June 23, 2015
What’s Behind Rising Mortgage Bond Issuance?
GlobeSt.com quoted me in What Else Is Behind Rising Mortgage Bond Issuance, Demand?. It opens,
Investor demand for mortgage bonds, both that have agency backing and not, is quite high these days.
Last week Bloomberg reported that issuance of home-loan securities that don’t have government backing reached more than $32 billion this year, compared to $18 billion a year ago, citing data compiled by Bloomberg and Bank of America Corp. These securities include rental-home bonds, a relatively new asset class that developed after the recession.
Agency and GSE securities are also in high demand, as a recent report from the Mortgage Bankers Association indicates. The level of commercial/multifamily mortgage debt outstanding increased by $40.4 billion in the first quarter of 2015 — a 1.5% increase over the fourth quarter of 2014. Said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research with the report’s release: “Multifamily mortgages continued to grow even more quickly than the market as a whole, with banks increasing their portfolios by $8 billion and agency and GSE portfolios and MBS increasing their holdings by $10 billion.”
There are a number of economic-based drivers behind the demand for mortgage bonds of course: the fundamentals in the real estate space and the low interest rates that have driven investors to consider all manner of securities to eek out yield.
However, there is another possibility to consider as well and that is that the changing financial regulations are driving both issuance and investment.
On one hand, mortgages and private-label mortgage backed securities are much more regulated per Dodd-Frank and its Qualified Mortgage and Qualified Residential Mortgage rules, according to David Reiss, professor of Law and research director of the Center for Urban Business Entrepreneurship (CUBE) at Brooklyn Law School. On the other, post-crisis rules put in place for mortgage bonds have made these securities far more attractive for banks to hold as various news reports suggest.
For example, new rules have made ratings on mortgage bonds less crucial, allowing US lenders to use an alternative approach to calculating capital requirements, according to another recent article in Bloomberg. In essence, these rules allow lenders to reduce the amount needed for junk-rated mortgage bonds that are trading at discounts.
In addition, banks are finding that “treasury debt and MBS pass-throughs meet regulators’ standards much more easily than other assets”, according to a report by Deutsche Bank analysts Steven Abrahams and Christopher Helwig, per a third recent article in Bloomberg.
Two Opinions
With these facts in mind we turned to two experts to see how much of an impact new regulations are having. As it turned out, they are driving some of the change – but what is actually moving the needle in terms of demand is yet another trend. Read on.
For starters, there are some caveats. It can be misleading to throw the new rental home bonds in the mix in such a comparison, Reiss tells GlobeSt.com. “They are a post-crisis product when Wall Street firms saw that single-family housing prices were so low that they could make money from buying them up in bulk and then renting them out,” he says.
“They are not regulated in the same way as private-label MBS.”
Meanwhile issuers are still navigating Dodd-Frank’s Qualified Mortgage and Qualified Residential Mortgage rules, he says. They “are still trying to figure out how to operate within these rules — and outside of them, with the origination of non-QM mortgages. The market is still in transition with these products.”
As he sees it, the surge in issuance is a reflection of market players trying to understand how to operate in a new regulatory environment. They “are increasing their issuances as they get a better sense of how to do so.”
June 23, 2015 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Round-Up
- U.S. Department of Housing and Urban Development (HUD) is proposing policy changes to improve access to low-poverty neighborhoods – recent research (summarized here) indicates that place has a lot to do with educational attainment and earning power throughout life. HUD’s housing choice voucher program is proposing new rules that will increase access to lower poverty neighborhoods by allowing higher fair market rent calculations.
June 23, 2015 | Permalink | No Comments
June 22, 2015
New FHA Guidelines No Biggie
(Original Purchases in Levittown Funded in Large Part by FHA Mortgages)
Law360 quoted me in New Guidelines For Bad FHA Loans Won’t Boost Lending (behind paywall). It opens,
The federal government on Thursday provided lenders with a streamlined framework for how it determines whether the Federal Housing Administration must be paid for a loan gone bad, but experts say the new framework will have limited effect because it failed to alleviate the threat of a Justice Department lawsuit.
The U.S. Department of Housing and Urban Development provided lenders with what it called a “defect taxonomy” that it will use to determine when a lender will have to indemnify the FHA, which essentially provides insurance for mortgages taken out by first-time and low-income borrowers, for bad loans. The new framework whittled down the number of categories the FHA would review when making its decisions on loans and highlighted how it would measure the severity of those defects.
All of this was done in a bid to increase transparency and boost a sagging home loan sector. However, HUD was careful to state that its new default taxonomy does not have any bearing on potential civil or administrative liability a lender may face for making bad loans.
And because of that, lenders will still be skittish about issuing new mortgages, said Jeffrey Naimon, a partner with BuckleySandler LLP.
“What this expressly doesn’t address is what is likely the single most important thing in housing policy right now, which is how the Department of Justice is going to handle these issues,” he said.
The U.S. housing market has been slow to recover since the 2008 financial crisis due to a combination of economics, regulatory changes and, according to the industry, the threat of litigation over questionable loans from the Justice Department, the FHA and the Federal Housing Finance Agency.
In recent years, the Justice Department has reached settlements reaching into the hundreds of millions of dollars with banks and other lenders over bad loans backed by the government using the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act.
The most recent settlement came in February when MetLife Inc. agreed to a $123.5 million deal.
In April, Quicken Loans Inc. filed a preemptive suit alleging that the Justice Department and HUD were pressuring the lender to admit to faulty lending practices that they did not commit. The Justice Department sued Quicken soon after.
Policymakers at the Federal Housing Finance Agency, which serves as the conservator for Fannie Mae and Freddie Mac, and HUD have attempted to ease lenders’ fears that they will force lenders to buy back bad loans or otherwise indemnify the programs.
HUD on Thursday said that its new single-family loan quality assessment methodology — the so-called defect taxonomy — would do just that by slimming down the categories it uses to categorize mortgage defects from 99 to nine and establishing a system for categorizing the severity of those defects.
Among the nine categories that will be included in HUD’s review of loans are measures of borrowers’ income, assets and credit histories as well as loan-to-value ratios and maximum mortgage amounts.
Providing greater insight into FHA’s thinking is intended to make lending easier, Edward Golding, HUD’s principal deputy assistant secretary for housing, said in a statement.
“By enhancing our approach, lenders will have more confidence in how they interact with FHA and, we anticipate, will be more willing to lend to future homeowners who are ready to own,” he said.
However, what the new guidelines do not do is address the potential risk for lenders from the Justice Department.
“This taxonomy is not a comprehensive statement on all compliance monitoring or enforcement efforts by FHA or the federal government and does not establish standards for administrative or civil enforcement action, which are set forth in separate law. Nor does it address FHA’s response to patterns and practice of loan-level defects, or FHA’s plans to address fraud or misrepresentation in connection with any FHA-insured loan,” the FHA’s statement said.
And that could blunt the overall benefits of the new guidelines, said David Reiss, a professor at Brooklyn Law School.
“To the extent it helps people make better decisions, it will help them reduce their exposure. But it is not any kind of bulletproof vest,” he said.
June 22, 2015 | Permalink | No Comments
Monday’s Adjudication Roundup
- Two Moody’s Investor Services Inc. entities remain the only defendants in appeal from Illinois Bank following the exit of McGraw-Hill Cos. Inc. and Standard and Poor’s in suit over residential mortgage-backed securities ratings.
- A Second Circuit judge did not revive untimely suit against Bank of America for failing to fully disclose exposure to the secondary mortgage market finding that a “reasonably diligent” plaintiff could have filed suit by 2008 based on the publicly available information.
- BlackRock Inc. and other investors filed a class action in New York state court against U.S. Bank NA for allegedly failing to oversee $743 billion in residential mortgage-backed security trusts. The claims had been dismissed in federal court.
June 22, 2015 | Permalink | No Comments
June 19, 2015
CFPB Roundup
The Consumer Financial Protection Bureau released its Semi-Annual Report. From a news perspective, it is a snoozer — dog bites man — as it is really just a summary of what the Bureau has done (and already issued press releases about) over the last year. That being said, it is a great compendium of the CFPB’s actions for those who are looking to sketch the forest after six months of peering at the trees. I note a few interesting aspects of the report.
Director Cordray writes that “our supervisory actions resulted in financial institutions providing more than $114 million in redress to over 700,000 consumers.” (2) In this era of billion dollar settlements, this amount seem relatively small. In fact, “$114 million in redress to over 700,000 consumers” comes out to just $163 per affected consumer. I am not sure exactly what that means, but $163 per consumer does not sound as impressive as $114 million. It would be helpful to have had more detail about those supervisory actions. This is not to say that big settlements are a good unto themselves, but it would be helpful to know whether the punishment fit the crime.
I also found the appendices to be particularly interesting, at least for CFPB geeks:
- Appendix B contains a list of all of the CFPB’s reporting requirements
- Appendix C lists all of the significant rules, orders and initiatives adopted by the Bureau in the past year
- Appendix D lists the consent orders the Bureau has entered into with certain regulated entities
- Appendix E lists significant state attorney general and regulatory actions
- Appendix F lists CFPB reports from the past year
- Appendix G lists Congressional testimony given by CFPB officials over the past year
- Appendix H lists speeches given by Director Cordray and Deputy Director Antonakes over the past year.
All in all, the report is a thorough review of the state of the CFPB. Enjoy!
June 19, 2015 | Permalink | No Comments
Friday’s Government Reports Roundup
- The National Low Income Housing Coalition (NLIHC) releases report on differences between the National Housing Trust Fund (NHTF) and HOME Investment Partnerships Program. It found that the NHTF is more targeted to low-income renter households than HOME.
- The US Department of the Treasury’s Community Development Financial Institutions Fund (CDFI) evaluated New Markets Tax Credit (NMTC), which “enables economically distressed communities to leverage private investment capital by providing investors with a federal tax credit.”
- The Center for Housing Policy at the National Housing Conference released report, Affordable Housing’s Place in Medicaid Reform: Opportunities Created by the Affordable Care Act and Medicaid Reform.
- The Center for Housing Policy and Children’s HealthWatch released report, The Timing and Duration Effects of Homelessness on Children’s Health.
- The Offices of the Inspector General released report, Coordination of Responsibilities Among the Consumer Financial Protection Bureau and the Prudential Regulators—Limited Scope Review.
- HUD released a report making changes to the Rental Assistance Demonstration (RAD).
June 19, 2015 | Permalink | No Comments
June 18, 2015
What Is To Be Done with Mortgage Servicers?
The Office of the Comptroller of the Currency has found that EverBank; HSBC Bank USA, N.A.; JPMorgan Chase Bank, N.A.; Santander Bank, National Association; U.S. Bank National Association; and Wells Fargo Bank, N.A. have not met all of the requirements of consent orders they had entered into because of deficiencies in how they dealt with foreclosure servicing. The details of these deficiencies are pretty bad.
The OCC recently issued amended consent orders with these banks. The amended orders restrict certain business activities that they conduct. The restrictions include limitations on:
- acquisition of residential mortgage servicing or residential mortgage servicing rights (does not apply to servicing associated with new originations or refinancings by the banks or contracts for new originations by the banks);
- new contracts for the bank to perform residential mortgage servicing for other parties;
- outsourcing or sub-servicing of new residential mortgage servicing activities to other parties;
- off-shoring new residential mortgage servicing activities; and
- new appointments of senior officers responsible for residential mortgage servicing or residential mortgage servicing risk management and compliance.
HSBC had the most deficiencies of the six: it did not make 45 of the 98 changes it had agreed to over the last few years. I was particularly interested in the portion of the consent orders that relate to MERS. The HSBC consent order states:
(1) The Bank shall implement its Revised Action Plan and ensure appropriate controls and oversight of the Bank’s activities with respect to the Mortgage Electronic Registration System (“MERS”) and compliance with MERSCORPS’s membership rules, terms, and conditions (“MERS Requirements”), include, at a minimum:
(a) processes to ensure that all mortgage assignments and endorsements with respect to mortgage loans serviced or owned by the Bank out of MERS’ name are executed only by a certifying officer authorized by MERS and approved by the Bank;
(b) processes to ensure that all other actions that may be taken by MERS certifying officers (with respect to mortgage loans serviced or owned by the Bank) are executed by a certifying officer authorized by MERS and approved by the Bank;
(c) processes to ensure that the Bank maintains up-to-date corporate resolutions from MERS for all Bank employees and third-parties who are certifying officers authorized by MERS, and up-to-date lists of MERS certifying officers;
(d) processes to ensure compliance with all MERS Requirements and with the requirements of the MERS Corporate Resolution Management System (“CRMS”);
(e) processes to ensure the accuracy and reliability of data reported to MERSCORP and MERS, including monthly system-to-system reconciliations for all MERS mandatory reporting fields, and daily capture of all rejects/warnings reports associated with registrations, transfers, and status updates on open-item aging reports. Unresolved items must be maintained on open-item aging reports and tracked until resolution. The Bank shall determine and report whether the foreclosures for loans serviced by the Bank that are currently pending in MERS’ name are accurate and how many are listed in error, and describe how and by when the data on the MERSCORP system will be corrected; and
(f) an appropriate MERS quality assurance workplan, which clearly describes all tests, test frequency, sampling methods, responsible parties, and the expected process for open- item follow-up, and includes an annual independent test of the control structure of the system-to- system reconciliation process, the reject/warning error correction process, and adherence to the Bank’s MERS Plan.
(2) The Bank shall include MERS and MERSCORP in its third-party vendor management process, which shall include a detailed analysis of potential vulnerabilities, including information security, business continuity, and vendor viability assessments.
These should all be easy enough for a financial institution to achieve as they relate to basic corporate practices (e.g., properly certifying officers); basic data management practices (e.g., system-to-system reconciliations); and basic third-party vendor practices (e.g., analyzing potential vulnerabilities of vendors).
It is hard to imagine why these well-funded and well-staffed enterprises are having such a hard time fixing their servicing operations. We often talk about governments as being too poorly run to handle reform of complex operations, but it appears that large banks face the same kinds of problems.
I am not sure what the takeaway is in terms of reform, but it does seem that homeowners need protection from companies that can’t reform themselves while they are under stringent consent orders with their primary regulator for years and years.
June 18, 2015 | Permalink | No Comments
