May 5, 2017
Friday’s Government Reports Roundup
- The Financial Services Committee of Congress narrowly passed the Financial CHOICE Act, H.R. 10. Democrats were unhappy about the initial proposal of the new bill. The group took measures to stall the mark-up and voice their opinions regarding the “Wrong Choice Act.” This 591 page bill seeks to end bailouts for big banks resulting in bankruptcy.
- The Federal Open Market Committee refused to raise interest rates. Economic activity decreased in the month of March while job gains remained stagnant. Although this is great news for now, the committee plans to increase rates at two additional points this year.
- The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to review various rules implemented withing five years of their effect. The CFPB committed to reviewing the “mortgage servicing rule” which protected borrowers against mortgage loan servicing practices.
May 5, 2017 | Permalink | No Comments
May 4, 2017
Running Circles around the CFPB
Lauren Willis has posted The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension to SSRN. It addresses an important subject — the cat and mouse game of the regulator and the regulated. The abstract reads,
To ensure that consumers understand financial products’ “costs, benefits, and risks,” the Consumer Financial Protection Bureau has been redesigning mandated disclosures, primarily through iterative lab testing. But no matter how well these disclosures perform in experiments, firms will run circles around the disclosures when studies end and marketing begins. To meet the challenge of the dynamic twenty-first-century consumer financial marketplace, the bureau should require firms to demonstrate that a good proportion of their customers understand key pertinent facts about the financial products they buy. Comprehension rules would induce firms to inform consumers and simplify products, tasks that firms are better equipped than the bureau to perform. (74)
The Bureau has worked hard to tackle financial education in a meaningful way, but Willis is right that this is a Herculean task given the profit incentive that financial institutions have to run circles around consumers and the Bureau itself. Willis explains
the feebleness of mandated disclosures, the inherent flaws in the alternatives the CFPB has been pursuing, the advantages firms have over regulators in ensuring their customers’ comprehension, and the CFPB’s legal authority to require customer confusion audits and enforce comprehension rules. I then elaborate on a few examples of how this form of regulation might operate in practice, including these four key elements:
1. Measuring the quality of a valued outcome (comprehension) rather than of an input that is often pointless (mandated or preapproved disclosure);
2. Assessing actual customer comprehension in the field as conditions change over time, rather than imagining what the “reasonable consumer” would understand or testing consumers in the lab or in single-shot field experiments;
3. Requiring firms to affirmatively and routinely demonstrate customer understanding, rather than relying on the bureau’s limited resources to examine firm performance ad hoc when problems arise ; and
4. Giving firms the flexibility and responsibility to effectively inform their customers about key relevant costs, benefits and risks through whatever means the firms see fit, whether that be education or product simplification, rather than asking regulators to dictate how disclosures and products should be designed. (76) (footnotes omitted)
Hopefully the Bureau will take a serious look at Willis’ critique. It is important, of course, to get consumer financial literacy right in order to benefit consumers directly. But it is also important for the Bureau to get it right in order to protect its reputation as an effective regulator that brings real value to the consumer finance sector.
May 4, 2017 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Roundup
- Homeowners in the U.S. are better at paying their loans. The number of “seriously delinquent mortgages” dropped 1.2 million in the 2016 fiscal year. Today’s negative equity has decreased in the first quarter of the year; however, many pockets throughout the U.S. continue to have high negative equity.
- Goldman Sachs recently paid one-third of it’s 5 billion dollar settlement obligation. In 2016, the financial giant settled with consumers due to their use of “toxic mortgage bonds.” So far entities such as the National Credit Union Administration and the Federal Home Loan Banks of Chicago received millions of dollars as part of this settlement.
May 4, 2017 | Permalink | No Comments
Wednesday’s Academic Roundup
- Prioritizing Which Homeless People Get Housing Using Predictive Algorithms, Flaming and Toros
- Liquidity Constraints in the U.S. Housing Market, Gorea and Midrigin
- Why are Reits Currently so Expensive?, Nieuwerburgh
- The Impact of Housing Prices on Health in U.S. Before, During, and After the Great Recession, Sung
May 3, 2017 | Permalink | No Comments
May 2, 2017
Tapping Home Equity for Retirement Income
Newsday quoted me in Consider Tapping Your Home Equity for Retirement Income (behind paywall). It opens,
Just as Dorothy in the “Wizard of Oz” had her ruby slippers that could have gotten her back to Kansas at any time with three clicks of her heels, retirees have the option of tapping their home sweet home to bridge income shortfalls.
Yet, according to research from the National Council on Aging, only 20 percent of retirees polled said they would be willing to use their home equity to generate income. Information was obtained through focus groups with 112 people aged 60 to 75, and two surveys of 254 financial advisers and 1,002 older homeowners.
When you’re in a pinch, here’s how to get the max out of your home.
– Get over the notion a home is sacred: “Using your home equity to generate retirement income can help you delay claiming Social Security,” says Gary Borowiec, a financial adviser and managing partner at Atlas Advisory Group in Cranford, New Jersey.
– Audit your housing situation: Determine if you’re using your home equity wisely. “Is a senior citizen living in the same home where she raised her children who have now gone off to live on their own? Would it make sense to downsize to an apartment with lower costs and fewer maintenance issues? If so, redirect some of the equity from the original home to investments that can generate an income stream over the course of her retirement,” says David Reiss, a professor at Brooklyn Law School specializing in real estate.
May 2, 2017 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- The federal government averted a government shut down through the creation of a new bill that has a high probability of being passed and signed into law. The proposal for housing aid consists of over 20 billion dollars. The funds are slated for Section 8 and rental based assistance. Congress also slated millions of dollars of funding for home purchasers.
- The Consumer Financial Protection Bureau (CFPB) set its sights on diversity and inclusiveness reform in the home mortgage industry. The Office of Minority and Women Inclusion (OMWI) of the CFPB, held in a roundtable discussion regarding current diversity practices and serving a diverse clientele.
May 2, 2017 | Permalink | No Comments
May 3, 2017
Hope for the Securitization Market
By David Reiss
The Structured Finance Industry Group has issued a white paper, Regulatory Reform: Securitization Industry Proposals to Support Growth in the Real Economy. While the paper is a useful summary of the industry’s needs, it would benefit from looking at the issue more broadly. The paper states that
One of the core policy responses to the financial crisis was the adoption of a wide variety of new regulations applicable to the securitization industry, largely in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). While many post-crisis analysts believe that the crisis laid bare the need for meaningful regulatory reform, SFIG members believe that any such regulation must:
In this paper, we will distinguish between the types of regulation we believe to be necessary and productive versus those that are, at the very least, not helpful and, in some cases, harmful. To support this approach, we believe it is helpful to evaluate financial market regulations, specifically those related to securitization, under three distinct categories, those that are:
1. Transactional in nature; i.e., directly impact the securitization market via a focus on underlying deal structures;
2. Banking rules that include securitization reform within their mandate; and
3. Banking rules that simply do not contemplate securitization and, therefore, may result in unintended consequences. (3)
The paper concludes,
The securitization industry serves as a mechanism for allowing institutional investors to deliver funding to the real economy, both to individual consumers of credit and to businesses of all sizes. This segment of credit reduces the real economy’s reliance on the banking system to deliver such funding, thereby reducing systemic risk.
It is important that both issuers of securitization bonds and investors in those bonds align at an appropriate balance in their goals to allow those issuers to maintain a business model that is not unduly penalized for using securitization as a funding tool, while at the same time, ensuring investors have confidence in the market via “skin in the game” and sufficiency of disclosure. (19)
I think the paper is totally right that we should design a regulatory environment that allows for responsible securitization. The paper is, however, silent on the interest of consumers, whose loans make up the collateral of many of the mortgage-backed and asset-backed securities that are at issue in the bond market. The system can’t be designed just to work for issuers and investors, consumers must have a voice too.
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May 3, 2017 | Permalink | No Comments