May 22, 2013
Reiss on Qualified Mortgage Rule
TheStreet.com quoted me in a story, New Mortgage Lending Rule Intended to Protect Borrowers May Hurt Self-Employed. It reads in part,
“Lenders are incentivized to originate qualified mortgages, because doing so makes it easier to defend against borrower lawsuits,” says David Reiss, a law professor at Brooklyn Law School. “In return, lenders must ensure that the terms of the mortgage conform with certain requirements that protect borrowers from abusive terms.”
Qualified mortgage loans cannot have interest-only periods, negative amortization, exceed 30 years, and cannot have balloon payments at the end of the term, with exceptions in rural or underserved areas. Further, qualified mortgage loans cannot exceed 43% of the borrower’s monthly pretax income, and borrowers must provide proof of income or assets.
“Determining whether self-employed individuals are able to make the loan payments presents particular challenges,” says Reiss. “The Consumer Financial Protection Bureau had originally proposed that self-employed individuals provide heavy documentation of their income, and for the lender to make sophisticated judgments about that income.”
In response to comments, the CFPB, in its proposal, subsequently reduced income documentation requirements and the level of lender income analysis required, Reiss says, but adds that “applicants must still demonstrate that their income is stable or increasing.”
May 22, 2013 | Permalink | No Comments
May 21, 2013
Two (or Three) Cheers for DeMarco’s Swan Song
FHFA acting Director Edward Demarco gave a thoughtful speech, Housing Finance, Systemic Risk, and Returning Private Capital to the Mortgage Market, on the future of federal housing finance policy. Given that the Administration has nominated Mel Watt as his permanent replacement, it is likely that DeMarco is seeking to leave a good final impression. I give the speech two real cheers, no more and no less.
First Cheer. The speech provides a review of two reasons why the government might intervene in the housing market. First, a “potential market failure could arise in housing finance if market participants have undue or unnecessary concerns about the ongoing stability and liquidity of mortgage credit in a purely private market across various economic environments.” (2) Second, another “potential market failure is what is often thought of as the positive externality associated with homeownership. In this view, the benefits of homeownership extend beyond the individual household to the broader aspects of society, hence if left solely to the market the number of homeowners will be less than optimal.” (3)
Second Cheer. The speech also provides a very nice summary of the two main approaches that the government can take to address housing market failures. First, is the issuer-based approach, which “is generally associated with a financial institution guaranteeing principal and interest repayment to investors. In this model, the issuer’s guarantee is backed by its shareholders’ capital. While not necessarily part of an issuer-based approach, typically this approach assumes a further credit enhancement in the form of a government guarantee on the securities issued.” (4) Second is the securities-based approach. With this approach, “as opposed to credit risk being absorbed by the equity of the securities issuer, credit risk would be absorbed through capital markets.” (6)
And One Bronx Cheer. That’s right, no real third cheer for DeMarco. Does he take a clear stand as to what course we should follow? No. Like the Administration in its oft-discussed White Paper, DeMarco sets forth the options and effectively punts on the trillion dollar question.
My two cents? The federal housing finance infrastructure should focus on two goals: (i) increasing housing affordability for low- and moderate-income households and (ii) providing a backstop during liquidity crises. Leadership is needed now, before Congress gets riproaringly drunk on Fannie and Freddie’s massive return to profitability. Otherwise, we have let one perfectly good crisis go to waste.
May 21, 2013 | Permalink | No Comments
May 20, 2013
Financial Education on a Wing and Prayer?
The CFPB released its report, Feedback from the Financial Education Field, which summarizes responses to an Request for Information on Effective Financial Education. The CFPB is required by Dodd-Frank to establish an Office of Financial Education “to educate American consumers and help them make better-informed decisions.” (5) The CFPB states that this “statutorily-mandated function serves as an important component of the CFPB’s consumer protection work.” (5)
But the feedback that the CFPB received is very disturbing. Not surprising, just disturbing. The report finds that “there is little systematic evidence about what approaches are most effective, for whom, and under what conditions.” (3) As of now, there “is a limited amount of rigorous evaluation on the effectiveness of financial education strategies and practices. A substantial amount of research in the field does not include control groups or use randomized control trials, and thus only limited compelling conclusions about financial education can be drawn, and often they cannot be reliably extrapolated to broader populations.” (11) Very basic things about financial education are still unknown. For instance, the CFPB acknowledges that there is uncertainty as to whether there is “a clear connection between financial knowledge and behavior.” (3)
For now, the CFPB should devote its efforts to evaluating “curricula, tools, and programs in order to identify programs and practices that are proven to improve financial outcomes.” (17) It is depressing to think that the CFPB might use a significant portion of its resources to promote financial education initiatives without strong evidence that they will work. So the CFPB should hold off on making significant investments in this area until it can identify successful strategies through evidence based practices. Too much of housing policy is based on sketchy academic research. Such research is readily relied upon to support politically palatable or ideologically driven decisions. But the CFPB should avoid taking the easy road as it will undercut its legitimacy and credibility in the long run.
May 20, 2013 | Permalink | No Comments
May 17, 2013
Reiss on the State of the Empire REIT
I was quoted by Bloomberg News in Empire State Building IPO Has Almost All Votes Needed. The story opens,
A plan to form a real estate investment trust holding New York’s Empire State Building has almost all of the votes needed to proceed, Malkin Holdings LLC said today.
Holders of 79.6 percent of the units of Empire State Building Associates LLC, which owns the Manhattan landmark, have voted in favor of the transaction, Malkin Holdings said in a regulatory filing. That’s up from 75 percent as of April 3, the most recent update. Eighty percent approval is needed.
The votes indicate that Malkin Holdings Chairman Peter Malkin and President Anthony Malkin, who control the tower, are edging closer to victory in their plan for an initial public offering of the building and 20 other properties. The Malkins, who have been fighting opposition from some of the investors, recently won two court rulings that eliminated potential obstacles to the plan.
The filing, a letter being mailed to all investors, “creates a sense that the vote is a fait accompli,” said David Reiss, a professor of real estate finance at Brooklyn Law School who isn’t involved in the transaction. “It is an effective document for creating a sense that this is a done deal.”
Court Rulings
On May 2, New York Supreme Court Justice O. Peter Sherwood said he intended to approve a $55 million settlement of a class-action lawsuit by a set of unit-holders. He has yet to make his approval official. Two days earlier, he denied a request by objectors to the settlement to declare a provision illegal which could result in opponents getting a token $100 a share if they didn’t switch their votes to “yes” within 10 days of official approval by 80 percent of the building’s units.
Malkin Holdings had said it would leave the voting on the IPO open until Sherwood ruled on the $100 provision, or until May 2. The voting has been open since late January, and the Malkins have the option to extend the ballot period until the end of 2014.
Each Empire State Building unit may be worth more than $300,000, according to the offering statement.
In today’s filing, investors are reminded that the buyout provision is “legally binding and enforceable.”
While the Malkins may invoke the provision to get the needed unanimity, they “may not enforce the $100 price,” Reiss said.
May 17, 2013 | Permalink | No Comments
May 16, 2013
Reiss on Threats to Housing
CBS News interviewed me (and gave a shout out to REFinblog.com) about The 5 Biggest Threats to the Housing Recovery. It reads in part:
3. The government’s role in the mortgage market will change
The U.S. government currently backs about 97 percent of mortgages though the Federal Housing Authority, Fannie Mae and Freddie Mac. That’s unlikely to continue. It may take years, but the feds will eventually start edging out of the mortgage market. Private mortgage financiers will have to fill the void. But exactly how that will happen and what effect it will have on borrowers remains to be seen.
“The entire lending industry needs [government] leadership as to what the bulk of the market is going to look like in the long run,” said David Reiss, professor at Brooklyn Law School and editor of real estate finance industry site REFinBlog. “How tight or loose will credit be? The Federal Housing Finance Agency will decide this to a large extent, as seen by the recent announcement that Fannie and Freddie will no longer buy interest only mortgages.”
May 16, 2013 | Permalink | No Comments
May 15, 2013
Lender Agrees to Permanent Injunction of Non-Judicial Foreclosure in Colorado
A pro se plaintiff has won at least a procedural victory against her lender in Brumfiel v. U.S. Bank et al. (May 14, 2013) (12-cv-02716-WJM-MEH). US Bank filed a Notice of Withdrawal of the foreclosure action and then a Motion to Vacate in which it consented “to a permanent injunction preventing it from” proceeding with a non-judicial foreclosure. (3) (quoting Motion to Vacate, emphasis in the original)
Under Colorado law, a party “may foreclose on a property by providing a document by his or her attorney that either ‘certifies’ or simply ‘states’ that ‘holder claims to be a qualified holder’ for the purposes of foreclosure.” (Order granting Plaintiff’s Request for Interim Preliminary Injunction, May 6, 2013, at 2) The court holds a Rule 120 hearing to confirm the existence of the default. Brumfiel challenges the constitutionality of this hearing on due process grounds.
In its May 6th order, the Court held that the questions that Brumfiel “raised regarding the serious, substantial, difficult issues apparent in this case” were a sufficient basis for an interim preliminary injunction. These difficult issues included whether the Colorado process
(1) [] lowers the standard of proof that a creditor must meet in order to proceed to foreclosure from original documentary evidence to an unsworn statement; and
(2) [] creates an additional burden upon a debtor to establish evidence of the creditor’s identity which the creditor, itself, is not required to locate.
Whether these issues create due process concerns within the limited scope of a Rule 120 hearing creates serious constitutional questions. (13-14)
This is only a tactical victory for the homeowner. By consenting to the permanent injunction, the lender should still be able to proceed with a judicial foreclosure. But the constitutionality of Colorado’s non-judicial foreclosure process will have to wait to be tested until another day,
May 15, 2013 | Permalink | No Comments
May 14, 2013
Reform for Whom?
David Stevens, the head of the Mortgage Bankers Association, gave an important and revealing speech about the direction of housing finance reform. It contains some good ideas, but also raises an alarm. Because the Administration and Congress are at an impasse, Stevens is leading the private sector in pushing for reform of Fannie and Freddie.
While Stevens is proposing some good ideas, the federal housing finance system should be designed — big surprise here — by the federal government first and foremost. Unfortunately, the private sector can take the lead because the federal government has not. Housing finance policy abhors a vacuum.
Stevens’ prepared remarks provide a “proposal for transition” for Fannie and Freddie. (3) The proposal has three steps:
First, it is imperative in this state of overlapping regulatory confusion that the White House name a Housing Policy Coordinator. This is an immediate need with a simple solution.
Second, we must have absolute transparency. FHFA, Fannie Mae and Freddie Mac must stop making market shifting decisions without the input of consumers or the industry.
Finally, we must have a clear path to transition out of conservatorship. To achieve this goal, we must move toward a single security, encourage additional risk sharing by mandating Fannie and Freddie to accept lower guarantee fees for deeper credit enhancements, and redirect the FHFA platform initiative. (3-4)
The first suggestion — some kind of Housing Czar — is both intuitively right and attractive. Housing cuts across so many arms of the federal government: the FHFA, HUD, FHA, CFPB and on and on. Those arms are frequently at cross purposes. A Housing Czar could seek to rationalize them. The second is also attractive, but given the focus of the housing finance industry, one would assume that “industry” would get a lot more input than “consumers.” And the third suggestion may have merit, but is not the type of decision that we want industry to make — we want the government, the people, to make it.
It is no secret that both parties have punted on housing finance reform. But it will be a tragedy if they do not recover the ball. Otherwise, industry will write the rules for future homeowners. Homeowners will then be playing a game designed for industry to win, not them.
May 14, 2013 | Permalink | No Comments
