February 7, 2017
Housing Booms and Busts
Patricia McCoy and Susan Wachter have posted Why Cyclicality Matter to Access to Mortgage Credit to SSRN. The paper is now particularly relevant because of President Trump’s plan to roll back Dodd-Frank’s regulation of the financial markets, including the mortgage market. While McCoy and Wachter do not claim that Dodd-Frank solves the problem of cyclicality in the mortgage market, they do highlight how it reduces some of the worst excesses in that market. They make a persuasive case that more work needs to be done to reduce mortgage market cyclicality.
The abstract reads,
Virtually no attention has been paid to the problem of cyclicality in debates over access to mortgage credit, despite its importance as a driver of tight credit. Housing markets are prone to booms accompanied by bubbles in mortgage credit in which lenders cut underwriting standards, leading to elevated loan defaults. During downturns, these cycles artificially impede access to mortgage credit for underserved communities. During upswings, these cycles make homeownership unnecessarily precarious for many who attain it. This volatility exacerbates wealth and income disparities by ethnicity and race.
The boom-bust cycle must be addressed in order to assure healthy and sustainable access to credit for creditworthy borrowers. While the inherent cyclicality of the housing finance market cannot be fully eliminated, it can be mitigated to some extent. Mitigation is possible because housing market cycles are financed by and fueled by debt. Policymakers have begun to develop a suite of countercyclical tools to help iron out the peaks and troughs of the residential mortgage market. In this article, we discuss why access to credit is intrinsically linked to cyclicality and canvass possible techniques to modulate the extremes in those cycles.
McCoy and Wachter’s conclusions are worth heeding:
If homeownership is to attain solid footing, mitigating the cyclicality in the housing finance system will be imperative. That will require rooting out procyclical practices and requirements that fuel booms and busts. In their place, countercyclical measures must be instituted to modulate the highs and lows in the lending cycle. In the process, the goal is not to maximize homeownership per se; rather, it is to ensure that residential mortgages are made on safe and affordable terms.
* * *
Taming procyclicality in industry practices in housing finance is much farther behind and will require significantly more work. There is no easy fix for the procyclical effect of mortgage appraisals because appraisals are based on neighboring comparables. Similarly, procyclicality will require serious attention if the private-label securitization market returns. While the Dodd-Frank Act made modest reforms designed at curbing inflation of credit ratings, the issuer-pays system that drives grade inflation remains in place. Similarly, underpricing the risk of MBS and CDS will continue to be a problem in the absence of an effective short-selling mechanism and the effective identification of market-wide leverage. (34-35)
McCoy and Wachter offer a thoughtful overview of the risks that mortgage market cyclicality poses, but I am not optimistic that it will get a hearing in today’s Washington. Maybe it will after the next bust.
February 7, 2017 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- Realtors are unhappy with President Trump’s recent decision to eliminate the “FHA mortgage insurance premium cut.” The National Association of Realtors attributes the downward trend of new home buyers to Trump’s recent decision. Furthermore, they believe reinstating the insurance cut would attract over 38,000 new homeowners.
- Invitation Homes is the United States leading provider for single-family rentals (SFRs). They recently received a 1 billion dollar loan from Fannie Mae. This loan is the government’s first loan of this kind. Laurie Goodman and Karan Kaul, published a report detailing the benefits and drawback to the program and its intended outcomes.
- Ellie Mae released its latest version of Encompass where it lends its support to construction loans. Ellie Mae explains its detailed plans to better support the entire construction process.
February 7, 2017 | Permalink | No Comments
February 6, 2017
No-Credit-Check Loan Red Flags
OppLoan quoted me in 6 No Credit Check Loan Red Flags. It opens,
Welp. A kid just threw a baseball through your window and ran away before you could get his parents’ information. Now you need a loan to fix it. But what if your credit score isn’t exactly a home run? What are you going to do now?
It’s a fact of modern life: a “good” credit score (a FICO score of 680 or higher) can make little financial emergencies like these much more bearable. Unfortunately, just over half of American consumers have weak or bad credit. According to credit expert David Hosterman of Castle and Cooke Mortgage (@CastleandCooke), “Customers with bad credit can have trouble financing a home, renting a home, obtaining credit cards, car loans, student loans, and more.” And it’s not a problem that goes away overnight. Hosterman says rebuilding credit can “sometimes take years to complete.”
So how can people with bad credit get a loan if an urgent need arises? One option is a “no credit check” loan. And if these loans sound too good to be true, it’s because they often are. Many “no credit check” loans are nothing more than financial traps designed to suck away as much of your paycheck as possible. Keep an eye out for these red flags before you end up in a very bad situation.
1. They Don’t Care About Your Income
Lenders see a bad credit rating and take it as a sign that a potential borrower might never pay them back. That’s why a good “no credit check” lender will make sure that you have a source of income—so they know they’ll get their money back eventually.
But not every “no credit check” lender will check your income. So how do they know you’ll pay it back? They don’t. In fact, it’s worse than that. They’re expecting you not to. Because if you can’t pay your loan in time, you’ll be forced to roll it over and pay an additional fee to extend it. These predatory practices are often associated with payday lenders, because you could end up having to turn over your paycheck as soon as you get it to pay back the loan. That doesn’t leave much money for luxuries like rent, so you could find yourself having to take out another loan or pay to extend the first one. This can easily trap you in a dangerous cycle, having to continually rollover your loan without any hope of paying it off. You want to avoid this situation at all costs.
2. Short Payment Terms
Any good lender wants you to have a real shot at actually paying back your loan in full. A bad lender, on the other hand, wants you to be trapped into rolling over your loans so that you can give them money forever. They’ll require you to pay back the entire loan, with interest, after only a few weeks—and sometimes less!
Instead, find a lender that will offer you an installment loan. David Bakke (@YourFinances101), a finance expert at MoneyCrashers.com, says that one of the main benefits of installment loans is that they “usually come with fixed interest rates, meaning that you know what your monthly payment is going to be.” A good “no credit check” lender will be certain that you have a source of income and then work with you to create a repayment plan that you can handle.
3. They Talk About Interest Rates Instead of APR
APR stands for Annual Percentage Rate. According to David Reiss (@REFinBlog), a law professor and editor of REFinBlog.com, the APR number shows the total cost of a loan, including fees and interest. Reiss points out that APRs allow potential borrowers to make an “apples-to-apples” comparison between loans. It gives you a full and clear picture of how expensive a loan really is. In other words, it’s a number that many “no credit check” lenders would prefer you never see.
They’d rather show you a basic interest rate, even though federal law requires APRs be used in most cases. Not only can that hide all sorts of fees, but it forces you to do some pretty complex math if you want to actually know how much you’ll be expected to pay. Friends never make friends do complex math problems, so if a lender isn’t talking in terms of APR, they’re likely not your friend.
February 6, 2017 | Permalink | No Comments
Monday’s Adjudication Roundup
- Two former Thornburg Mortgage executives can rest easily because the SEC is no longer seeking damages for their behavior during the early 2000’s financial crisis. The cases spanned over 5 years and disputed an amount over 400 million in losses.
- Exxon Mobile Corp. is back on the hook for royalties owed to over 40 landowners. Texas’ highest court reinstated the “mineral royalty dispute” on February 3, 2017. The court stated the suit was previously wrongly dismissed.
- New Jersey’s city of Hoboken is not happy with a developer’s plan to develop the waterfront area. Residents of the city asked the New Jersey Appellate Division to block the developers plan; however, the court refused to do so. Shipyard Associates LLP, will be able to add recreational and parking facilities to its mixed use property along the Hudson River.
February 6, 2017 | Permalink | No Comments
February 3, 2017
Whither FHA Premiums?
Various NBC News affiliates quoted me in What You Need To Know About Trump’s Reversal of the FHA Mortgage Insurance Rate Cut. It opens,
On his first day in office, President Donald Trump issued an executive order to undo a quarter-point decrease in Federal Housing Administration (FHA) mortgage insurance premiums. The rate decrease had been announced by the Obama administration shortly before Trump’s inauguration. Many congressional Republicans, including incoming Department of Housing and Urban Development Secretary Ben Carson, opposed the Obama administration’s rate cut because they worried that the FHA would not be able to maintain adequate cash reserves.
What does this mean for potential homebuyers going forward? We’ll explain in this post.
How FHA mortgage insurance premiums work
FHA-backed mortgages are popular among first-time homebuyers because borrowers can get a loan with as little as 3.5% down. However, in exchange for a lower down payment, borrowers are required to pay mortgage insurance premiums. Lower mortgage insurance premiums can make FHA mortgages more affordable, and help incentivize more first-time homebuyers to enter the housing market.
On January 9, 2016, outgoing HUD Secretary Julian Castro announced that the administration would reduce the annual mortgage insurance premiums borrowers pay when taking out FHA-backed home loans.
For most borrowers, the rate reduction would have meant mortgage insurance premiums decrease from 0.85% of the loan amount to 0.60%. The FHA estimated that the reduction, a quarter of one percentage point, would save homeowners an average of $500 per year.
To see how the numbers would compare, we ran two scenarios through an FHA Loan Calculator — once with the reduced MIP, and again with the higher rates.
Using the December 2016 median price for an existing home in the U.S. of $232,200 and assuming a 30-year loan, a down payment of 3.5%, and an interest rate of 3.750%, the difference in the monthly payment under the new and old rates would be as follows:
Monthly payment under the existing MIP rate: $1,213.27
Monthly payment with the reduced MIP rate: $1,166.98
Annual savings: $555.48
What the rate cut reversal means for consumers
This could be bad news for people who went under contract to buy a house using an FHA loan during the week of Trump’s inauguration. Those buyers could find that their estimated monthly payment has gone up.
Heather McRae, a loan officer at Chicago Financial Services, says Trump’s move was unfortunate. “A lower premium provides for a lower overall monthly payment,” she says. “For those homebuyers who are on the bubble, it could be the deciding factor in determining whether or not the person qualifies to purchase a new home.”
David Reiss, a law professor at the Center for Urban Business Entrepreneurship at Brooklyn Law School, says the change will have only a “modest negative impact” on a potential borrower’s ability to qualify for a loan.
To be clear, the fluctuating mortgage insurance premiums do not affect homeowners with existing loans. They do affect buyers in the process of buying a home using an FHA-backed loan, and anyone buying or refinancing with an FHA-backed mortgage loan in the future. Had the rate cut remained in effect, Mortgagee Letter 2017-01 would have applied to federally-backed mortgages with closing/disbursement dates of January 27, 2017, and later.
Reiss does not believe the rate reversal will have an impact on the housing market. “Given that the Obama premium cut had not yet taken effect,” he says, “it is unlikely that Trump’s action had much of an impact on home sales.”
February 3, 2017 | Permalink | No Comments
Friday’s Government Reports Roundup
- January more jobs than economists expected, led by gains in retail trade, construction and financial activities. Total nonfarm payroll employment increased by 227,000 in January, while the unemployment rate remained unchanged at 4.8%, according to today’s report from the Bureau of Labor Statistics.
- The Federal Open Market Committee unanimously voted to maintain the target range for the federal funds rate at 0.5% to 0.75% during the first meeting of the year. After not moving interest rates since December 2015, the FOMC finally announced an increase to interest rates in the final meeting of 2016.
February 3, 2017 | Permalink | No Comments
February 2, 2017
Mortgage Rates & Refis
TheStreet.com quoted me in Mortgage Rates Expected to Rise and Push Down Refinancing Levels. It reads, in part,
Mortgage rates will continue their upward climb in 2017 as the economy demonstrates additional growth and inflation, but this will of course dampen the enthusiasm for homeowners who have sought to refinance their mortgages up until early this year.
The levels of refinancing will definitely “take a hit relative to 2016,” said Greg McBride, chief financial analyst for Bankrate, a New York-based financial content company.”
A survey conducted by RateWatch found that 56.57% of the 400 financial institutions polled said it is unlikely mortgage rates will fall and unlikely there will be an increase in refinancing in 2017. RateWatch, a Fort Atkinson, Wis.-based premier banking data and analytics service owned by TheStreet, Inc., surveyed the majority of banks, credit unions, and other financial institutions in the U.S. between December 16 and December 29, 2016 on how the Donald Trump presidency will affect the banking industry. The survey found that 35.71% said an increase in refinancing levels is very unlikely, while 6.29% said such an increase is somewhat likely, 1.14% said one would be likely and 0.29% said it would be very likely.
Mortgage rates, which are tied to the 10-year Treasury note, are predicted to fluctuate between 4% to 4.5% in 2017 “with a brief trip below 4% in the event of a market sell-off or economic stumble,” McBride said.
The 4% threshold is critical for homeowners, because when mortgage rates fall below this benchmark level, more consumers are in a position to refinance “profitably,” which is why 2016 experienced a “surge in activity,” McBride said.
When rates rise about the 4% level, the number of homeowners who opt to refinance declines dramatically and “refinancing levels will be notably lower in 2017,” he said.
The mortgages in the 3% range gave many homeowners the opportunity to refinance last year, some for the second time, as many consumers also chose to refinance their mortgages during the 2013 to 2015 period.
As the economy expands and workers are experiencing pay increases, the number of home sales should also rise in 2017.
“People who are working and receiving a pay increase will buy a house whether mortgage rates are 4% or 4.5%,” McBride said. “They may buy a different house, but they will still buy a house.”
Refinancing activity is likely to continue ramping up in January rather than later in the year as the “recent dip in rates allows procrastinators to act before rates continue their movement up,” said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. “As interest rates resume their ascent and get closer to 4.5% on the 30-year mortgage, the number of households who can benefit from refinancing will diminish. That’s why we expect lenders to shift their focus to the purchase market this year.”
Economic growth resulted in interest rates rising before the election and in its aftermath. The rates rose because of the expectation from the financial markets of expanding fiscal policies leading to additional growth and inflationary pressures, Smoke said.
Mortgage rates will continue to rise in 2017 as a result of more people being employed, and this economic backdrop will favor the buyer’s market instead of the refinancing market. Current data from the Mortgage Bankers Association already demonstrates that refinancing activity has declined compared to 2016 due to higher interest rates, Smoke said.
“Rates have eased a bit since the start of the year as evidence of a substantial shift in inflation remains limited and the financial markets oversold bonds in December,” he added.
* * *
Borrowers should be concerned with increased interest rate volatility in 2017, said David Reiss, a professor at the Brooklyn Law School. The Trump administration has been sending out mixed signals, which may lead bond investors and lenders to change their outlook more frequently than in the past.
“Borrowers should focus on locking in attractive interest rates quickly and working closely with their lender to ensure that the loan closes before the interest rate lock expires,” he said. “While there is no clear consensus on why rates went lower after the new year, Trump has not set forth a clear plan as to how he will achieve those goals and Congress has not signaled that it is fully on board with them. This leaves investors less confident that Trump will make good on those positions, particularly in the short-term.”
February 2, 2017 | Permalink | No Comments
