Thursday’s Advocacy & Think Tank Roundup
- A group of New York City’s nonprofit housing organizations partnered together to create a Community Land Trust (CLT). This effort spans across all five boroughs to create additional long-term affordable housing facilities. The coalition’s initial plan is to provide approximately 250 affordable housing units which will permanently house the families and individuals permanently. Other housing coalitions are partnering with the coalition to provide funding. For instance, Enterprise Community will support the initiative by investing 3.5 million into the deal.
- The Annie E. Casey Foundation recently released a report entitled, Measuring Equity, Results for Results Index. Casey’s report found that 25% of immigrant children live below the poverty line. Further, immigrant families typically earn 20% less than the median household in the U.S. As a solution to this issue, the Annie E. Casey Foundation advises U.S. and local policy makers to create milestones that immigrant families can achieve in order to support their transition to the U.S.
October 26, 2017 | Permalink | No Comments
October 25, 2017
Renters and Natural Disasters
Avvo quoted me in What Do Renters Need To Know in A Natural Disaster? It opens,
From hurricanes in the East to wildfires in the West, the past few months have seen an on-going slew of natural disasters in the United States. Fires and floods don’t care whether a property is inhabited by owners or renters. However, most states have laws that address how landlords and tenants deal with a rental property in the aftermath of a natural disaster.
Renters’ recourse in a natural disaster? Leases and local laws.
Check the lease first
The first source of authority on the obligations of landlords and tenants is found in the lease agreement, which should spell out the terms of what happens in case of a natural disaster. But not all leases clearly address this situation. According to Michael Simkin, managing partner of Simkin & Associates in Los Angeles, in cases where the lease is “burdensome or unfair,” local or state laws will govern what happens.
Landlord and tenant responsibilities vary by state
Every state has different laws regarding landlord and tenant obligations after a natural disaster strikes. Here are examples of answers to common tenant questions from some of the states recovering from recent natural disasters.
Can a lease be terminated if a natural disaster makes a rental property unusable?
California: If a rental property is destroyed in a natural disaster, the lease is automatically cancelled. The landlord must refund the rent for that rental period on a prorated basis.
“Many times, the city can come in and condemn the property and effectively force out tenants in unsafe situations. It is also the landlord’s responsibility to terminate a lease when they have knowledge that their rental property is unusable or unsafe,” notes Monrae English, a partner at Wild, Carter & Tipton in Fresno.
Florida: If the premises are “damaged or destroyed,” the tenant may terminate the rental agreement with written notice and move out immediately.
Louisiana: According to the Louisiana attorney general, if a natural disaster damages a property to the point that it is completely unusable, the lease is terminated automatically.
New York: If a rental becomes unfit for occupancy due to a natural disaster, the tenant may quit the premises and is no longer liable to pay rent. Any rent paid in advance should be returned on a prorated basis, according to David Reiss, law professor at Brooklyn Law School.
Texas: Either the tenant or the landlord can terminate the lease with written notice. Once the lease is canceled, tenants’ obligation to pay rent ceases and they’re entitled to a prorated refund of any rent paid during the time the home was not usable.
If the lease is terminated due to a natural disaster, does the renter get the security deposit back?
California: The landlord must return the security deposit within three weeks of the tenant vacating, with any deductions accounted for in writing. The landlord is not allowed to deduct disaster damage.
Louisiana: The landlord is required to return security deposits within one month, as long as the tenant fulfilled the lease obligations and left a forwarding address, according to Brent Cueria, an attorney with Cueria Law Firm, LLC in New Orleans. The landlord cannot deduct for natural disaster damage.
New York: The security deposit must be returned to the tenant, according to Reiss.
Texas: The security deposit must be refunded.
October 25, 2017 | Permalink | No Comments
Wednesday’s Academic Roundup
- Family Options Study: 3-Year Impacts of Housing and Services Interventions for Homeless Families, Bell, Brown, Dastrup, Gubits, Kattel, McCall, McInnis, Shinn, Solari, and Wood
- Encouraging Residential Moves to Opportunity Neighborhoods: An Experiment Testing Incentives Offered to Housing Voucher Recipients, Gala, Mihaly, and Schwartz
- Securitisation: The Lessons from the Financial Crisis of 2007, Bokov
- First-Time Homebuyers: Toward a New Measure, Acolin, Calem, Jagtiani, and Wachter
- The Local Aggregate Effects of Minimum Wage Increases, Cooper, Luengo-Prado and Parker
October 25, 2017 | Permalink | No Comments
October 24, 2017
Arbitration Rule Hit Job
The department of the Treasury issued a report, Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule. The report is a hit job on the Consumer Financial Protection Bureau’s new Arbitration Rule. The Arbitration Rule prohibits certain consumer financial product and service providers from barring consumers from participating in class action lawsuits involving those goods or services. It also requires that those providers submit certain records of their arbitrations to the Bureau. Academics (myself included) who study consumer finance generally believe that the Rule benefits consumers.
The Treasury report contains a bunch of weak arguments against the rule. For instance, it argues that “improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban” because such disclosures “would be a lower cost, choice-preserving means to advance consumer protection.”(2) This argument in favor of more and more disclosure as a response to predatory behavior in the consumer financial services market gets trotted out all of the time by opponents of consumer protection. The subprime boom and bust taught us (if we had not learned this before then) that disclosure is not enough. Every homeowner has had the experience of signing document after document without having the faintest idea of what they said. Disclosure is overwhelmed by complexity and consumer finance transactions are quite complex (have you read your credit card disclosures recently?).
Here are the other key arguments in the Treasury report for your consideration:
- The Rule will impose extraordinary costs—based on the Bureau’s own incomplete estimates.
- The vast majority of consumer class actions deliver zero relief to the putative members of the class.
- In the fraction of class actions that generate class-wide relief, few affected consumers demonstrate interest in recovery.
- The Rule will effect a large wealth transfer to plaintiffs’ attorneys.
- The Bureau did not adequately assess the share of class actions that are without merit.
- The Bureau offered no foundation for its assumption that the Rule will improve compliance with federal consumer financial laws. (1-2)
On my first read, I do not find them to be convincing reasons to get rid of the Rule. With time, others will respond to them in greater depth. This document, which references no authors, no internal institutional review process and no consultation with stakeholders, strikes me as nothing more than flimsy cover for a takedown of the Rule.
October 24, 2017 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- The United States Department of Housing and Urban Development (HUD) and the U.S. Department of Justice partnered together to tackle the issues surrounding the Federal Housing Administration and consumer practice. Consumers, at an alarming rate, are falsely filing claims against FHA lenders which is bolstering the number of suits in federal court. As a result, less consumers are able to appreciate the benefits of such programs and federal courts are burdened. The pair of agencies partnered together to determine an efficient and effective way to protect the consumers that act in good-faith with the agency so that other consumers do not pay higher costs through mortgage rates.
- Unlike the Department of Justice and the United States Department of Housing and Urban Development (HUD), two other federal agencies are butting heads. The Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Treasury (Treasury) are at odds over the CFPB’s arbitration rule. The Treasury believes the agency’s rule fails to adequately protect businesses because it opens the door for class action suits. To combat this rule, the Treasury released a report detailing the drawbacks of the rule. For instance, this new rule could potentially add approximately three thousand new lawsuits to the federal docket.
October 24, 2017 | Permalink | No Comments
October 23, 2017
Improving the 30-Year Mortgage
Wayne Passmore and Alexander von Hafften have posted Improving the 30-Year Fixed-Rate Mortgage to SSRN. The abstract reads,
The 30-year fixed-rate fully amortizing mortgage (or “traditional fixed-rate mortgage”) was a substantial innovation when first developed during the Great Depression. However, it has three major flaws. First, because homeowner equity accumulates slowly during the first decade, homeowners are essentially renting their homes from lenders. With so little equity accumulation, many lenders require large down payments. Second, in each monthly mortgage payment, homeowners substantially compensate capital markets investors for the ability to prepay. The homeowner might have better uses for this money. Third, refinancing mortgages is often very costly. We propose a new fixed-rate mortgage, called the Fixed-Payment-COFI mortgage (or “Fixed-COFI mortgage”), that resolves these three flaws. This mortgage has fixed monthly payments equal to payments for traditional fixed-rate mortgages and no down payment. Also, unlike traditional fixed-rate mortgages, Fixed-COFI mortgages do not bundle mortgage financing with compensation paid to capital markets investors for bearing prepayment risks; instead, this money is directed toward purchasing the home. The Fixed-COFI mortgage exploits the often-present prepayment-risk wedge between the fixed-rate mortgage rate and the estimated cost of funds index (COFI) mortgage rate. Committing to a savings program based on the difference between fixed-rate mortgage payments and payments based on COFI plus a margin, the homeowner uses this wedge to accumulate home equity quickly. In addition, the Fixed-COFI mortgage is a highly profitable asset for many mortgage lenders. Fixed-COFI mortgages may help some renters gain access to homeownership. These renters may be, for example, paying rents as high as comparable mortgage payments in high-cost metropolitan areas but do not have enough savings for a down payment. The Fixed-COFI mortgage may help such renters, among others, purchase homes.
The authors acknowledge some drawbacks for Fixed-COFI mortgages that can make them unattractive to some borrowers:
What do homeowners lose by choosing Fixed-COFI mortgages instead of traditional fixed-rate mortgages? First, they cannot freely spend refinancing gains on non-housing items. When mortgage rates fall, homeowners with Fixed-COFI mortgages automatically pay less interest and pay down the mortgage principal more. Second, they can no longer “win the lottery” played with capital markets investors and lock in a substantially lower rate for the remainder of their mortgage. With Fixed-COFI mortgages, homeowners trade the option of prepayment for faster home equity accumulation. We believe that many households may prefer Fixed-COFI mortgages to traditional fixed-rate mortgages. Furthermore, we believe that many renting households without savings for a down payment may prefer Fixed-COFI mortgages to renting. (4)
American households rely too much on the plain vanilla 30-year fixed rate mortgage for their own good. Papers like this give us some reasonable alternatives that might be better suited for many households.
October 23, 2017 | Permalink | No Comments
October 26, 2017
Mortgage Servicing Since The Financial Crisis
By David Reiss
Standard & Poors issued a report, A Decade After The Financial Crisis, What’s The New Normal For Residential Mortgage Servicing? It provides a good overview of how this hidden infrastructure of the mortgage market is functioning after it emerged from the crucible of the subprime and foreclosure crises. It reads, in part,
Ten years after the start of the financial crisis, residential mortgage servicing is finally settling into a new sense of normal. Before the crisis, mortgage servicing was a fairly static business. Traditional prime servicers had low delinquency rates, regulatory requirements rarely changed, and servicing systems were focused on core functions such as payment processing, investor accounting, escrow management, and customer service. Subprime was a specific market with specialty servicers, which used high-touch collection practices rather than the low-touch model prime servicers used. Workout options for delinquent borrowers mainly included repayment plans or extensions. And though servicers completed some modifications, short sales, and deeds in lieu of foreclosure, these were exceptions to the normal course of business.
Today, residential mortgage servicing involves complex regulation, increased mandatory workout options, and multiple layers of internal control functions. Over the past 10 years servicers have had to not only modify their processes, but also hire more employees and enhance their technology infrastructure and internal controls to support those new processes. As a result, servicing mortgage loans has become less profitable, which has caused loan servicers to consolidate and has created a barrier to entry for new servicers. While the industry expects reduced regulatory requirements under the Trump administration and delinquency rates to continue to fall, we do not foresee servicers reverting to pre-crisis operational processes. Instead, we expect states to maintain, and in some cases enhance, their regulatory requirements to fill the gap for any lifted or reduced at the federal level. Additionally, most mortgage loan servicers have already invested in new processes and technology, and despite the cost to support these and adapt to any additional requirements, we do not expect them to strip back the controls that have become their new normal. (2/10, citation omitted)
* * *
As The Economy Improves, Delinquency Rates Have Become More Stable
Total delinquency rates have only just begun returning to around pre-crisis levels as the economy–and borrowers’ abilities to make their mortgage payments–has improved (see charts 1 and 2). Lower delinquency rates can also be attributed to delinquent accounts moving through the default management process, either becoming reperforming loans after modifications or through liquidation. New regulatory requirements have also extended workout timelines for delinquent accounts. In 2010, one year after 90-plus delinquency rates hit a high point, the percentage of prime and subprime loans in foreclosure actually surpassed the percentage that were more than 90 days delinquent–a trend that continued until 2013 for prime loans and 2014 for subprime loans. But since the end of 2014, all delinquency buckets have remained fairly stable, with overall delinquency rates for prime loans down to slightly over 4% for 2016 from a peak of just over 8% in 2009. Overall delinquency rates for subprime loans have fluctuated more since the peak at 29% in 2009. (2/10)
* * *
Modifications Now Make Up About Half Of Loan Workout Strategies
Government agencies and government-sponsored enterprises (Fannie Mae and Freddie Mac) developed new formal modification programs beginning in 2008 to address the rising delinquency and foreclosure rates. The largest of these programs was HAMP, launched in March 2009. While HAMP was required for banks accepting funds from the Troubled Asset Relief Program (TARP), all servicers were allowed to participate. These programs required that servicers exhaust all loss mitigation options before completing foreclosure. This requirement, and the fact that servicers started receiving incentives to complete modifications, spurred the increase in modifications. (4/10)
* * *
Foreclosure Timelines Have Become Longer
As the number of loans in foreclosure rose during the financial crisis, the requirements associated with the foreclosure process grew. As a result, the time it took to complete the foreclosure process increased to almost 475 days in 2016 from more than 160 days in 2007–an increase of almost 200%. While this is not a weighted average and therefore not adjusted for states with smaller or larger foreclosure portfolios, which could skew the average, the data show longer timelines across all states. And even though the percentage of loans in foreclosure has decreased in recent years (to 1% and 9% by the end of 2016 for prime and subprime, respectively, from peaks of 3% in 2010 and 13% in 2011) the time it takes to complete a foreclosure has still not lessened (6/10)
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October 26, 2017 | Permalink | No Comments