January 20, 2016
Wednesday’s Academic Roundup
- Towards a New Eviction Jurisprudence, Gerald S. Dickinson, Georgetown Journal on Poverty Law Policy, Vol. 23, No. 1, 2015.
- Managing Retirement Risks with Reverse Mortgage Loans and Long-Term Care Insurance, Adam Wenqiang Shao, Hua Chen & Michael Sherris, 7th Australasian Actuarial Education and Research Symposium.
- Real Estate Holdings of Public Firms and Collateral Discount, Irem Demirci, Umit G. Gurun & Erkan Yönder.
- Decomposition of Debt and the Road to REIT Returns, Linda Allen & Mariya Letdin.
- Mortgaged to the Hilt: Risks from the Distribution of Household Mortgage Debt, Craig R. Alexander & Paul Jacobson, C.D. Howe Institute Commentary 441.
- Clustered Housing Cycles, Ruben Hernandez-Murillo, Michael Owyang & Margarita Rubio, FRB of Cleveland Working Paper No. 1524.
- The Consumer Financial Protection Bureau: A Five Year Retrospective, Robert E. Krainer.
- Unemployment as an Adverse Trigger Event for Mortgage Default, Chao Yue Tian, Roberto Quercia & Sarah F. Riley, Journal of Real Estate Finance and Economics, Vol. 52, No. 1, 2016.
- Intermediation in Markets with Buyer and Seller Selection: Theory and an Application to Real Estate Brokerage, Bert Willekens, Roel Helgers, Maarten Goos & Erik Buyst.
January 20, 2016 | Permalink | No Comments
January 19, 2016
Know How to Get a Mortgage?
Fannie Mae’s Economic & Strategy Research Group posted research findings titled What Do Consumers Know About The Mortgage Qualification Criteria. The findings are sobering:
When asked to identify accurate key mortgage qualification criteria (down payment, credit score, and DTI ratio), about one half of consumers were unable to provide an answer.
o The lack of understanding is more pronounced among those with less education and lower income as well as among renters (as opposed to homeowners with mortgages), African-Americans, and Hispanics.
o Regression analysis shows that education, income, and age are most highly associated with mortgage qualification understanding. Lower-income consumers, less-educated consumers, and seniors are more likely to say “don’t know.” Ethnicity accounts for 2 to 9 percent of model explanation.
o Only 23 percent are aware of the 3 percent and 5 percent down payment programs.
o Although more than eight in 10 consumers (81 percent) indicate that they have seen their credit score, when asked what their score is, nearly half consumers (49 percent) say “don’t know” or provide a number outside of the score range (300-850).
And, among those who did provide an answer, only 5 to 16 percent of them chose an answer with the correct range.
o The “over-estimate” is more pronounced among less-educated and lower-income consumers, African-Americans, and Hispanics. When asked about the maximum DTI ratio, these consumer groups are more likely to “under-estimate” the ratio.
o Their mean responses about the minimum down payment and credit score requirements are higher than Fannie Mae requirements.
Lenders are cited as the most influential source of information for getting mortgage advice (33 percent most influential; 64 percent top three most influential), followed by family and friends (20 percent most influential; 47 percent top three most influential).
Regression analysis shows that ethnicity and age are most highly associated with differences in the influence of various information sources. For example:
o Older and Caucasian consumers are more likely to cite lenders as the most influential source of information.
o African-Americans and Hispanics are more likely to cite real estate agents, government agencies, and non-profit housing counselors.
o Younger consumers and Asian-Americans are more likely to cite family and friends as the most influential source of information. (5, emphasis in the original)
The authors identify a lot of important implications that arise from this study, the main one being — “Do not take consumer confidence at face value — there is a need and opening for educational efforts surrounding primary underwriting principles (credit score, down payment/LTV, DTI ratos, and low down payment mortgage programs.” (6)
The big open question is, however, does financial education really work?
January 19, 2016 | Permalink | No Comments
January 18, 2016
The Golden Rule of Conduct
In honor of the Reverend Martin Luther King, Jr., a quotation from Mahatma Gandhi, one of his heroes:
The golden rule of conduct…is mutual toleration, seeing that we will never all think alike and we shall see Truth in fragments and from different angles of vision. Conscience is not the same thing for all. Whilst, therefore, it is a good guide for individual conduct, imposition of that conduct upon all will be an insufferable interference with everybody’s freedom of conscience.
Democracy is not a state in which people act like sheep.
Truth resides in every human heart, and one has to search for it there, and to be guided by truth as one see it. But no one has a right to coerce others to act according to his own truth.
January 18, 2016 | Permalink | No Comments
Happy Martin Luther King, Jr. Day!
“Injustice anywhere is a threat to justice everywhere.”
Martin Luther King, Jr.
January 18, 2016 | Permalink | No Comments
January 15, 2016
Rent-to-Own Risks
Kroll Bond Rating Agency has released a CMBS Commentary, Rent-to-Own Deals Present More Risk than SFR [Single-Family Rental]. The commentary addresses the first rent-to-own securitization, one that Kroll is not rating. With rent-to-own, ” the tenant has the right to purchase the property it is currently renting in the future at a specified exercise price.” (1) With single-family rental, the tenant is currently renting a property from a large institutional investor without a right to purchase.
Kroll has identified a variety of risks that are specific to R2O deals. While some are specific to potential investors, others will also impact the tenants in these properties:
A primary concern was that the legality of purchase options associated with rent-to-own properties are largely untested and there is a possibility that these purchase options could subsequently be found to violate consumer protection and/ or predatory lending laws. If this occurred, it could result in considerable litigation costs for the securitization trust, as well as a cessation of advancing by the servicer. For example, if it was determined that the purchase option violated consumer protection laws, tenants in the applicable jurisdiction could potentially cease making rental payments under their leases, potentially causing a shortfall in the funds available for the borrower to make debt service payments under the mortgage loan and if the servicer failed to advance such amounts because it determined that advances were non-recoverable, this could result in a shortfall in the amounts available for distribution to the bondholders. Another risk present in the rent-to-own structure is a delay in the ability to foreclose on mortgaged properties that are subject to purchase options because the mortgages are subordinate to the purchase option right. As a result, the servicer may not be able to foreclose following an event of default under the loan unless the related purchase option period has expired. These risks are not applicable in standard SFR deals because the tenants do not hold purchase options with respect to the rental properties. (1)
I was somewhat skeptical that these types of securitizations would have much of a life once the housing bust worked itself out. It looks, however, like they might. Kroll is right to alert potential investors to the concerns outlined above. The CFPB and state regulators should also be looking at these cutting-edge transactions to ensure that residents of these homes are appropriately protected.
January 15, 2016 | Permalink | No Comments
Friday’s Government Reports Roundup
- The Federal Housing Finance Agency released its 2016 Scorecard outlining conservatorship priorities for Fannie Mae and Freddie Mac, and Common Securitization Solutions.
- The Joint Center for Housing Studies released its Rental Housing Report and created an interactive map series that shows where renters are experiencing housing cost burdens.
- The Labor Department’s latest report finds that there were 292,000 jobs created in December, particularly in temporary-help services, health care, transportation and construction.
January 15, 2016 | Permalink | No Comments
January 14, 2016
Why Have a Complaint Window?
Angela Littwin of the the University of Texas School of Law has posted Why Process Complaints? Then and Now to SSRN. The abstract reads,
The creation of the Consumer Financial Protection Bureau (CFPB) established the first comprehensive federal forum for processing consumer complaints about financial products and services. The CFPB not only handles consumers complaints; it also publishes a database that includes most complaints and their initial resolutions. For a symposium honoring the scholarship of Professor William C. Whitford, I analyze the CFPB’s complaint system and database using a framework he developed to explore the reasons why government agencies process consumer complaints and whether these reasons justify the resources that complaint processing entails. Whitford and his co-author proposed three “obvious” reasons to process consumer complaints: to settle consumer disputes; to inform the agency’s regulatory activities; and to generate good will for the agency among constituencies such as consumers, government actors, and the companies the CFPB regulates.
I find that the CFPB has mixed success in providing an alternative dispute resolution forum for consumers. I am, however, missing key information for this evaluation. The CFPB Consumer Complaint Database contains the financial institutions’ responses to consumer complaints but there is almost no information available about any follow up actions the CFPB takes. The CFPB is particularly strong on the regulatory function. It makes significant use of complaint data in its regulatory roles and evinces a commitment to ensuring that companies are handling complaints well. Last comes good will. With respect to public good will, I was unable to find much evidence one way or the other. As for good will among government actors, the CFPB appropriately appears not to apply different treatment to complaints referred by government entities or officials. Finally, the CFPB’s complaint data reveal an intriguing possibility that the process may provide some legitimization of financial institutions’ complaint resolutions. But given that consumer financial companies are pushing for the CFPB’s elimination, working to generate good will among financial institutions in this way may be entirely reasonable on the CFPB’s part. This is especially true because the CFPB has made important complaints decisions – such as publishing the database without redacting company names – despite financial companies’ vociferous objections.
I was interested by the “argument regarding bureaucratic companies . . . that a complaint process can find and resolve violations of the bureaucracy’s own rules.” (944) But Littwin also notes that the key issue is the “ineffectiveness in handling the harder cases, such as those raising issues of fact or law.” (Id.) We are still a long way off from figuring out the optimal system for addressing consumer complaints, but this article helps to frame the issue nicely.
January 14, 2016 | Permalink | No Comments
