October 25, 2017
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
Monday’s Adjudication Roundup
- Fairbanks aka Select Portfolio Servicing (SPS) pleaded to a California court to dismiss claims against it from a class of citizens. SPS alleged the class of past customers failed to sufficiently plead actual injuries suffered. SPS, owned by Credit Suisse, stands accused of failing to properly report interest paid by their customers.
- U.S. Bank attempted to ask a New York federal court to sanction Royal Park for their delays during discovery; however, the presiding judge denied their request. While Royal Park’s delays were unacceptable, the judge deemed them insufficient to warrant sanctions. The Court further explained U.S. Bank was not prejudiced by the inefficiency; therefore, no other action need be taken.
October 23, 2017 | Permalink | No Comments
October 20, 2017
The Long-Term Effects of Redlining
Daniel Aaronson et al. have posted The Effects of the 1930s HOLC “Redlining” Maps to SSRN. The paper provides empirical support for the argument that discriminatory government policies have consequences that can last for decades, including increased segregation. The abstract reads,
In the wake of the Great Depression, the Federal government created new institutions such as the Home Owners’ Loan Corporation (HOLC) to stabilize housing markets. As part of that effort, the HOLC created residential security maps for over 200 cities to grade the riskiness of lending to neighborhoods. We trace out the effects of these maps over the course of the 20th and into the early 21st century by linking geocoded HOLC maps to both Census and modern credit bureau data. Our analysis looks at the difference in outcomes between residents living on a lower graded side versus a higher graded side of an HOLC boundary within highly close proximity to one another. We compare these differences to “counterfactual” boundaries using propensity score and other weighting procedures. In addition, we exploit borders that are least likely to have been endogenously drawn. We find that areas that were the lower graded side of HOLC boundaries in the 1930s experienced a marked increase in racial segregation in subsequent decades that peaked around 1970 before beginning to decline. We also find evidence of a long-run decline in home ownership, house values, and credit scores along the lower graded side of HOLC borders that persists today. We document similar long-run patterns among both “redlined” and non-redlined neighborhoods and, in some important outcomes, show larger and more lasting effects among the latter. Our results provide strongly suggestive evidence that the HOLC maps had a causal and persistent effect on the development of neighborhoods through credit access.
The paper’s conclusion is just as interesting:
That the pattern begins to revert starting in the 1970s is at least suggestive that Federal interventions like the Fair Housing Act of 1968, the Equal Credit Opportunity Act of 1974, and the Community Reinvestment Act of 1977 may have played a role in reversing the increase in segregation caused by the HOLC maps. . . . We believe our results highlight the key role that access to credit plays on the growth and long-running development of local communities. (33)
October 20, 2017 | Permalink | No Comments
Friday’s Government Reports Roundup
- The Consumer Financial Protection Bureau (CFPB) recently released a report detailing its consumer protection principles. In the report, the CFPB lists their grounds for authorizing “financial data sharing and aggregation.” The agency’s goal is to improve the market by enhancing financial services and products, fostering competition, and enabling consumers to fully own their financial choices. The agency notes, while these principles provide for great practice, they are not intended to override or overturn any existing statutes or rules in the financial industry.
- The U.S. Commerce Department recently released a report regarding new residential construction across the Nation. In various pockets throughout the U.S., building permits among other indicia of building new homes have declined. According to the report by the Commerce Department, new home construction is well below the homebuilding percentages of 2006. Moreover, homebuilding is in its third month of decline. Similar to building permits and new home construction, housing stocks are also decreasing.
October 20, 2017 | Permalink | No Comments
