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
April 20, 2017
Blockchain and Real Estate
CoinDesk.com quoted me in Land Registry: A Big Blockchain Use Case Explored. It opens,
With distributed ledger technology being promoted as a benefit to everything from farming to Fair Trade coffee, use case investigation has emerged as a full-time fascination for many.
In this light, one popular blockchain use case that has remained generally outside scrutiny has been land title projects started in countries including in Georgia, Sweden and the Ukraine.
One could argue land registries seemed to become newsworthy only after work on the use case had begun. However, those working on projects disagree, asserting that land registries could prove one of the first viable beachheads for blockchain.
Elliot Hedman, chief operating officer of Bitland Global, the technology partner for a real estate title registration program in Ghana, for example, said that issues with land rights make it a logical fit.
Hedman told CoinDesk: “As for the benefit of a blockchain-based land registry, look to Haiti. There are still people fighting over whose land is whose. When disaster struck, all of their records were on paper, that being if they were written down at all.”
Hedman argued that, with a blockchain-based registry employing a network of distributed databases as a way to facilitate data exchange, the “monumental headache” associated with a recovery effort would cease.
Modern real estate
To understand the potential of a blockchain land registry system, analysts argue one must first understand how property changes hands.
When a purchaser seeks to buy property today, he or she must find and secure the title and have the lawful owner sign it over.
This seems simple on the surface, but the devil is in the details. For a large number of residential mortgage holders, flawed paperwork, forged signatures and defects in foreclosure and mortgage documents have marred proper documentation of property ownership.
The problem is so acute that Bank of America attempted foreclosure on properties for which it did not have mortgages in the wake of the financial crisis.
Readers may also recall the proliferation of NINJA (No Income, No Job or Assets) subprime loans during the Great Recession and how this practice created a flood of distressed assets that banks were simply unable to handle.
The resulting situation means that the property no longer has a ‘good title’ attached to it and is no longer legally sellable, leaving the prospective buyer in many cases with no remedies.
Economic booster
Land registry blockchains seek to fix these problems.
By using hashes to identify every real estate transaction (thus making it publicly available and searchable), proponents argue issues such as who is the legal owner of a property can be remedied.
“Land registry records are pretty reliable methods for maintaining land records, but they are expensive and inefficient,” David Reiss, professor of law and academic program director at the Center for Urban Business Entrepreneurship, told CoinDesk.
He explained: “There is good reason to think that blockchain technology could serve as the basis for a more reliable, cheaper and more efficient land registry.”
April 20, 2017 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Roundup
- The total time for the process of closings in the U.S. are at the lowest level in over 700 days. In February and March of this year, the time span for closings landed at 46 and 43 days respectively. Last year the Consumer Financial Protection Bureau created the “TILA-RESPA Integrated Disclosure rule” which caused the industry to create a narrowed focus to decrease the time length of U.S. closings.
- The Office of Comptroller of the Currency (OCC) failed to affirmatively do it’s job when working with Wells Fargo. A report shows that shows the agency failed to take action when Wells Fargo began to fire bank tellers for creating “accounts without customer authorization.” Their oversight failure led to the false creation of over two million accounts.
April 20, 2017 | Permalink | No Comments
April 19, 2017
How Tight Is The Credit Box?
Laurie Goodman of the Urban Institute’s Housing Finance Policy Center has posted a working paper, Quantifying the Tightness of Mortgage Credit and Assessing Policy Actions. The paper opens,
Mortgage credit has become very tight in the aftermath of the financial crisis. While experts generally agree that it is poor public policy to make loans to borrowers who cannot make their payments, failing to make mortgages to those who can make their payments has an opportunity cost, because historically homeownership has been the best way to build wealth. And, default is not binary: very few borrowers will default under all circumstances, and very few borrowers will never default. The decision where to draw the line—which mortgages to make—comes down to what probability of default we as a society are prepared to tolerate.
This paper first quantifies the tightness of mortgage credit in historical perspective. It then discusses one consequence of tight credit: fewer mortgage loans are being made. Then the paper evaluates the policy actions to loosen the credit box taken by the government-sponsored enterprises (GSEs) and their regulator, the Federal Housing Finance Agency (FHFA), as well as the policy actions taken by the Federal Housing Administration (FHA), arguing that the GSEs have been much more successful than the FHA. The paper concludes with the argument that if we don’t solve mortgage credit availability issues, we will have a much lower percentage of homeowners because a larger share of potential new homebuyers will likely be Hispanic or nonwhite—groups that have had lower incomes, less wealth, and lower credit scores than whites. Because homeownership has traditionally been the best way for households to build wealth, the inability of these new potential homeowners to buy could increase economic inequality between whites and nonwhites. (1)
Goodman has been making the case for some time that the credit box is too tight. I would have liked to see a broader discussion in the paper of policies that could further loosen credit. What, for instance, could the Consumer Financial Protection Bureau do to encourage more lending? Should it be offering more of a safe harbor for lenders who are willing to make non-Qualified Mortgage loans? The private-label mortgage-backed securities sector has remained close to dead since the financial crisis. Are there ways to bring some life — responsible life — back to that sector? Why aren’t portfolio lenders stepping into that space? What would they need to do so?
When the Qualified Mortgage rule was being hashed out, there was a debate as to whether there should be any non-Qualified Mortgages available to borrowers. Some argued that every borrower should get a Qualified Mortgage, which has so many consumer protection provisions built into it. I was of the opinion that there should be a market for non-QM although the CFPB would need to monitor that sector closely. I stand by that position. The credit box is too tight and non-QM could help to loosen it up.
April 19, 2017 | Permalink | No Comments
Wednesday’s Academic Roundup
- Residential House Prices, Commercial Real Estate and Bank Failures, Fissel, Hanweck, and Sanders.
- Governance Structures and Trust: A Study of Real Estate Networks, Armando, Azevedo, Boaventura, Carnauba, and Todeva
- The Federal Housing Administration and African-American Homeownership, Reiss
- Do the FASB’s Standards Add Shareholder Value?, Khan, Rajgopal, and Venkatachalam
- Equity Risk Premiums (ERP): Determinants, Estimation, and Implications- The 2017 Edition, Damodaran
April 19, 2017 | Permalink | No Comments
April 18, 2017
The FHA and African-American Homeownership
Federal Government Redlining Map from 1936
I have posted my article, The Federal Housing Administration and African-American Homeownership, to SSRN and BePress. The abstract reads,
The United States Federal Housing Administration (“FHA”) has been a versatile tool of government since it was created during the Great Depression. It achieved success with some of its goals and had a terrible record with others. Its impact on African-American households falls, in many ways, into the latter category. The FHA began redlining African-American communities at its very beginning. Its later days have been marred by high default and foreclosure rates in those same communities.
At the same time, the FHA’s overall impact on the housing market has been immense. Over its lifetime, it has insured more than 40 million mortgages, helping to make home ownership available to a broad swath of American households. And indeed, the FHA mortgage was central to America’s transformation from a nation of renters to homeowners. The early FHA really created the modern American housing finance system, as well as the look and feel of postwar suburban communities.
Recently, the FHA has come under attack for the poor execution of some of its policies to expand homeownership, particularly minority homeownership. Leading commentators have called for the federal government to stop employing the FHA to do anything other than provide liquidity to the low end of the mortgage market. These critics’ arguments rely on a couple of examples of programs that were clearly failures, but they fail to address the FHA’s long history of undertaking comparable initiatives. This Article takes the long view and demonstrates that the FHA has a history of successfully undertaking new homeownership programs. At the same time, the Article identifies flaws in the FHA model that should be addressed in order to prevent them from occurring if the FHA were to undertake similar initiatives to expand homeownership opportunities in the future, particularly for African-American households.
April 18, 2017 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- The Federal Reserve Board is making changes to its current practices. This shift potentially could change America’s housing road to recovery. In recent months, reducing the number of bond holdings have been discussed by federal officials. Currently, the U.S. has a 1.75 trillion “stash of mortgage-backed securities.”
- The Consumer Financial Protection Bureau (CFPB) asked for thoughts on its potential changes to the Home Mortgage Disclosure Act (HMDA). The Bureau seeks to clarify some of the mortgage lending procedures such as the the reporting and information collection processes of financial institutions.
April 18, 2017 | Permalink | No Comments
