November 7, 2017
Tuesday’s Regulatory & Legislative Roundup
- Though the Trump Administration is aiming to dethrone Consumer Financial Protection Bureau’s leader, Richard Cordray. Cordray recently was found not guilty for his alleged Hatch Act violation. As a result, the Trump administration will have to determine another way to eject Cordray from office. Furthermore, the Office of Special Counsel found no evidence to convict Cordray of a violation.
- The Republican’s Tax Reform plan will not pass without a fight. Tax cuts and the Jobs Act will reek havoc on the mortgage industry by decreasing mortgage interest deductions and reducing the time-frames in which a homeowner may claim a capital gains exemption. According to critics, the impact will affect California more than any other state.
November 7, 2017 | Permalink | No Comments
November 6, 2017
A Shortage of Short Sales
Calvin Zhang of the Federal Reserve Bank of Philadelphia has posted A Shortage of Short Sales: Explaining the Under-Utilization of a Foreclosure Alternative to SSRN. The abstract reads,
The Great Recession led to widespread mortgage defaults, with borrowers resorting to both foreclosures and short sales to resolve their defaults. I first quantify the economic impact of foreclosures relative to short sales by comparing the home price implications of both. After accounting for omitted variable bias, I find that homes selling as a short sale transact at 8.5% higher prices on average than those that sell after foreclosure. Short sales also exert smaller negative externalities than foreclosures, with one short sale decreasing nearby property values by one percentage point less than a foreclosure. So why weren’t short sales more prevalent? These home-price benefits did not increase the prevalence of short sales because free rents during foreclosures caused more borrowers to select foreclosures, even though higher advances led servicers to prefer more short sales. In states with longer foreclosure timelines, the benefits from foreclosures increased for borrowers, so short sales were less utilized. I find that one standard deviation increase in the average length of the foreclosure process decreased the short sale share by 0.35-0.45 standard deviation. My results suggest that policies that increase the relative attractiveness of short sales could help stabilize distressed housing markets.
The paper highlights the importance of aligning incentives in the mortgage market among lenders, investors, servicers and borrowers. Zhang makes this clear in his conclusion:
While these individual results seem small in magnitude, the total economic impact is big because of how large the real estate market is. A back-of-the-envelope calculation suggests that having 5% more short sales than foreclosures would have saved up to $5.8 billion in housing wealth between 2007 and 2011. Thus, there needs to be more incentives for short sales to be done. The government and GSEs already began encouraging short sales by offering programs like HAFA [Home Affordable Foreclosure Alternatives] starting in 2009 to increase the benefits of short sales for both the borrower and the servicer, but more could be done such as decreasing foreclosure timelines. If we can continue to increase the incentives to do short sales so that they become more popular than foreclosures, future housing downturns may not be as extreme or last as long. (29)
November 6, 2017 | Permalink | No Comments
Monday’s Adjudication Roundup
- Three non-tribal couples attempted to challenge Washington’s property tax; however, a federal judge dismissed the claims due to the state’s lack of enforcement. Further, the couple has not attempted to use their tribe’s tribunal system nor any administrative process. As support for their claims, the couples cite the marketability of their homes.
- Two men pled guilty to their role in a scheme to defraud banks which yielded the pair $3.5 million in illegally earned income. Simon Curanaj, 62 and Michael Arruoyo, 59 pled guilty in a federal court in the first week of November. Their cunning scheme entailed obtaining home equity loans from banks, a practice known as “shotgunning.”
- Moody’s Investor Service Inc.(Moody’s) is back in federal court for their ratings on mortgage-backed-securities which misled investors and consumers. Federal Home Loan Bank of Boston, re-initiated a suit against Moody alleging the entity falsely stated “the quality of $5.7 billion in risky mortgage-backed securities.“
November 6, 2017 | Permalink | No Comments
November 3, 2017
Republicans and the Mortgage Interest Deduction
There is a lot to hate in the Republican tax reform plan contained in the proposed Tax Cuts and Jobs Act. (click here for a summary and here for the text of the bill itself). Overall, the bill is extraordinarily regressive, heavily favoring the wealthy. There will, of course, be all sorts of compromises to this proposal as Republicans work to get it passed. But it is worth highlighting what is good about the bill as it would be a shame to lose sight of it while the sausage is being made in Congress.
The best real-estate related provision from a policy perspective is the reduction of the mortgage interest deduction. In a section of the summary with the Orwellian title, Preserving the Mortgage Interest Deduction, the Republicans outline how they will slice the deduction in half:
For so many Americans, buying a home is often the largest investment – and perhaps most important – investment they will make in their lifetime.
The Tax Cuts and Jobs Act will continue to support the American dream of homeownership by preserving the Mortgage Interest Deduction.
This ensures that hardworking families can continue to access this important tax relief as they buy, own, and maintain their home.
Policy Specifics
• Increasing the standard deduction means a simpler, fairer, and flatter tax code in which fewer taxpayers need to go through the trouble of determining whether they should itemize.
• Under the Tax Cuts and Jobs Act, taxpayers will still be able to deduct mortgage interest in excess of the standard deduction, in combination with other remaining itemized deductions, including charitable contributions and property taxes.
• The mortgage interest deduction would be available for interest paid on new mortgages for up to $500,000 in home acquisition indebtedness on principal residences.
• For existing mortgages, the plan allows for current law deduction on indebtedness of up to $1,000,000 and up to $100,000 in home equity to help taxpayers who may have relied on the current mortgage-interest deduction.
How This Policy Helps the American People
Preserving the home mortgage – and the deduction for state and local property taxes – will help more Americans of all income levels achieve the American dream of homeownership. (15-16)
This plan would cut the principal amount of a mortgage that would be eligible for the mortgage interest deduction from the current maximum of $1,000,000 to $500,000. Given that wealthy households generally take the mortgage interest deduction more often and get more bang for their buck from it, it is a regressive aspect of the tax code.
It is striking that a provision with such broad support such as the mortgage interest deduction is actually on the table. It will be interesting to see how special interests in the real estate industry will respond. My bet is that at the end of day the deduction will remain mostly untouched, even though this particular Republican proposal makes good policy sense.
November 3, 2017 | Permalink | No Comments
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
