April 26, 2017
Comparison Shopping Savings in Mortgage Market
Alexei Alexandrov and Sergei Koulayev of the Consumer Financial Protection Bureau have posted a working paper, No Shopping in the U.S. Mortgage Market: Direct and Strategic Effects of Providing Information to SSRN. The paper is the first to answer the question, “How much do consumers lose by not shopping enough for mortgages?” (5) They find that “for the average consumer, the the difference between the actual and the lowest offered rate amounted to an extra $300 per year.” (Id.)
The abstract reads,
We document and analyze price dispersion in the U.S. mortgage market. We find significant price dispersion in posted prices in the retail channel: for example, a consumer with a prime credit score and with a 20% down payment might see a spread in interest rates of 50 basis points, controlling for all relevant consumer/property characteristics, including discount points. We also show, from survey evidence, that close to half of consumers did not shop before taking out a mortgage, and worse, many consumers do not seem to realize that there is price dispersion. Using a proprietary dataset of lenders’ ratesheets, we estimate an equilibrium model of costly search where a share of consumers holds incorrect beliefs regarding price dispersion. Whereas high search costs is one reason behind the lack of search, we show that non-price preferences also play an important role in preventing consumers from searching more; and so an effective policy would target both. In one of our counterfactuals, we show that eliminating non-price preferences results in savings of about $9 billion dollars a year.
In addition to its significant finding on a new topic (one that should have policy implications for the Consumer Financial Protection Bureau), the paper also demonstrates the value of government research on the mortgage markets.
The paper relies on data from the National Survey of Mortgage Originations. The NSMO is a survey designed by the CFPB and the Federal Housing Finance Agency. It is sent out on a quarterly basis to a nationally representative sample of recent mortgage borrowers. Jeb Hensarling (R-TX), the Chair of the House Financial Services Committee, has introduced legislation to stop the CFPB from conducting research on the mortgage markets. That would be a bad result for consumers.
April 26, 2017 | Permalink | No Comments
Wednesday’s Academic Roundup
- Matthew Desmond’s Evicted: Poverty and Profit in the American City is a triumphant work that provides the missing socio-legal data needed to prove why America should recognize housing as a human right. This Essay, titled Evicted: The Socio-Legal Case for the Right to Housing – A Book Review of Matthew Desmond, Evicted: Poverty and Profit in the American City, argues that Desmond’s mostly federal legal prescriptions are insufficient to help all Americans realize the full promise of the human right to housing.
April 26, 2017 | Permalink | No Comments
April 25, 2017
Budding GSE Reform
The Mortgage Bankers Association has released a paper on GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market (link to paper on this page). This paper builds on a shorter version that the MBA released a few months ago. Jim Parrott of the Urban Institute has provided a helpful comparison of the basic MBA proposal to two other leading proposals. This longer paper explains in detail
MBA’s recommended approach to GSE reform, the last piece of unfinished business from the 2008 financial crisis. It outlines the key principles and guardrails that should guide the reform effort and provides a detailed picture of a new secondary-market end state. It also attempts to shed light on two critical areas that have tested past reform efforts — the appropriate transition to the post-GSE system and the role of the secondary market in advancing an affordable-housing strategy. GSE reform holds the potential to help stabilize the housing market for decades to come. The time to take action is now. (1)
Basically, the MBA proposes that Fannie and Freddie be rechartered into two of a number of competitors that would guarantee mortgage-backed securities (MBS). All of these guarantors would be specialized mortgage companies that are to be treated as regulated utilities owned by private shareholders. These guarantors would issue standardized MBS through the Common Securitization Platform that is currently being designed by Fannie and Freddie pursuant to the Federal Housing Finance Agency’s instructions.
These MBS would be backed by the full faith and credit of the the federal government as well as by a federal mortgage insurance fund (MIF), which would be similar to the Federal Housing Administration’s MMI fund. This MIF would cover catastrophic losses. Like the FHA’s MMI fund, the MIF could be restored by means of higher premiums after the catastrophe had been dealt with. This model would protect taxpayers from having to bail out the guarantors, as they did with Fannie and Freddie at the onset of the most recent financial crisis.
The MBA proposal is well thought out and should be taken very seriously by Congress and the Administration. That is not to say that it is the obvious best choice among the three that Parrott reviewed. But it clearly addresses the issues of concern to the broad middle of decision-makers and housing policy analysts.
Not everyone is in that broad middle of course. But there is a lot for the Warren wing of the Democratic party to like about this proposal as it includes affordable housing goals and subsidies. The Hensarling wing of the Republican party, on the other hand, is not likely to embrace this proposal because it still contemplates a significant role for the federal government in housing finance. We’ll see if a plan of this type can move forward without the support of the Chair of the House Financial Services Committee.
April 25, 2017 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- HUD has published its third annual report on demographic and economic data for people living in Low-Income Housing Tax Credit (Housing Credit) properties. As of December 31, 2014, the median annual income of residents was $17,152 and approximately 47 percent of tenants earned 30 percent or less of the area median income.
- The Mortgage Bankers Association (MBA) released a report on proposed changes in a possible reform of the secondary mortgage market, including the roles of Fannie Mae and Freddie Mac. The report addresses the appropriate transition to the reformed system as well as the role of the secondary market in advancing an affordable housing strategy.
April 25, 2017 | Permalink | No Comments
April 24, 2017
What is the Debt to Income Ratio?
OppLoans.com quoted me in What is the Debt to Income Ratio? It opens,
One of the great things about credit is that it lets you make purchases you wouldn’t otherwise be able to afford at one time. But this arrangement only works if you are able to make your monthly payments. That’s why lenders look at something called your debt to income ratio. It’s a number that indicates what kind of debt load you’ll be able to afford. And if you’re looking to borrow, it’s a number you’ll want to know.
Unless your rich eccentric uncle suddenly dies and leave you a giant pile of money, making any large purchase, like a car or a home, is going to mean taking out a loan. Legitimate loans spread the repayment process over time (or a longer term), which makes owning these incredibly expensive items possible for regular folks.
But not all loans are affordable. If the loan’s monthly payments take up too much of your budget, then you’re likely to default. And as much as you, the borrower, do not want that to happen, it’s also something that lenders want to avoid at all costs.
It doesn’t matter how much you want that cute, three-bedroom Victorian or that sweet, two-door muscle car (or even if you’re just looking for a personal loan to consolidate your higher interest credit card debt). If you can’t afford your monthly payments, reputable lenders aren’t going to want to do business with you. (Predatory payday lenders are a different story, they actually want you to be unable to afford your loan. You can read more about that shadiness in our personal loans guide.)
So how do mortgage, car, and personal lenders determine what a person can afford before they lend them? Well, they usually do it by looking at their debt to income ratio.
What is the debt to income ratio?
Basically, it’s the amount of your monthly budget that goes towards paying debts—including rent or mortgage payments.
“Your debt to income ratio is benchmark metric used to measure an individual’s ability to repay debt and manage their monthly payments,” says Brian Woltman, branch manager at Embrace Home Loans (@EmbraceHomeLoan).
“Your ‘DTI’ as it’s commonly referred to is exactly what it sounds like. It’s calculated by dividing your total current recurring monthly debt by your gross monthly income—the amount you make before any taxes are taken out,” says Woltman. “It’s important because it helps a lender to determine the proper amount of money that someone can borrow, and reasonably expect to be paid back, based on the terms agreed upon.”
According to Gerri Detweiler (@gerridetweiler), head of market education for Nav (@navSMB), “Your debt to income ratio provides important information about whether you can afford the payment on your new loan.”
“On some consumer loans, like mortgages or auto loans, your debt to income ratio can make or break your loan application,” says Detweiler. “This ratio typically compares your monthly recurring debt payments, such as credit card minimum payments, student loan payments, mortgage or auto loans to your monthly gross (before tax) income.”
Here’s an example…
Larry has a monthly income of $5,000 and a list of the following monthly debt obligations:
Rent: $1,200
Credit Card: $150
Student Loan: $400
Installment Loan: $250
Total: $2,000
To calculate Larry’s DTI we need to divide his total monthly debt payments by his monthly income:
$2,000 / $5,000 = .40
Larry’s debt to income ratio is 40 percent.
David Reiss (@REFinBlog), is a professor of real estate finance at Brooklyn Law School. He says that the debt to income ratio is an important metric for lenders because “It is one of the three “C’s” of loan underwriting:
Character: Does a person have a history of repaying debts?
Capacity: Does a person have the income to repay debts?
Capital: Does the person have assets that can be used to retire debt if income should prove insufficient?
What is a good debt to income ratio?
“If you listen to Ben Franklin, who subscribed to the saying ‘neither a borrower nor lender be,’ the ideal ratio is 0,” says Reiss. But he adds that only lending to people with no debt whatsoever would put home ownership out of reach for, well, almost everyone. Besides, a person can have some debt on-hand and still be a responsible borrower.
“More realistically, in today’s world,” says Reiss, “we might take guidance from the Consumer Financial Protection Bureau (CFPB) which advises against having a DTI ratio of greater than 43 percent. If it creeps higher than that, you might have trouble paying for other important things like rent, food and clothing.”
“Requirements vary but usually if you can stay below a 33 percent debt-to-income ratio, you’re fine,” says Detweiler. “Some lenders will lend up to a 50 percent debt ratio, but the interest rate may be higher since that represents a higher risk.”
For Larry, the guy in our previous example, a 33 percent DTI would mean keeping his monthly debt obligations to $1650.
Let’s go back to that 43 percent number that Reiss mentioned because it isn’t just an arbitrary number. 43 percent DTI is the highest ratio that borrower can have and still receive a “Qualified Mortgage.”
April 24, 2017 | Permalink | No Comments
Monday’s Adjudication Roundup
- The Consumer Financial Protection Bureau on Thursday sued mortgage servicer Ocwen Financial Corp. in Florida federal court alleging that the firm’s servicing database is riddled with inaccuracies and incomplete information that resulted in wrongful foreclosure proceedings against around 1,000 families
- Commerzbank AG urged a New York judge on Tuesday not to rethink his allowing its claims over the Bank of New York Mellon’s oversight of residential mortgage-backed securities to proceed, saying BNY Mellon cannot point to anything the judge overlooked.
- Wells Fargo announced Friday that it is expanding both the size of the fake account class action settlement and the time period the settlement covers by an additional seven years. According to an announcement from Wells Fargo, the settlement is being expanded by $32 million to $142 million, and now covers anyone who had a fake account opened in their name all the way back to 2002.
April 24, 2017 | Permalink | No Comments
April 21, 2017
Kafka and the CFPB
Statue of Franz Kafka by Jaroslav Rona
The Hill published my latest column, The CFPB Is a Champion for Americans Across The Country. It opens,
Republicans like Sen. Ted Cruz (R-Texas) have been arguing that consumers should be freed from the Consumer Financial Protection Bureau’s “regulatory blockades and financial activism.” House Financial Services Committee Chairman Jeb Hensarling (R-Texas) accuses the CFPB of engaging in “financial shakedowns” of lenders. These accusations are weighty.
But let’s take a look at the types of behaviors consumers are facing from those put-upon lenders. A recent decision in federal bankruptcy court, Sundquist v. Bank of America, shows how consumers can be treated by them. You can tell from the first two sentences of the judge’s opinion that it goes poorly for the consumers: “Franz Kafka lives. This automatic stay violation case reveals that he works at Bank of America.”
The judge continues, “The mirage of promised mortgage modification lured the plaintiff debtors into a Kafka-esque nightmare of stay-violating foreclosure and unlawful detainer, tardy foreclosure rescission kept secret for months, home looted while the debtors were dispossessed, emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder, for all of which Bank of America disclaims responsibility.”
Homeowners who reads this opinion will feel a pit in their stomachs, knowing that if they were in the Sundquists’ shoes they would also tremble with rage and fear from the way Bank of America treated them: 20 or so loan modification requests or supplements were “lost;” declared insufficient, incomplete or stale; or denied with no clear explanation.
Over the years, I have documented similar cases on REFinBlog.com. In U.S. Bank, N.A. v. David Sawyer et al., the Maine Supreme Judicial Court documented how loan servicers demanded various documents which were provided numerous times over the course of four court-ordered mediations and how the servicers made numerous promises about modifications that they did not keep. In Federal National Mortgage Assoc. v. Singer, the court documents the multiple delays and misrepresentations that the lender’s agents made to the homeowners.
The good news is that in those three cases, judges punished the servicers and lenders for their pattern of Kafka-esque abuse of the homeowners. Indeed, the Sundquist judge fined Bank of America a whopping $45 million to send it a message about its horrible treatment of borrowers.
But a fairy tale ending for a handful of borrowers who are lucky enough to have a good lawyer with the resources to fully litigate one of these crazy cases is not a solution for the thousands upon thousands of borrowers who had to give up because they did not have the resources, patience, or mental fortitude to take on big lenders who were happy to drag these matters on for years and years through court proceeding after court proceeding.
What homeowners need is a champion that will stand up for all of them, one that will create fair procedures that govern the origination and servicing of mortgages, one that will enforce those procedures, and one that will study and monitor the mortgage market to ensure that new forms of predatory behavior do not have the opportunity to take root. This is just what the Consumer Financial Protection Bureau has done. It has promulgated the qualified mortgage and ability-to-repay rules and has worked to ensure that lenders comply with them.
Kafka himself said that it was “the blend of absurd, surreal and mundane which gave rise to the adjective ‘kafkaesque.’” Most certainly that is the experience of borrowers like the Sundquists as they jump through hoop after hoop only to be told to jump once again, higher this time.
When we read a book like Kafka’s The Trial, we are left with a sense of dislocation. What if the world was the way Kafka described it to be? But if we go through an experience like the Sundquists’, it is so much worse. It turns out that an actor in the real world is insidiously working to destroy us, bit by bit.
The occasional win in court won’t save the vast majority of homeowners from abusive lending practices. A regulator like the Consumer Financial Protection Bureau can. And in fact it does.
April 21, 2017 | Permalink | No Comments
