October 5, 2017
Evolution of the CFPB?
The Mortgage Bankers Association has issued a white paper, CFPB 2.0: Advancing Consumer Protection. The Executive Summary reads, in part,
In its first years, the Bureau’s regulatory expertise was largely consumed by the need to meet deadlines on specific rules required under the Dodd-Frank Act, and its supervision program took time to stand up. In its first years, the Bureau spent relatively little time providing guidance to industry on its expectations.
The combination of aggressive enforcement and the absence of regulatory guidance evolved into a regime of “regulation by enforcement.” Director Richard Cordray has argued that the Bureau’s enforcement regime provides “detailed guidance for compliance officers” and that it “would be ‘compliance malpractice’ for the industry not to take careful bearings from [consent] orders about how to comply with the law.” Unfortunately, the reality is that the Bureau’s enforcement program offers only fragmentary glimpses of how the Bureau interprets the laws and regulations it enforces.
This paper explains why authoritative guidance is still needed. Rather than seeking to provide the equivalent of “detailed guidance” through enforcement, the Bureau should simply provide detailed guidance. Such guidance can be provided in a host of forms, including advisory opinions, bulletins, no-action letters, statements of policy, and answers to frequently asked questions. In contrast to enforcement orders, such guidance can be proactive, efficient, clear and comprehensive, and can allow for stakeholder input and revision when facts and circumstances warrant. (v)
It is hard to argue with the MBA that it is better to regulate by supervision than by enforcement as that allows regulated companies to design policies that meet with their regulatory requirements. As the CFPB matures, I would expect that this would happen naturally. Indeed, the white paper acknowledges the challenges of standing up the CFPB in its first few years of existence that led to the early emphasis on enforcement.
I wonder a bit about the timing of this report. The MBA describes the CFPB as being at a “crossroads.” (19) That crossroads may refer to the Republican control of Congress and the Executive Branch, it may refer to the soon-to-be ending term of Director Cordray, or it may refer to both of those developments. So I wonder if this report is meant to provide some intellectual cover to bigger changes that would reduce the CFPB’s role as America’s consumer protection sheriff. Let’s see where the MBA comes down on those bigger changes once their floated in the coming months. Are they advocating tweaks to the way the CFPB does business or are they looking for some kind of revolution in the regulation of consumer protection?
October 5, 2017 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Roundup
- The federal government wants to lower the number of sexual harassment occurrences in the nation’s housing sector. As a result, the United States Department of Justice (DOJ), recently launched an initiative to decrease the amount of sexual harassment in housing practices. The DOJ’s initiative seeks to protect women from unruly landlords, property managers, security guards, and other housing employees. The Department of Justice, Civil Rights division will lead the initiative through the enforcement of the Fair Housing Act.
- In 2012, 44% of middle class families could afford the inventory of homes being sold. Four short years later, the percentage of middle class families able to afford the inventory of homes decreased by 12% in 2016. In order to aid in the decline, Trump’s Administration must support middle class mortgages. In doing so, the administration will encourage economic growth because middle class families will have the mobility to move to areas that offer better jobs and housing options. Further, many of the nation’s largest metropolitans will become more diverse.
October 5, 2017 | Permalink | No Comments
October 4, 2017
FHFA’s Strategic Plan for Fannie and Freddie
The Federal Housing Finance Agency released its Strategic Plan for fiscal years 2018-2022 for public input. As discussed in yesterday’s post, Director Watt is very focused on maintaining the health of Fannie Mae and Freddie Mac. The Strategic Plan reiterates that focus:
As conservator of the Enterprises, FHFA will also promote stability by working to preserve and conserve the Enterprises’ assets and business operations. Additionally, FHFA will encourage the Enterprises and the housing industry to adopt standards and practices that promote market and stakeholder confidence. (8)
The Plan goes into depth to describe the FHFA’s role as conservator:
The Enterprises were placed into conservatorships in September 2008 in the midst of a severe financial crisis. Their ongoing participation in the housing finance market has been an important factor in maintaining market liquidity and stability. Conservatorship permitted the U.S. Government to take greater control over management of the Enterprises and gave investors in the Enterprises’ debt and MBS confidence that the Enterprises would have the capacity to honor their financial obligations. As conservator, FHFA establishes restrictions and expectations for the Enterprises’ boards and for their managements while authorizing them to conduct the Enterprises’ day-to-day operations.
As detailed earlier, FHFA’s authority as both regulator and conservator of the Enterprises is based upon statutory mandates. FHFA, acting as regulator and conservator, must follow the mandates assigned to it by statute and the missions assigned to the Enterprises by their charters. Congress may choose to revise the statutory mandates governing the Enterprises at any time.
* * *
The Enterprises are also parties to PSPAs with the Treasury Department. Under the PSPAs, the Enterprises are provided U.S. taxpayer backing with explicit dollar limits. The PSPA commitment still available to Fannie Mae is $117.6 billion and the commitment still available to Freddie Mac is $140.5 billion. Additional draws would reduce these commitments, and dividend payments do not replenish or increase the commitments under the terms of the PSPAs. Starting in 2013, the PSPAs provided each Enterprise with a capital buffer of $3 billion to protect each Enterprise against making additional draws of taxpayer support in the event of an operating loss in any quarter, and the PSPAs provide mandated declines of $600 million each year to these capital buffers. On January 1, 2017, each Enterprise’s capital buffer declined to $600 million and the capital buffer is scheduled to decline to zero on January 1, 2018.
FHFA continues to encourage Congress to complete the important work of housing finance reform. FHFA has reiterated the urgency of reform and that it is up to Congress to determine what future, if any, the Enterprises will have in the future housing finance system. (16-17)
Reading between the lines, I see the FHFA under Watt doing whatever it has to in order to maintain stability and liquidity in the mortgage markets. If Congress does not act, if the Treasury does not act, I think that Director Watt will go it alone and do what it takes to maintain Fannie and Freddie’s reputation with mortgage lenders and MBS investors.
October 4, 2017 | Permalink | No Comments
Wednesday’s Academic Roundup
- New Construction and the Mortgage Crisis, Mayock and Tzioumis
- Regulating Household Leverage, DeFusco, Johnson, and Mondragon
- Systemic Operational Risk: People Risk in the Global Financial Crisis, McConnell and Blacker
- Payday-Loan Bans: Evidence of Indirect Effects on Supply, Ramirez
- Ancillary Agreements in Real Estate Transactions, Berman, Hines, and Ward
October 4, 2017 | Permalink | No Comments
October 3, 2017
Watt’s Happening with Fannie and Freddie?
FHFA Director Watt
Federal Housing Finance Agency Director Watt testified before the House Committee on Financial Services today and gave a good overview of the decade-long conservatorship of Fannie and Freddie. He also gave some sense of the urgency of coming up with at least a stopgap measure before the two companies’ capital buffer drops to zero at the end of the year pursuant to the terms of the Senior Preferred Stock Purchase Agreements (PSPAs) that govern the two companies’ relationship with the Treasury. He stated that it would
be a serious misconception for members of this Committee, or for anyone else, to consider any actions FHFA may take as conservator to avoid additional draws of taxpayer support either as interference with the prerogatives of Congress, as an effort to influence the outcome of housing finance reform, or as a step toward recap and release. FHFA’s actions would be taken solely to avoid a draw during conservatorship.
This signifies to me that he is planning on doing something other than reducing the capital buffer to $0. As far as I can tell, Watt is playing a game of chicken with Congress — if you do not act, I will.
It is not clear to me clear how much authority Watt has or thinks he has to change the rules relating to the capital buffer. Does he think that he could act inconsistent with the PSPAa and withhold capital? I have not seen a legal argument that says he could. Is he willing to do it and be sued by Treasury? These are speculative questions, but I do think that he has laid the groundwork for taking action if Congress and Treasury do not.
It does not seem to me that he was much wiggle room according to the terms of the PSPAs themselves, except perhaps to delay making the net worth sweep at the end of this year by converting it to an annual sweep or by some other mechanism. That will be a short-term fix.
Given his strong language — “FHFA’s actions would be taken solely to avoid a draw during conservatorship” — I think he might be prepared to take an action that is inconsistent with the plain language of the PSPAs in order to act in a way that he thinks is consistent with his duty as the conservator. This is less risky than it sounds because the only party that would seem to have standing to sue would be the Treasury, the counter-party to the PSPAs. One could imagine that the Treasury would prefer to negotiate a response with the FHFA or await Watt’s departure rather than to have a judge decide the issue. One could also imagine that Treasury would go along with the FHFA without explicitly condoning its actions, particularly if its actions soothed a turbulent market for Fannie and Freddie mortgage-backed securities.
Watt has consistently signaled that he will act if no other responsible party does and he emphasized that again today.
October 3, 2017 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- Years after the nation’s last recession, lower socio-economic workers are now reaping the benefits of a stronger economy.Though this is great, wealthier Americans still are gaining the most benefits from an upward flowing economy. A study found in 2016, 38.6% of America’s total wealth was controlled by 1% of households. However, within three years, the net worth of the average American family increased 16% to, $97,300.
- The Consumer Financial Protection Bureau is under judicial scrutiny again. A number of financial groups came together to file a lawsuit against the agency’s arbitration rule. Groups supporting the lawsuit include the U.S. Chamber of Commerce, American Bankers Association, Texas Association of Business, and nine chambers of commerce in Texas. Further, the group asserts the rule is invalid for four varying reasons.
October 3, 2017 | Permalink | No Comments
October 2, 2017
Foreclosure Alternatives
Realtor.com quoted me in 3 Foreclosure Alternatives: What to Do Before Your Mortgage Goes Underwater. It opens,
Maybe you’ve missed a couple of monthly mortgage payments. Maybe a notice of default from your lender is looming right now. You understand the severity of the situation, but what most homeowners don’t know is that foreclosure is not the only option you have when you’re no longer able to afford your house.
The first step for anyone in risk of foreclosure is to get in contact with your lender. This shows that you are aware of the problem and committed to finding a solution—and trust us, that will go a long way. The earlier you reach out, the greater shot you have of amicably rectifying the problem.
After you speak with your lender, your lender will lay out your options, including the foreclosure alternatives that you might be able to take advantage of. Let’s take a closer look at some of the alternatives so you—and your credit history—don’t suffer the ultimate blow.
1. Standard sale or rental
If your home is currently valued at more than you owe and if you are up to date on your mortgage payments (but you anticipate that paying your mortgage could become a problem), you can hold out as long as possible for a buyer.
You can also try to rent out the home to cover the mortgage payments until the house sells, says Carolyn Rae Cole, a Realtor® with Nourmand & Associates. In the end, virtually all homes eventually sell—it’s just about pricing.
2. Short sale
When a home has fallen in value and is priced so low that there isn’t enough equity to cover the mortgage, you might have the option to conduct a short sale. It’s also known as going “underwater.” This means the lender agrees to accept less than the amount the borrower owes through a sale of the property to a third party.
A short sale works like this: A specialist brokers a deal with the mortgage lender to sell the home for whatever the market will bear. If the amount of the sale is for less than what’s owed on the mortgage, the lender gets the money from the sale and relinquishes the remaining debt. (This means you won’t owe anything else.) In a short sale, the lender usually pays for the seller’s closing costs. A traditional sale takes about 30 to 45 days to close after the offer is accepted, whereas a short sale can take 90 to 120 days, sometimes even longer.
Sellers will need to prove hardship—like a loss of primary income or death of a spouse—to their lender. In addition to explaining why they’re unable to make mortgage payments, sellers will have to provide supporting financial documents to the lender to consider for a short sale.
3. Deed in lieu of foreclosure agreement
A deed in lieu of foreclosure is a transaction between a lender and borrower that effectively ends a home loan. Essentially both parties agree to avoid a lengthy foreclosure proceeding by the borrower voluntarily turning over the home’s deed to a lender, says professor David Reiss of Brooklyn Law School . The lender then releases the borrower from any further liability relating to the mortgage. However, if the property is worth significantly less than the outstanding mortgage, the lender may require the borrower to pay a portion of the remaining loan balance.
You might be eligible for a deed in lieu if you’re experiencing financial hardship, can’t afford your current mortgage payment, and were unable to sell your property at fair market value for at least 90 days.
Bottom line: This agreement is a negotiated solution to a bad situation—borrowers who have fallen behind on their payments are going to lose their house and the lender is not getting paid back in full.
October 2, 2017 | Permalink | No Comments
