- CFPB releases report of KPMG audit of its operations and budget. In the report, CFPB agrees with KPMG’s findings about control deficiencies and is aiming to fix such deficiencies.
- FHFA releases report on progress of Fannie/Freddie Conservatorships in advancing access to credit and loss mitigation/foreclosure prevention, among other improvements.
- Report from NYC Department of Investigation raises concerns for health and safety of those in homeless shelters.
- Report from the National Low Income Housing Coalition (NLIHC) claims: “Affordable Housing is Nowhere to be Found for Millions.
Tag Archives: access
Risky Cash-Out Refis
Anil Kumar of the Dallas Fed has posted Do Restrictions on Home Equity Extraction Contribute to Lower Mortgage Defaults? Evidence from a Policy Discontinuity at the Texas’ Border to SSRN. The abstract reads
Given that excessive borrowing helped precipitate the housing crisis, a key component of a policy agenda to prevent future meltdowns is effective regulation to curb unaffordable mortgage debt. Texas is the only US state that limits home equity borrowing to 80 percent of home value. Anecdotal reports have long suggested that home equity restrictions shielded Texas homeowners from the worst of the subprime mortgage crisis. But there is, as yet, no formal empirical investigation of these restrictions’ role in curbing mortgage default. This paper is the first to empirically estimate the impact of Texas home equity restrictions on mortgage default using individual and loan level data from three different sources. The paper exploits the policy discontinuity around Texas’ interstate borders induced by the home equity restrictions to identify the causal effect of home equity extraction on mortgage default in a border discontinuity design framework. The paper finds that limits on home equity borrowing in Texas lowered the likelihood of mortgage default by about 2 percentage points with a significantly larger impact on mortgage borrowers in the bottom quartile of the credit score distribution. Estimated default hazards for mortgages within 50 to 100 miles of the Texas’ border decline sharply as one crosses into Texas. Overall, the paper finds evidence that Texas’ home equity restrictions exert a robust negative impact on mortgage default.
This is a really important paper asking a really important question. If its findings are confirmed, it brings us back to that age-old question of paternalism in consumer financial protection: should we limit a consumer’s choice if that choice is consistently shown to have harmful effects? I am not sure where I come down in this particular case, but I wonder if some version of Quercia et al.‘s benefit ratio could help measure the costs and benefits of such a rule. The benefit ratio compares “the percent reduction in the number of defaults to the percent reduction in the number of borrowers who would have access to [a certain type of] mortgages.” (20) I am not sure whether access to cash out refi mortgages is of the same import as purchase mortgages or even plain old refis, but the concept of the benefit ratio might still make sense in this context.
Access to Sustainable Credit
Reid & Quercia have posted Risk, Access and the QRM Reproposal. This document is intended to influence the most recent proposed rulemaking for the Qualified Residential Mortgages (QRMs). The rulemaking process for the QRM has been controversial and the stakes could not be higher for the health of the residential mortgage market. The first proposed rulemaking in 2011 would have required QRMs to have substantial down payments. A broad coalition of lenders and consumer groups believed that this requirement would excessively restrict credit and so the regulators responsible for the QRM rule issued an new proposed rulemaking in 2013 that removed the requirement for down payments from the QRM definition.
Reid & Quercia argue that the more restrictive 2011 proposed QRM rule only provided marginal benefits over the 2013 proposed QRM rule, while significantly restricting credit particularly for households of color. They note that the “objective of weighing the marginal benefit of stricter QRM requirements against the costs of cutting off access to the mainstream mortgage market is an important one.” (7) They have created simple metrics “for evaluating the tradeoffs of reducing the number of defaults against the number of successful borrowers who would not be able to obtain a QRM loan as a result of stricter down payment and credit score requirements” (7)
While Reid & Quercia do not say so explicitly, I believe that their metrics, such as the benefit ratio, should be explicitly worked into the final QRM rule so that regulators are constantly considering the two sides of credit: availability and sustainability. There is a lot of pressure to increase access to residential mortgage credit by a range of players — consumer advocates, lenders and politicians to name just a few. But credit that cannot be sustained by homeowners leads to mortgage default and foreclosure. We will be doing new homeowners no favors by letting them take out mortgages with payments that they cannot consistently make, year in and year out.
