Wednesday’s Academic Roundup
- On the Cyclicity of Regional House Prices: New Evidence for U.S. Metropolitan Statistical Areas, Michael André Flor & Torben Klarl, CESifo Working Paper Series No. 5471.
- How Mortgage Finance Affects the Urban Landscape, Sewin Chan, Andrew Haughwout & Joseph S. Tracy, FRB of New York Working Paper No. FEDNSR713.
- House-Price Expectations, Alternative Mortgage Products, and Default, Jan K. Brueckner, Paul S. Calem & Leondard I. Nakamura, FRB of Philadelphia Working Paper No. FEDPWP15-1.
- A Cost-Benefit Analysis of Judicial Foreclosure Delay and a Preliminary Look at New Mortgage Servicing Rules, Lawrence R. Cordell & Lauren Lambie-Hanson, FRB of Philadelphia Working Paper No. FEDPWP15-14.
- Sharing Property, Kellen Zale, University of Colorado Law Review (Forthcoming); U of Houston Law Center No. 2015-A-16.
- [Re]Integrating Community Space: The Legal and Social Meanings of Reclaiming Abandoned Space in New York’s Lower East Side, Andrea L. McArdle, 2 Savannah Law Review 247 (2015).
- Bankruptcy Weapons to Terminate a Zombie Mortgage, Andrea J. Boyack & Robert Berger, Washburn Law Journal, Vol. 54, No. 3, 2015.
September 2, 2015 | Permalink | No Comments
September 1, 2015
Credit Risk Transfer Deals
The Federal Housing Finance Agency released an Overview of Fannie Mae and Freddie Mac Credit Risk Transfer Transactions. It opens,
In 2012, the Federal Housing Finance Agency (FHFA) initiated a strategic plan to develop a program of credit risk transfer intended to reduce Fannie Mae’s and Freddie Mac’s (the Enterprises’) overall risk and, therefore, the risk they pose to taxpayers. In just three years, the Enterprises have made significant progress in developing a market for credit risk transfer securities, evidenced by the fact that they have already transferred significant credit risk on loans with over $667 billion of unpaid principal balance (UPB).
Credit risk transfer is now a regular part of the Enterprises’ business. The Enterprises are currently transferring a significant amount of the credit risk on almost 90% of the loans that account for the vast majority of their underlying credit risk. These loans constitute about half of all Enterprise loan acquisitions. Going forward, FHFA will continue to encourage the Enterprises to engage in large volumes of meaningful credit risk transfer through specific goals in the annual conservatorship scorecard and by working closely with Enterprise staff to develop and evaluate credit risk transfer structures. (2)
This is indeed good news for taxpayers and should reduce their exposure to future losses at Fannie and Freddie. There is still a lot of work to do, though, to get that risk level as low as possible. The report notes that these transactions have not yet been done for adjustable-rate mortgages or 15 year mortgages. Most importantly, the report cautions that
Because the programs have not been implemented through an entire housing price cycle, it is too soon to say whether the credit risk transfer transactions currently ongoing will make economic sense in all stages of the cycle. Specifically, we cannot know the extent to which investors will continue to participate through a housing downturn. Additionally, the investor base and pricing for these transactions could be affected by a higher interest rate environment in which other fixed-income securities may be more attractive alternatives. (22)
Taxpayers are exposed to many heightened risks during Fannie and Freddie’s conservatorship, such as operational risk. These risk transfer transactions are thus particularly important while the two companies linger on in that state.
September 1, 2015 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Round-Up
- Fannie Mae announced HomeReady – a new affordable lending product which will be rolled out later in the year. The program includes features designed to make it more flexible for lenders and buyers alike. For lenders Desktop Underwriter (DU) allows lenders to make credit risk, eligibility and loan availability assessment in one tool. HomeReady loans also promise simplified execution due to the ability to commingle them with standard loans into Mortgaged Backed Security polls. Purchasers are able to put as little as 3% down, and are able to use rental income from the property and non-borrower household income to meet the requirements.
September 1, 2015 | Permalink | No Comments
August 31, 2015
Saving on Home Insurance (en Español y Ingles)
Univision quoted me in 5 Ways to Save on Your Home Insurance (the article is in Spanish). It opens,
The cost of homeowners insurance can vary by hundreds of dollars depending on various factors. If you are looking to obtain a discount keep in mind these five tips when you purchase a policy.
1. Increase your deductible. Even though it is common for homeowners to have a deductible of $500 in their insurance policy, raising it to $1,000 could represent a significant reduction in the premium, says David Reiss, Professor of Law at the Center for Urban Business Entrepreneurship at Brooklyn Law School.
Extra tip: You should have an emergency fund to cover any additional expenses which may be incurred. Use this fund instead of putting in a claim to your insurance, since this can increase your rate.
August 31, 2015 | Permalink | No Comments
Monday’s Adjudication Roundup
- Thornburg Mortgage Inc. Ch. 11 trustee wins $45 million against RBC Capital Markets LLC for seizing and miscalculating the value of some mortgage-backed securities from Thornburg in 2007.
- Fidelity National Title Insurance Co. will not be liable for $38 million for its policyholders settling in third-party mechanic’s lien suit against Fidelity’s interest in a real estate development, as it does not comply with Arizona Supreme Court precedent.
August 31, 2015 | Permalink | No Comments
August 28, 2015
Underwriting Sustainable Homeownership
I have posted Underwriting Sustainable Homeownership: The Federal Housing Administration and the Low Down Payment Loan to SSRN (and to BePress). It is forthcoming in the Georgia Law Review. The abstract reads,
The United States Federal Housing Administration (“FHA”) has been a versatile tool of government since it was created during the Great Depression. The FHA was created in large part to inject liquidity into a moribund mortgage market. It succeeded wonderfully, with rapid growth during the late 1930s. The federal government repositioned it a number of times over the following decades to achieve a variety of additional social goals. These goals included supporting civilian mobilization during World War II; helping veterans returning from the War; stabilizing urban housing markets during the 1960s; and expanding minority homeownership rates during the 1990s. It achieved success with some of its goals and had a terrible record with others. More recently, the FHA is in the worst financial shape it has ever been in.
Today’s FHA suffers from many of the same unrealistic underwriting assumptions that have done in so many other lenders during the 2000s. It has also been harmed, like other lenders, by a housing market as bad as any seen since the Great Depression. As a result, the federal government recently announced the first bailout of the FHA in its history. At the same time that it has faced these financial challenges, the FHA has also come under attack for the poor execution of some of its policies to expand homeownership. Leading commentators have called for the federal government to stop using the FHA to do anything other than provide liquidity to the low end of the mortgage market. These critics rely on a couple of examples of programs that were clearly failures but they do not address the FHA’s long history of undertaking comparable initiatives. This article takes the long view and demonstrates that the FHA has a history of successfully undertaking new homeownership programs. At the same time, the article identifies flaws in the FHA model that should be addressed in order to prevent them from occurring if the FHA were to undertake similar initiatives in the future.
In order to demonstrate this, the article first sets forth the dominant critique of the FHA. Relying on often overlooked primary sources, it then sets forth a history of the FHA and charts its constantly changing roles in the housing finance sector. In order to give a more detailed picture of the federal government’s role in housing finance, the article also incorporates the scholarly literature regarding (i) the intersection of race and housing policy and (ii) the economics and finance literature regarding the role that down payments play in the appropriate underwriting of mortgages for low- and moderate-income households. The article concludes that the FHA can responsibly address objectives other than the provision of liquidity to the residential mortgage market. It further proposes that FHA homeownership programs for low- and moderate-income families should be required to balance access to credit with households’ ability to make their mortgage payments over the long term. Such a proposal will ensure that the FHA extends credit responsibly to low- and moderate-income households while minimizing the likelihood of future bailouts.
August 28, 2015 | Permalink | No Comments
September 2, 2015
Expanding the Credit Box
By David Reiss
DBRS has posted U.S. Residential Mortgage Servicing Mid-Year Review and 2015 Outlook. There is a lot of interest in it, including a table that demonstrates how “the underwriting box for prime mortgages slowly keeps getting wider.” (7) The report notes that
While most lenders continue to originate only QM [Qualified Mortgage] loans some have expanded their criteria to include Non-QM loans. The firms that are originating Non-QM loans typically ensure that they are designated as Ability-to-Repay (ATR) compliant and adhere to the standards set forth in the Consumer Financial Protection Bureau’s (CFPB) Reg Z, Section 1026.43(c). Additionally, most Non-QM lenders are targeting borrowers with high FICO scores (typically 700 and above), low loan to values (generally below 80%) and a substantial amount of liquid reserves (usually two to three years). Furthermore, most require that the borrower have no late mortgage payments in the last 24 months and no prior bankruptcy, foreclosure, deed-in-lieu or short sale. DBRS believes that for the remainder of 2015 the industry will continue to see only a few Non-QM loan originators with very conservative programs.
CFPB ATR And QM Rules
The ATR and QM rules (collectively, the Rules) issued by the CFPB require lenders to demonstrate they have made a reasonable and good faith determination, based on verified and documented information, that a borrower has a reasonable ability to repay his or her loan according to its terms. The Rules also give loans that follow the criteria a safe harbor from legal action. (8)
DBRS believes
that the issuance of the ATR and QM rules removed much of the ambiguity that caused many originators to sit on the sidelines for the last few years by setting underwriting standards that ensure lenders only make loans to borrowers who have the ability to repay them. In 2015, most of the loans that were originated were QM Safe Harbor. DBRS recognizes that the ATR and QM rules are still relatively new, having only been in effect for a little over a year, and believes that over time, QM Rebuttable Presumption and Non-QM loan originations will likely increase as court precedents are set and greater certainty around liabilities and damages is established. In the meantime, DBRS expects that most lenders who are still recovering from the massive fines they had to pay for making subprime loans will not be originating anything but QM loans in 2015 unless it is in an effort to accommodate a customer with significant liquid assets. As a result, DBRS expects the availability of credit to continue to be constrained in 2015 for borrowers with blemished credit and a limited amount of cash reserves. (8)
The DBRS analysis is reasonable, but I am not so sure that lenders are withholding credit because they “are still recovering from the massive fines they had to pay for making subprime loans . . ..” There may be a sense of caution that arises from new CFPB enforcement. But if there is money to be made, past missteps are unlikely to keep lenders from trying to make it.
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September 2, 2015 | Permalink | No Comments