November 3, 2017
Friday’s Government Reports Roundup
- National affordable housing is in danger yet again. Kevin Brady, chairman of the House Ways and Means Committee, introduced new tax reform legislation. The proposed bill significantly cuts funding for Housing Bonds and Housing Credit projects. While the plan does not make any cuts to Low-Income Housing Tax Credits, it cuts other affordable housing programs which results in a loss of many of the nation’s affordable housing monies.
- Mortgages account for the “nation’s largest consumer credit market,” at an approximate value of $10 trillion and in recent years, mortgage delinquency rates decreased significantly. The Consumer Financial Protection Bureau (CFPB) wants to ensure the downward trend continues. As a result the agency launched a new edition of its Mortgage Performance Trends tool. The CFPB’s newest version of this tool determines nation and locality trends through tracking borrowers delinquency status within one to three payments behind and borrows delinquency status four or more months behind.
November 3, 2017 | Permalink | No Comments
November 2, 2017
The Case for Prepaying your Mortgage
Never, ever hurts to be redundant
Christi R. Wann has posted The Case for Prepaying your Mortgage to SSRN. The abstract reads,
Households that already contribute sufficiently to tax-deferred retirement accounts often believe that the tax break from interest expense deduction is more beneficial than prepaying a mortgage. This idea stems from a faulty assumption regarding the appropriate opportunity cost of funds. This study covers a 26-year period and shows that prepayment is optimal for this type of household when correctly comparing the after-tax cost of the mortgage and the after-tax return of the risk-appropriate competing investment. The study illustrates that interest expense savings are greater than tax deduction benefits from 1990-2016 when prepaying 15-year and 30-year mortgages.
While somewhat technical, this paper argues that mortgage prepayment makes sense for many people who reject that idea based on bad information. It recommends that people who are making all of the right financial moves, like sufficiently funding their retirement, should prepay their mortgage if they have the resources to do it. The conclusion section is worth reading in full, if you want to know more:
This study proposes a proper competing investment that better accounts for the risky aspect of home ownership which is rarely addressed in the prior literature. Relying on the precedent 16 established in the commercial mortgage industry related to mortgage prepayment through defeasance, Treasury securities are recommended as the proper competing investment. This case should be compelling given the fact that Section 2(a)(16) of the Investment Company Act of 1940 as amended (15 U.S.C. 80a-1) requires that the substitute collateral in defeasance consist only of government securities. For example, this study shows that the opportunity cost of not paying off a 30-year mortgage five years early is 1.42 percent. This represents the excess mortgage interest rate paid over the interest that could be earned by investing in a five-year Treasury security.
A key assumption in this study that makes the Treasury security a valid competing investment is that particular households have already contributed the recommended minimum of at least ten percent of their earnings to their tax-deferred retirement account. It is important to note that the study advocates contributing sufficiently to a tax-deferred retirement account before considering an early mortgage paydown. Both foreclosure risk and interest expense are reduced when mortgage prepayment occurs for households projected to have sufficient retirement income.
This study computes the required average monthly extra principal payment and average total interest expense savings net of lost tax shelters for the early retirement of 30- or 15-year mortgage debt for various scenarios from 1990 to 2016. For example, it would only take an average extra principal payment of $83 a month to prepay a 30-year mortgage five years early and save an average $33,477 based on the historical rates for the last twenty-seven years. Similarly, by making an extra principal payment of approximately $218 households can prepay a 30-year mortgage ten years early and can save an average of $65,191. The estimates reported in this study are very conservative because they target married persons filing jointly in the 25 17 percent marginal tax bracket and the study assumes a 20 percent down payment. Further, based upon the 25 percent tax bracket for 2014, the study assumes an average state tax rate based on an average tax bracket of greater than $45,504 up to a maximum tax bracket of greater than $139,400. Therefore, the savings could be much greater for those in lower tax brackets and those without state income taxes. The results of the study are of interest to homeowners who have the financial ability to make extra principal payments but fear losing the commonly cited tax benefit of interest expense deductibility.
The prior literature revealed that, in general, most households could not liquidate all of their financial assets to pay down their mortgages [citation omitted]. Further research should determine the characteristics of households that overextend themselves with respect to their mortgage debt. These results could be used for targeted education about how much house to buy. Further, the priority of investing in retirement assets and having an appropriate emergency fund should also be included in this education. Once households are equipped with and utilize this knowledge, then mortgage prepayment can become optimal for most households. This result would warrant a study of the effects of such a widespread change in the mortgage market on aggregate household saving and the consumption of non-housing goods. (15-17)
November 2, 2017 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Roundup
- Eviction is a reality for many Americans. Approximately 3.7 million renters have been evicted from a rental in their lifetime. In the past two years, the nation’s eviction rate increased by half percent. Moreover, Blacks account for the highest percentage of people affected by these alarming eviction rates. Lastly, families which include at least one member with a college degree are two times less likely to experience eviction in their lifetime.
- The Consumer Financial Protection Bureau’s (CFPB) arbitration rule is officially obliterated. Yesterday, President Trump signed a resolution revoking the regulatory agency’s controversial arbitration rule. CFPB’s initial goal attempted to shield consumers from binding arbitration clauses in their contracts. Such rules would have protected consumers from the harsh rules of arbitration, such as the lack of an appeal process. According to reports, the Vice President broke the tie with his vote which allowed for the revocation to reach the President.
November 2, 2017 | Permalink | No Comments
November 1, 2017
Understanding Private Mortgage Insurance (PMI)
LendingTree quoted me in Guide to Understanding Private Mortgage Insurance (That’s PMI). It opens,
Part I: Basics of private mortgage insurance (PMI)
What is PMI?
If you’ve ever purchased a home without a large down payment, you may have faced the possibility of paying PMI, or private mortgage insurance. This financial product is a type of loan insurance typically bought by consumers when they purchase a house. However, the premiums paid toward PMI aren’t intended to protect the consumer. Rather, they provide protection for the lender, in case you stop making payments on your home loan.
As the Consumer Financial Protection Bureau (CFPB) notes, PMI is typically arranged by your lender during the home loan process and comes into play when you have a conventional loan and put down less than 20 percent of the property’s purchase price. However, private mortgage insurance is not just associated with home purchases; it can also be required when a consumer refinances his or her home and has less than 20 percent equity in it.
Generally speaking, PMI can be paid in three different ways — as a monthly premium, a one-time upfront premium or a mix of monthly premiums with an upfront fee.
There are also ways to avoid paying PMI altogether, which we’ll address later in this guide.
PMI versus MIP: What’s the difference?
While PMI is private mortgage insurance consumers buy to insure their conventional home loans, the similarly named MIP – that’s mortgage insurance premium — is mortgage insurance you buy when you take out an FHA home loan.
MIP works kind of like PMI, in that it’s required for FHA (Federal Housing Administration) loans with a down payment of less than 20 percent of the purchase price. With MIP, you pay both an upfront assessment at the time of closing and an annual premium that is calculated every year and paid within your monthly mortgage premiums.
Generally speaking, the upfront component of MIP is equal to 1.75 percent of the base loan amount. The annual MIP premiums, on the other hand, are based on the amount of money you owe each year.
The biggest difference between PMI and MIP is this: PMI can be canceled after a homeowner achieves at least 20 percent equity in his/her property, whereas homeowners paying MIP in conjunction with a FHA loan that originated after June 13, 2013, cannot cancel this coverage until their mortgage is paid in full. You can also get out from under MIP by refinancing your FHA loan into a new, conventional loan. However, you’ll need to leave at least 20 percent equity in your home to avoid having to pay private mortgage insurance on the refi.
Which types of home loans require PMI? MIP?
If you’re thinking of buying a home and wondering if you’ll be on the hook for PMI or MIP, it’s important to understand different scenarios in which these extra charges may apply.
Here are the two main loan situations where you’ll absolutely need to pay mortgage insurance:
- FHA loans with less than 20 percent down – If you’re taking out a FHA loan to purchase a home, you may only be required to come up with a 3.5 percent down payment. You will, however, be required to pay both upfront and annual mortgage insurance premium (MIP).
- Conventional loans with less than 20 percent down – If you’re taking out a conventional home loan and have less than 20 percent of the home’s purchase price to put down, you’ll need to pay PMI.
* * *
Part V: Frequently asked questions (FAQs)
Before you decide whether to pay PMI – or whether you should try to avoid it – it pays to learn all you can about this insurance product. Consider these frequently asked questions and their answers as you continue your path toward homeownership.
Q. Is PMI tax-deductible?
According to David Reiss, professor of law and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School, PMI may be tax-deductible but it all depends on your situation. “The deduction phases out at higher income levels,” he says.
According to IRS.gov, the deduction for PMI starts phasing out once your adjusted gross income exceeds $100,000 and phases out completely once it exceeds $109,000 (or $54,500 if married filing separately).
November 1, 2017 | Permalink | No Comments
Wednesday’s Academic Roundup
- Ditching the Middle Class with Financial Regulation, D’Acunto and Rossi
- Temporary Loan Limits as a Natural Experiment in FHA Insurance, Park
- Home Equity Conversion Mortgages: The Secondary Market Investor Experience, Begley, Fout, LaCour-Little, and Mota
- The Case for Prepaying your Mortgage, Wann
- Adverse Selection in the Home Equity Line of Credit Market, LaCour-Little and Zhang
November 1, 2017 | Permalink | No Comments
October 31, 2017
Tuesday’s Regulatory & Legislative Roundup
- The United States Department of Housing and Urban Development (HUD) continues its efforts to aid the victims of Hurricanes Irma, Maria, and Harvey. HUD recently created administrative and regulatory waivers. Though these waivers are new, current HUD programs are responsible for facilitating these waivers such as the Community Planning and Development (CPD) program.
- The federal Rental Assistance Demonstration (RAD) program, which has allowed for investment of private capital in public housing, has proven to help many lower socio-economic families and individuals. Approximately 62,000 public housing units have either been converted or rehabilitated through the conversion of subsidies and existing housing budgets. Overall, the RAD program has facilitated roughly $4 billion in investments.
October 31, 2017 | Permalink | No Comments
Relegating Consumer Protection To The Shadows
The Department of the Treasury released its report on Asset Management and Insurance, which follows on the heels of its report on the capital markets. The latest report calls for replacing the term “shadow banking” with “market based finance.” (63) The term “shadow banking” reflected a belief that there was a less regulated sector of the financial services industry that operated in the shadows of heavily regulated financial services sectors like banking.
While innocent enough as a matter of nomenclature, retiring “shadow banking” reflects the Trump Administration’s desire to reduce regulation across the financial services industry and to put an end to any negative connotations that the term shadow banking carries. The report makes this crystal clear: “Applying the term “shadow banking” to registered investment companies is particularly inappropriate as the word “shadow” could be interpreted as implying insufficient regulatory oversight, or disclosure.” (63)
Given that the Trump Administration is focused on rolling back many of the provisions of Dodd-Frank, it is worth reviewing the changes that this report advocates. I focus here on how the report seeks to limit the regulatory oversight role of the Consumer Financial Protection Bureau:
Title X of Dodd-Frank expressly excludes the “business of insurance” from the list of financial products and services within the CFPB’s jurisdiction. Dodd-Frank also prohibits the CFPB from exercising enforcement authority over “a person regulated by a State insurance regulator.” A “person” is defined to be “any person that is engaged in the business of insurance and subject to regulation by any State insurance regulator, but only to the extent that such person acts in such capacity.”
There are, however, a limited number of exceptions where the CFPB may exercise its authority over the business of insurance and persons regulated by state insurance regulators:
• If an insurer offers a financial product or service to the extent that the insurer is engaged in the offering or provision of a consumer financial product or service (e.g., debt protection contracts that are administered by insurers on behalf of a bank); To supervise and enforce violations of federal consumer laws (e.g., violations of the Real Estate Settlement Procedures Act that relate to insurers);
• If persons knowingly or recklessly provide substantial assistance in an Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) violation (i.e., if an insurer knowingly or recklessly supports a covered person or service provider in violation of the UDAAP provisions of Dodd-Frank); or
• To request information from a person regulated by a state insurance regulator in connection with the CFPB’s rulemaking, investigative, subpoena, or hearing powers.
Despite the general exclusions, these statutory exceptions create considerable uncertainty concerning what the CFPB can examine or regulate. Insurers are concerned that, if the CFPB interprets the exceptions broadly, it could potentially regulate insurers or the business of insurance in a manner more expansive than the statutory exceptions intend. Such regulatory actions could also be duplicative of actions undertaken by state insurance regulators.
Recommendations
Treasury recommends that Congress clarify the “business of insurance” exception to ensure that the CFPB does not engage in the oversight of activities already monitored by state insurance regulators. (108-09)
This recommendation seeks to further reduce consumer protection in the financial services industry. Republicans have been quite open with this goal, so there is really nothing hypocritical about this recommendation. It is just a bad one. There have been a lot of abusive debt protection contracts like credit life insurance products that are priced way higher than comparable life insurance products. Blocking the CFPB from regulating in this area will be bad news for consumers.
October 31, 2017 | Permalink | No Comments
