What’s the CFPB Ever Done for Housing?

TheStreet.com quoted me in What’s the CFPB Ever Done For Housing? Quite A Lot. It reads, in part,

The Consumer Financial Protection Bureau grew out of the housing market crash of 2008 and subsequent Dodd-Frank legislation. As a watchdog with teeth, the CFPB’s job is to protect homebuyers from the predatory mortgages that helped sink the economy nine years ago. And it worked.

In theory.

Problem is, for some would-be homeowners, the CFPB is an inconvenient middle-man, adding more red tape to an already impossible situation. In short, it isn’t perfect. But with the Trump administration threatening to tear the whole damn thing down, you’ve got to wonder, is the CFPB really doing more harm to the housing market than good?

How we got here

Pre-housing market crash, the mortgage lending world was a vastly different, Wild West sort of landscape. Dodd-Frank and the CFPB entered the scene, in part, for lending oversight in that uncontrolled housing market. For example, once not-uncommon ‘liar loans,’ which were largely based on the borrower’s word and not much else-for instance, someone saying they made $100,000 a year to qualify for a huge home even though they made $30,000-are now illegal thanks to Dodd-Frank and the CFPB. Mortgage companies cashing in at the expensive of uneducated buyers happened, and it happened a lot.

“Just about everybody I talked to prior to 2008 thought the lending climate was out of control,” says Chandler Crouch, broker and owner of Chandler Crouch Realtors in Dallas-Fort Worth. “People were saying it couldn’t last. It just didn’t make sense. Lending requirements were too loose. Everybody, from Wall Street to the banks to the loan officers to the consumers, was being rewarded for making bad decisions. Lending needed to tighten.”

*     *     *

“The CFPB has been criticized for restricting mortgage credit too much with its Qualified Mortgage and ability to repay rules,” says David Reiss, a law professor at Brooklyn Law School who has practiced real estate law since 1998.

This was all done to ensure buyers could afford their home and not end up in foreclosure or short sale (and also avoid another economic collapse). These rules also bar lenders from predatory loans like massive balloon loans and shady adjustable rate mortgages.

*     *     *

Will no CFPB = housing hellscape?

Let’s say the Republicans get their way and the CFPB goes poof. What happens?

“You’d see an expansion of the credit box-more people would be approved for credit,” says Reiss. “To the extent that credit is offered on good terms, that would be a good development. I think you would see more potential homebuyers being approved for mortgages which would drive up home prices in the short term as there would be more competition.”

But then there’s the opportunity for those really bad loans to come swinging back, which harm homeowners would have in the past and also trigger fears of another housing collapse.

“Liar loans would definitely have a comeback if the CFPB and Dodd-Frank were dismantled,” says Reiss. “The Qualified Mortgage and ability to repay rules were implemented as part of the broader Dodd-Frank rulemaking agenda; without those rules, credit would quickly return to its extreme boom and bust cycle, with liar loans a product that would pick up steam just as the boom reaches its heights…We would bemoan them once again as soon as the bust hits its depths.”

Another Housing Bubble?

bubble-500130_1280

Trulia quoted me in Warning Signs: Another Housing Bubble Is Coming. It opens,

Signs show another bubble coming. Some experts have a different opinion.

When the housing market crashed in 2008, it caused what came to be known as ”The Great Recession.” When the bubble burst, it ”sent a shock through the entire financial system, increasing the perceived credit risk throughout the economy,” according to a report published in The Journal of Business Inquiry.

The crash caused homes to lose up to half their value. People became underwater, owing more than their home was worth. And who wants to pay on a mortgage that’s larger than what the home could sell for? Although some people did just that, many more opted to short sell their homes or to simply walk away and have the bank foreclose.

Present Day

Fast-forward to 2016, and we are seeing hot, even ” overheated,” housing markets; bidding wars; rising home prices; and house flippers – all the signs of a housing bubble that’s about to burst. Are we repeating the mistakes we made before? Yes and no. Let’s explore four reasons the housing bubble burst and whether we’re experiencing the same conditions today.

1. Easy Credit

Before the 2008 crash, credit was easy to get. Pretty much, if you were breathing, you could get a mortgage loan. This led to people getting mortgages who ultimately couldn’t afford to pay them back. They lost their homes, and this contributed in large part to the housing crisis. Today the situation is different. ”Credit is still much tighter than it was before the financial crisis,” says David Reiss, professor of law at Brooklyn Law School. ”This is particularly true for those with less-than-perfect credit scores.” He explains: ”There are almost no no-down-payment loans as there were in the early 2000s. Those defaulted at incredibly high rates.”

But what about Federal Housing Administration (FHA) loans? They feature ”low down payments, low closing costs, and easy credit qualifying.” Those are the very features that should sound some warning bells. But before you get too alarmed, keep in mind that the FHA has been making loans to people who do not qualify for a conventional mortgage since 1934. ”While there are low-down-payment loans available from Fannie, Freddie, and the FHA, their underwriting standards appear to be higher than those for low-down-payment products from the early 2000s,” says Reiss.

2. Low Interest Rates

Mortgage rates have been low for so long that you might not realize that was not always the case. In 1982, for example, mortgage rates were 18 percent. From 2002 to 2005, the rates stayed at about 6 percent, which enticed people to take out mortgage loans. And in 2016, we’re seeing historic lows of under 3.5 percent. If rates go up, we might see housing demand and housing prices fall.

3. ARMS

Before the housing crash when home prices were rising fast, many people were priced out of the market with a fixed-rate mortgage because they couldn’t afford the monthly mortgage payments. But they could afford lower payments that were possible with an adjustable-rate mortgage – until that rate adjusted up. In 2005, 38.5 percent of the mortgage market was ARMs. But in 2015, that amount has dropped considerably to 5.3 percent.

4. A Buying Frenzy

There’s an old story that before the stock market crash of 1929, Joseph Kennedy, Sr., sold his shares. Why? Because he received a stock tip from a shoeshine boy. Kennedy figured, the story goes, that if the stock market was popular enough for a shoeshine boy to be interested, the speculative bubble had become too big.

Before the housing crash, this country saw a home buying frenzy similar to what happened before the stock market crash. Everyone from lenders to rating agencies to investors (foreign and American) to investment bankers to home buyers was eager to get into the mortgage game because house values kept rising. Today, we are seeing a similar buying frenzy in some markets, such as San Francisco, New York, and Miami . Some experts think that the price increases of homes in those areas are not sustainable. They say that because heavy foreign investment in those areas is part of what’s driving up prices, if those investments slow or stop, we could see a bubble burst.

So what do some experts think?

David Ranish, owner/broker for The Coastline Real Estate Group in Laguna Beach, CA, says: ”There are concerns about another housing bubble, but I do not see it. The market could stabilize, but a complete collapse is highly unlikely.”

Bruce Ailion, an Atlanta, GA, real estate expert, says,” ”Five to six years ago, I was a buyer of homes. Today I am a seller.”

David Reiss says, ”It is probably a fool’s game to predict the future of the housing market or whether we are in a bubble that is soon to burst.”

The Ghosts of the Housing Bubble

NYC Councilmember Daniel Garodnick has released a report, The Ghosts of the Housing Bubble: How Debt, Deterioration, and Foreclosure Continue to Haunt New York after the Crash. The report opens,

New York continues to have the highest rents in the country and a housing crisis that has lasted for decades. Many residential rents are below market value – a result of the myriad of state and local laws that have been implemented to protect working and middle class tenants from being forced out of their homes. This gap between the current affordable rent and potential fair market value can fuel the imaginations of investors and owners who dream of squeezing out the unrealized value hidden in these properties. This leads some developers to make riskier and riskier decisions following visions of real estate fortune, only to find themselves tilting at windmills, stuck with unpayable mortgages and escalating maintenance costs. (1)

The report proposes a number of interesting solutions to the problems it identifies, all of which should be looked into further. I am particularly intrigued by the proposal that Community Reinvestment Act exams should include a review of “the quality of the investments being made, measuring if banks are lending mortgages to landlords with portfolios of distressed housing. Were their bad loans to be reflected in their CRA ratings, banks might change their behavior.” (8)

But as with a similar ANHD report, the magnitude of the proposed solutions does not seem to match that of the identified problems. Market forces are extraordinarily powerful in NYC right now. It is unclear whether initiatives such as the “First Look Program,” which gives “good developers the first opportunity to buy” properties in foreclosure, can do anything when valuations are so frothy and predatory equity is on the prowl. (1)

That being said, the report is still quite valuable for shining light once again on the problem of owners who seek to illegally force rent regulated tenants out of their homes.