of problems that communities faced before the financial crisis and before the Dodd-Frank Act authorized the creation of the Consumer Financial Protection Bureau. As President Trump and Chairman Hensarling (R-TX) of the House Financial Services Committee continue their assault on consumer protection regulation, we should understand the Wild West environment that preceded our current regulatory environment. Miami’s complaints charge that

the Banks discriminatorily imposed more onerous, and indeed “predatory,” conditions on loans made to minority borrowers than to similarly situated nonminority borrowers. Those “predatory” practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and—when default loomed—unjustified refusals to refinance or modify the loans. Due to the discriminatory nature of the Banks’ practices, default and foreclosure rates among minority borrowers were higher than among otherwise similar white borrowers and were concentrated in minority neighborhoods. Higher foreclosure rates lowered property values and diminished property-tax revenue. Higher foreclosure rates—especially when accompanied by vacancies—also increased demand for municipal services, such as police, fire, and building and code enforcement services, all needed “to remedy blight and unsafe and dangerous conditions” that the foreclosures and vacancies generate. The complaints describe statistical analyses that trace the City’s financial losses to the Banks’ discriminatory practices. (3-4, citations omitted)

Excessively high interest rates, unjustified fees, teaser interest rates and large prepayment penalties were all hallmarks of the subprime mortgage market in the early 2000s. The Supreme Court has ruled that such activities may arise to violations of the Fair Housing Act when they are targeted at minority communities.

Dodd-Frank has barred many such loan terms from a large swath of the mortgage market through its Qualified Mortgage and Ability-to-Repay rules. Trump and Hensarling want to bring those loan terms back to the mortgage market in the name of lifting regulatory burdens from financial institutions.

What’s worse, the  burden of regulation on the banks or the burden of predatory lending on the borrowers? I’d go with the latter.

Running Circles around the CFPB

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Lauren Willis has posted The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension to SSRN.  It addresses an important subject — the cat and mouse game of the regulator and the regulated. The abstract reads,

To ensure that consumers understand financial products’ “costs, benefits, and risks,” the Consumer Financial Protection Bureau has been redesigning mandated disclosures, primarily through iterative lab testing. But no matter how well these disclosures perform in experiments, firms will run circles around the disclosures when studies end and marketing begins. To meet the challenge of the dynamic twenty-first-century consumer financial marketplace, the bureau should require firms to demonstrate that a good proportion of their customers understand key pertinent facts about the financial products they buy. Comprehension rules would induce firms to inform consumers and simplify products, tasks that firms are better equipped than the bureau to perform. (74)

The Bureau has worked hard to tackle financial education in a meaningful way, but Willis is right that this is a Herculean task given the profit incentive that financial institutions have to run circles around consumers and the Bureau itself. Willis explains

the feebleness of mandated disclosures, the inherent flaws in the alternatives the CFPB has been pursuing, the advantages firms have over regulators in ensuring their customers’ comprehension, and the CFPB’s legal authority to require customer confusion audits and enforce comprehension rules. I then elaborate on a few examples of how this form of regulation might operate in practice, including these four key elements:

1. Measuring the quality of a valued outcome (comprehension) rather than of an input that is often pointless (mandated or preapproved disclosure);

2. Assessing actual customer comprehension in the field as conditions change over time, rather than imagining what the “reasonable consumer” would understand or testing consumers in the lab or in single-shot field experiments;

3. Requiring firms to affirmatively and routinely demonstrate customer understanding, rather than relying on the bureau’s limited resources to examine firm performance ad hoc when problems arise ; and

4. Giving firms the flexibility and responsibility to effectively inform their customers about key relevant costs, benefits and risks through whatever means the firms see fit, whether that be education or product simplification, rather than asking regulators to dictate how disclosures and products should be designed. (76) (footnotes omitted)

Hopefully the Bureau will take a serious look at Willis’ critique.  It is important, of course, to get consumer financial literacy right in order to benefit consumers directly. But it is also important for the Bureau to get it right in order to protect its reputation as an effective regulator that brings real value to the consumer finance sector.

Hope for the Securitization Market

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The Structured Finance Industry Group has issued a white paper, Regulatory Reform: Securitization Industry Proposals to Support Growth in the Real Economy. While the paper is a useful summary of the industry’s needs, it would benefit from looking at the issue more broadly. The paper states that

One of the core policy responses to the financial crisis was the adoption of a wide variety of new regulations applicable to the securitization industry, largely in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). While many post-crisis analysts believe that the crisis laid bare the need for meaningful regulatory reform, SFIG members believe that any such regulation must: ƒ

  • Reduce risk in a manner such that benefits outweigh costs, including operational costs and inefficiencies; ƒ
  • Be coherent and consistent across the various sectors and across similar risk profiles; ƒ
  • Be operationally feasible from both a transactional and a loan origination basis so as not to compromise provision of credit to the real economy; ƒ
  • Be valued by key market participants; and ƒ
  • Be implemented in a targeted way (i.e. without unintended consequences).

In this paper, we will distinguish between the types of regulation we believe to be necessary and productive versus those that are, at the very least, not helpful and, in some cases, harmful. To support this approach, we believe it is helpful to evaluate financial market regulations, specifically those related to securitization, under three distinct categories, those that are:

1. Transactional in nature; i.e., directly impact the securitization market via a focus on underlying deal structures;

2. Banking rules that include securitization reform within their mandate; and

3. Banking rules that simply do not contemplate securitization and, therefore, may result in unintended consequences. (3)

The paper concludes,

The securitization industry serves as a mechanism for allowing institutional investors to deliver funding to the real economy, both to individual consumers of credit and to businesses of all sizes. This segment of credit reduces the real economy’s reliance on the banking system to deliver such funding, thereby reducing systemic risk.

It is important that both issuers of securitization bonds and investors in those bonds align at an appropriate balance in their goals to allow those issuers to maintain a business model that is not unduly penalized for using securitization as a funding tool, while at the same time, ensuring investors have confidence in the market via “skin in the game” and sufficiency of disclosure. (19)

I think the paper is totally right that we should design a regulatory environment that allows for responsible securitization. The paper is, however, silent on the interest of consumers, whose loans make up the collateral of many of the mortgage-backed and asset-backed securities that are at issue in the bond market. The system can’t be designed just to work for issuers and investors, consumers must have a voice too.

Tapping Home Equity for Retirement Income

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photo by www.aag.com/retirement-reverse-mortgage-pictures

Newsday quoted me in Consider Tapping Your Home Equity for Retirement Income (behind paywall). It opens,

Just as Dorothy in the “Wizard of Oz” had her ruby slippers that could have gotten her back to Kansas at any time with three clicks of her heels, retirees have the option of tapping their home sweet home to bridge income shortfalls.

Yet, according to research from the National Council on Aging, only 20 percent of retirees polled said they would be willing to use their home equity to generate income. Information was obtained through focus groups with 112 people aged 60 to 75, and two surveys of 254 financial advisers and 1,002 older homeowners.

When you’re in a pinch, here’s how to get the max out of your home.

– Get over the notion a home is sacred: “Using your home equity to generate retirement income can help you delay claiming Social Security,” says Gary Borowiec, a financial adviser and managing partner at Atlas Advisory Group in Cranford, New Jersey.

– Audit your housing situation: Determine if you’re using your home equity wisely. “Is a senior citizen living in the same home where she raised her children who have now gone off to live on their own? Would it make sense to downsize to an apartment with lower costs and fewer maintenance issues? If so, redirect some of the equity from the original home to investments that can generate an income stream over the course of her retirement,” says David Reiss, a professor at Brooklyn Law School specializing in real estate.

Patenaude To Help Lead HUD

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photo: J. Ronald Terwilliger Foundation for Housing America’s Families

Pamela Hughes Patenaude

Realtor.com quoted me in ‘Ultimate Housing Insider’: Pam Patenaude Nominated as HUD Deputy Secretary. It reads,

Pam Patenaude was nominated by President Donald Trump to become deputy secretary of Housing and Urban Development, according to a White House statement released on Friday. The move has been met with resounding applause by industry insiders who think her background could serve as the perfect complement to HUD Secretary Ben Carson, who entered his role without experience in housing or government.

Patenaude, currently president of the J. Ronald Terwilliger Foundation for America’s Families, was formerly an assistant secretary for community, planning, and development at HUD, under President George W. Bush. She also served as director of housing policy at the Bipartisan Policy Center’s Housing Commission. Patenaude’s nomination must be confirmed by the Senate.

“She’s the ultimate housing insider,” says David Reiss, research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School. “She’s connected and has a lot of respect within the housing field.”

Real estate industry organizations hailed the choice, including the National Association of Realtors®. In a statement, NAR President William E. Brown said, “Pam’s extensive and strong background in real estate and housing will be an asset. … Pam is an ideal candidate for the position; she understands the issues that impact the industry.”

David Stevens, president and CEO of the Mortgage Bankers Association, also offered his thumbs-up.

“Pam is an exceptional choice for the position,” Stevens said in a statement. “Personally, I have worked with her for a number of years and she is exactly the kind of leader who will help support the secretary and also address the critical issues ahead for HUD. She has a well-informed understanding of the agency, and essential technical knowledge of the real-estate finance industry. I would encourage the Senate to move swiftly in confirming her nomination.”

This depth of experience, Reiss says, serves as the perfect foil for Carson. As HUD secretary, Carson serves as the public face of this department, while Patenaude will handle the daily duties of running the organization.

“The big criticism of Carson is that he has no experience or background in housing,” Reiss continues. “So to have a No. 2 who’s really responsible for the day-to-day responsibility of the agency is a plus.”

What Patenaude’s appointment could mean for housing

In November, rumors were swirling that the Trump administration was considering Patenaude as HUD secretary, but then Carson got the nod instead, and then the Trump administration released a budget calling for $6 billion in cuts to the department. Patenaude’s nomination has many hopeful that HUD’s core initiatives—like affordable housing—will remain a priority.

“Trump’s ‘skinny budget’ decimated HUD,” Reiss continues. “Trump has made lots of appointments who’ve expressly said they want to destroy the agencies that they’re running. But Patenaude is an insider with HUD. So my hope is she sees the value it provides, and be an advocate for many HUD programs.”

Rental Potholes

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photo by Eric Haddox

Realtor.com quoted me in Rental Potholes—and How to Avoid Falling Into Them. It opens,

Until you have the money to buy your own home, renting is eventually a part of just about every person’s life. And typically this transaction tends to work out just fine. Until it doesn’t. Because there is indeed plenty that can go wrong, leaving renters learning some difficult lessons through trial and error. To make sure you aren’t one of them, check out these rental roadblocks—and what you can do to keep from getting stuck.

Somebody’s watching you

“My work took our family to Florida and in our haste to find somewhere to live with our two kids, we found a gorgeous townhouse seaside rental. The ocean views were incredible, just what we’d dreamed of. So incredible, in fact, that we didn’t realize the unit lacked window coverings of any kind! And as much as I loved looking at the ocean, there were times when some level of privacy was desired; people could see into the whole house if they were walking along the beach. When we shared this ‘oversight’ with the landlord, his offer was to split the costs of full-house window coverings! We decided not to help the property owner increase the value of his home. We continued to enjoy ocean views on a 24/7 basis but moved out after a year.” – Rhonda Moret, Del Mar, CA

Lesson learned: Don’t let your enthusiasm keep you from doing your due diligence before thoroughly vetting a place and signing on the dotted line.

“This responsibility falls squarely on the tenant; you can’t expect someone else to look out for your interests. That’s your job,” says David Reiss, academic program director for Brooklyn Law School’s Center for Urban Business Entrepreneurship. But by the same turn, don’t fall for a landlord’s request to “split the cost”—any renovations should be his responsibility all the way.

Bye-bye, security deposit

“When I handed our landlord a $1,000 security deposit, I assumed I’d get it back whenever we left, and didn’t bother to do a walk-through of the apartment to make sure it was in decent shape. Big mistake! Once we moved out, the landlord sent us a letter stating he was keeping the security deposit because we had broken a window in the garage. Only we hadn’t—that must have been done by a previous tenant. We got charged for someone else’s damage.” – Mindy Jensen, Wheaton, IL

Lesson learned: “Doing a walk-through inspection is important if you want your security deposit back,” says Reiss. “It’s important to add details like time stamps to everything and get documentation that your landlord received the report.”

Also consider recording a video with your smartphone while you walk through the place. The more backup material you have, the better the odds that you’ll get back what you deserve.

Your pet or your pad

“A few years ago, my family and I rented a townhouse. There was a pet shop on the corner selling the cutest puppies, and we fell in love with a French bulldog and bought him. That’s when things started to get ugly. We hadn’t checked the rental agreement to see if we could own a pet. When our landlord found out, she became hysterical and asked us to leave—or get rid of the dog. We ended up homeless, but with a very cute puppy. Fortunately, we stayed at a friend’s place until we found a dog-friendly home.” – Derek McLane, Sydney, Australia

Lesson learned: “Read the fine print before you sign. This is pretty fundamental, even if it is not fun to do,” says Reiss.

At the very least, ask your landlord what the rules are and to specify where the pertinent parts can be found in the lease. Be aware that many leases don’t allow pets, or will make pet owners pay an extra fee known as pet rent.

You’ve got mail … a mile away

“I was living in an amazing apartment when the mailboxes in the foyer were vandalized to the point where the USPS deemed them ‘unsafe for delivery of mail.’ We were ‘temporarily’ redirected to pick up mail six blocks up and four very long avenue blocks over until the landlords had an opportunity to repair our mailboxes. A year and a half later, they still hadn’t been fixed—and to make matters worse, a stairwell skylight had collapsed. I was forced to take on the practically full-time job of challenging my landlord to make repairs. I finally was able to make something happen by researching the building and finding out that my landlord had illegally jacked up the rent more than was legally allowed by rent-stabilization laws. Eventually, my efforts resulted in a rent reduction, reinstated mail delivery, and a very bad tenant/landlord relationship.” – Tim Tucker, Las Vegas, NV

Lesson learned: “Know your rights. Tenants have a lot of them, particularly in rent-regulated apartments,” says Reiss.