September 27, 2017
Fannie, Freddie and Climate Change
The Housing Finance Policy Center at the Urban Institute issued its September 2017 Housing Finance At A Glance Chartbook. The introduction asks what the recent hurricanes tell us about GSE credit risk transfer. But it also has broader implications regarding the impact of climate-change related natural disasters on the mortgage market:
The GSEs’ capital markets risk transfer programs that began in 2013 have proven to be very successful in bringing in private capital, reducing the government’s role in the mortgage market and reducing taxpayer risk. Investor demand for Fannie Mae’s CAS and Freddie Mac’s STACR securities overall has been robust, in large part because of an improving economy and extremely low delinquency rates for loans underlying these securities.
Enter hurricanes Harvey, Irma and Maria. These three storms have inflicted substantial damage to homes in the affected areas. Many of these homes have mortgages backed by Fannie Mae and Freddie Mac, and many of these mortgages in turn are in the reference pools of mortgages underlying CAS and STACR securities. It is too early to know what the eventual losses might look like – that will depend on the extent of the damage, insurance coverage (including flood insurance), and the degree to which loss mitigation will succeed in minimizing borrower defaults and foreclosures.
Depending on how all of these factors eventually play out, investors in the riskiest tranches of CAS and STACR securities could witness marginally higher than expected losses. Up until Harvey, CRT markets had not experienced a real shock that threatened to affect the credit performance of underlying mortgages (except after Brexit, whose impact on the US mortgage market proved to be minimal). The arrival of these storms therefore in some ways is the first real test of the resiliency of credit risk transfer market.
It is also the first test for the GSEs in balancing the needs of borrowers with those of CRT investors. In some of the earlier fixed severity deals, investor losses were triggered when a loan went 180 days delinquent (i.e. experienced a credit event). Hence, forbearance of more than six months could trigger a credit event. Fannie Mae put out a press release that it would wait 20 months from the point at which disaster relief was granted before evaluating whether a loan in a CAS deal experienced a credit event. While most of Freddie’s STACR deals had language that dealt with this issue, a few of the very early deals did not; no changes were made to these deals. Both Freddie Mac and Fannie Mae have provided investors with an exposure assessment of the volume of affected loans in order to allow them to better estimate their risk exposure.
So how has the market responded so far? In the immediate aftermath of the first storm, spreads on CRT bonds generally widened by about 40 basis points, meaning investors demanded a higher rate of return. But thereafter, spreads have tightened by about 20 basis points, suggesting that many investors saw this as a good buying opportunity. This is precisely how capital markets are intended to work. If spreads had continued to widen substantially, that would have signaled a breakdown in investor confidence in future performance of these securities. The fact that that did not happen is an encouraging sign for the continued evolution of the credit risk transfer market.
To be clear, it is still very early to reasonably estimate what eventual investor losses will look like. As the process of damage assessment continues and more robust loss estimates come in, one can expect CAS/STACR pricing to fluctuate. But early pricing strongly indicates that investors’ underlying belief in these securities is largely intact. This matters because it tells the GSEs that the CRT market is resilient enough to withstand shocks and gives them confidence to further expand these offerings.
September 27, 2017 | Permalink | No Comments
Wednesday’s Academic Roundup
- Financial Regulatory Reform and the Excess of the Dodd-Frank Act, Dodwell
- Opposite of Correct: Inverted Insider Perceptions of Race and Bankruptcy, Cohen, Lawless, and Shin
- The Effect of House Prices on Household Borrowing: A New Approach, Cloyne, Huber, Ilzetki, and Kleven
- Multiple Tranches, Information Asymmetry and the Impediments to Mortgage Renegotiation, Korgaonkar
- Sunk-Cost Fallacy and Seller Behavior in the Housing Market, Ratnadiwakara and Yerramilli
September 27, 2017 | Permalink | No Comments
September 26, 2017
Safeguarding The CFPB’s Arbitration Rule
image by Nick Youngson https://nyphotographic.com/
I was one of the many signatories of this letter to Senators Crapo (R-ID) and Brown (D-OH) opposing H.R. Res. 111/S.J. Res. 47, “which would block the Consumer Financial Protection Bureau’s new forced arbitration rule.” the 423 signatories all agree “(1) it is important to protect financial consumers’ opportunity to participate in class proceedings; and (2) it is desirable for the CFPB to collect additional information regarding financial consumer arbitration.” The letter, reads, in part,
Class action lawsuits are an important means of protecting consumers harmed by violations of federal or state law. Class actions enable a court to see that a company’s violations are widespread and to order appropriate relief. The CFPB’s study shows that, over five years, 160 million class members were awarded $2.2 billion in relief – after deducting attorneys’ fees. Class actions are especially important for small dollar claims, because the time, expense and investigation needed for an individual claim typically make no sense either for the consumer or for an attorney. Additionally, class actions provide behavioral relief both for the plaintiffs and the public at large, incentivizing businesses to change their behavior or to refrain from similar practices.
Individual arbitrations are not a realistic substitute for class actions. Compared to the annual average of 32 million consumers receiving $440 million per year in class actions, the CFPB’s study found an average of only 16 consumers per year received relief from affirmative claims and another 23 received relief through counterclaims; in total, those consumers received an average of $180,770 per year. While the average per-person arbitration recovery may be higher than the average class action payment, the types of cases are completely different. The few arbitrations that people pursue tend to be individual disputes involving much larger dollar amounts than the smaller claims in class actions. Most consumers do not pursue individual claims in either court or arbitration for several reasons: they may not know their rights were violated; they may not know how to pursue a claim; the time and expense would outstrip any reward; or they cannot find an attorney willing to take an individual case. Thus, if a class action is not permitted, most consumers will have no chance at having their dispute vindicated at all. Class actions, on the other hand, are an efficient method of resolving claims impacting a large number of people.
The U.S. legal system depends on private enforcement of rights. Whereas some countries invest substantial resources in large government agencies to enforce their laws, the United States relies substantially on private enforcement. The CFPB’s study shows that, in those cases where there was overlap between private and public enforcement, private action preceded government enforcement 71% of the time. Moreover, consumer class actions provide monetary recoveries and reform of financial services and products to many consumers whose injuries are not the focus of public enforcers. American consumers can’t solely depend on government agencies to protect their rights.
Reporting on individual arbitrations will increase transparency, broaden understanding of arbitration, and improve the arbitration process. As scholars, we heartily endorse the information reporting requirements of the rule for individual arbitrations. This reporting will address many questions that have gone largely unanswered, due to the lack of transparency that currently exists in this area of law. For example, the public will now know the rate at which claimants prevail, whether it is important to be represented by an attorney, and whether repeat arbitrators tend to rule more favorably for one side than the other. The reporting will permit academic study, which will prompt a necessary debate on how to strengthen and improve the process.
In conclusion, we strongly support the CFPB rule as an important step in protecting consumers. We believe it is vital that Congress not deprive injured consumers of the right to group together to have their day in court or block important research into the arbitration process.
September 26, 2017 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- Wells Fargo may have thought it was out the fire with their fraudulent accounts scandal; however, the super bank may face additional penalties. The Federal Reserve may be next in line to penalize the bank. Earlier this year, Wells Fargo received a $100 million dollar fine from the Consumer Financial Protection Bureau. Though, Janet Yellen, chair of the Federal Reserve, did not allude to the specifics of a looming penalty the agency may impose, she did mention the agency will do whatever is necessary to ensure the appropriate controls are in place within the organization.
- After 30 years, East St. Louis Housing Authority no longer has to report to the United States Department of Housing and Urban Development (HUD). In October of 1985, the federal agency began overseeing the department due to the physical condition of the city’s housing, the mismanagement of the agency’s finances, and poor management by the agency’s leaders. In 1985, the East St. Louis Housing Authority was the first agency taken under federal control and to date the longest agency under HUD’s control.
September 26, 2017 | Permalink | No Comments
September 25, 2017
Getting CAMELS Past Regulators
Bloomberg BNA Banking Daily quoted me in Court Asked to Second-Guess Bank Capital, Earnings, Risk Ratings (behind a paywall). It reads, in part,
September 25, 2017 | Permalink | No Comments
Monday’s Adjudication Roundup
- A class of tenants in New Jersey alleged their landlord unreasonably charged the group for attorneys’ fees during their eviction proceedings. In a New Jersey trial court, the group was unsuccessful at becoming a certified class; however, the group achieved success when the New Jersey Appellate Division overturned the prior decision.
- Spainhour Law Group recently overcame a legal challenge. Spainhour’s adversary attempted to disqualify the company from representing their client, Real Estate Management LLC. As a result, Spainhour may now move forward in defending the management group and its owner in a breached partnership agreement suit.
- Bank of America, is in a federal Colorado court. A class of homeowners sued the bank for allegedly conspiring to deny their loan modifications. Under the Home Affordable Modification Program, most of the applicants were eligible; however, the bank and it’s contractors allegedly determined various ways to deny their applications.
September 25, 2017 | Permalink | No Comments
September 22, 2017
What Is a Credit Reference?
image by www.cafecredit.com
WalletHub quoted me in What Is A Credit Reference? Definition, Examples & More. It opens,
A “credit reference” is a document that attests to the creditworthiness of a prospective borrower or rental applicant. The most common type of credit reference is a credit report, as it chronicles an individual’s or business’s credit history. And the most notable credit reports are those from TransUnion, Equifax and Experian. You can check your TransUnion credit report for free on WalletHub.
A credit report isn’t the only type of credit reference, though. The term can also refer to the individual accounts on your credit report. For example, someone with no prior credit history may be deemed to have “insufficient credit references.” And that just means there are too few data points for the lender to assess his or her creditworthiness.
A letter from a credible source that speaks to an applicant’s financial trustworthiness would also qualify. This type of credit reference isn’t likely to help individual borrowers very much, except maybe for situations involving small neighborhood banks and credit unions, which are more likely than national lenders to value personal relationships. But it plays a big role in corporate lending. This includes business-to-business credit arrangements, where a borrower’s history is less readily available and the voucher of a trusted source – such as a vendor with whom the business has previously worked – is thus more meaningful. In this context, a credit reference may also be called a “trade reference.”
Below, we’ll explore credit references in greater detail, explaining the most common types of credit references and when they’re most effective.
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Ask The Experts: Assessing The Effectiveness Of Credit References
Credit references are characterized by variety. Myriad types exist and the impact of many is difficult to quantify. We therefore sought additional perspectives from a panel of lending experts from both the consumer and corporate sides of the aisle.
David Reiss
Mortgage lenders want to know that borrowers have the capacity to repay your loan and one way that they can gain comfort is to see what types of assets you have. Lenders will often ask to see your statements from financial institutions as part of their underwriting process. These statements can be considered as a type of credit reference. The more liquid the asset (a savings account, for instance) the better, as far as the lender is concerned. This is because it means that you can access the funds in the account readily if you needed to make a mortgage payment.
September 22, 2017 | Permalink | No Comments
