- Fannie Mae announced HomeReady – a new affordable lending product which will be rolled out later in the year. The program includes features designed to make it more flexible for lenders and buyers alike. For lenders Desktop Underwriter (DU) allows lenders to make credit risk, eligibility and loan availability assessment in one tool. HomeReady loans also promise simplified execution due to the ability to commingle them with standard loans into Mortgaged Backed Security polls. Purchasers are able to put as little as 3% down, and are able to use rental income from the property and non-borrower household income to meet the requirements.
Tag Archives: Fannie Mae
Bank Settlements and the Arc of Justice
MLK Memorial in DC
Martin Luther King, Jr. said that the “arc of the moral universe is long, but it bends towards justice.” A recent report by SNL Financial (available here, but requires a lot of sign-up info) offers us a chance to evaluate that claim in the context of the financial crisis.
SNL reports that the six largest bank holding companies have paid over $132 billion to settle credit crisis and mortgage-related lawsuits brought by governments, investors and other financial institutions.
In the context of the litigation over the Fannie and Freddie conservatorships, I had considered whether it is efficient to respond to financial crises by allowing the government to do what it needs to do during the crisis and then “use litigation to make an accounting to all of the stakeholders once the situation has stabilized.” (121)
Given that the biggest bank settlements are now in the rear view window, we can now say that the accounting for the financial crisis comes in at around $132 billion give or take. Does that number do justice for the wrongs of the boom times? I don’t think I have my own answer to that question yet, but it is certainly worth considering.
On the one hand, we should acknowledge that it is a humongous number, a number so big that that no one would have considered it a likely one at the beginning of the financial crisis. This crisis made nine and ten digit settlement numbers a routine event.
On the other hand, wrongdoing (along with good old-fashioned boom mentality) during the financial crisis almost sent the global economy into a depression. It also wreaked havoc on so many individuals, directly and indirectly.
I look forward to seeing metrics that can make sense of this (ratio of settlement amounts to annual profits of Wall Street firms; ratio to bonus pools; ratio to home equity lost), but I will say that I am struck by the lack of individual accountability that has come out of all of this litigation.
Individuals who made six, seven and eight figure paychecks from this wrongdoing were able to move on relatively unscathed. We should think about how to avoid that result the next time around. Otherwise the arc of justice will bend in the wrong direction.
Wednesday’s Academic Roundup
- Housing Markets and Unconventional Monetary Policy, Charles Rahal.
- The Effect of Housing Wealth Shocks on Work and Retirement Decisions, Jaclene Begley & Sewin Chan.
- Millennials, Baby Boomers, and Rebounding Multifamily Home Construction, Jordan Rappaport, Federal Reserve Bank of Kansas City Working Paper.
- House Money and Entrepreneurship, Sari Pekkala Kerr, William R. Kerr & Ramana Nanda, Harvard Business School Entrepreneurial Management Working Paper No. 15-069.
- The Rescue of Fannie Mae and Freddie Mac, W. Scott Frame, Andreas Fuster, Joseph S. Tracy, & James I. Vickery, FRB Atlanta Working Paper No. FEDAWP2015-02.
- Second Homes: Households’ Life Dream or (Wrong) Investment?, Marianna Brunetti & Costanza Torricelli, CEIS Working Paper No. 351.
- Holding Deposit Agreements: Pre-Tenancy Obligations and Rights, Samuel Beswick, Landlord & Tenant Review, vol. 19(4), pp. 143-147, 2015.
- Housing Tenure and Unemployment, Richard K. Green & Bingbing Wang.
Monday’s Adjudication Roundup
- NY federal court approves Citigroup Global Markets Inc., Goldman Sachs & Co. and UBS Securities LLC settlement for $235 million in class action from pension fund for false prospectuses in mortgage-backed securities.
- Better Markets, a financial reform advocacy group, files brief in support of $1.3 billion penalty for Bank of America Corp. for fraud in one of its programs, “Hustle”, which allegedly ripped off Fannie Mae and Freddie Mac.
- Investors filed suit against US Bank NA in New York for failing to act in their best interests in regard to mortgage-backed security trust losses.
First-Time Homebuyers, You’re Okay
Saty Patrabansh of the Office of Policy Analysis and Research at the Federal Housing Finance Agency has posted a working paper, The Marginal Effect of First-Time Homebuyer Status on Mortgage Default and Prepayment.
While this is a dry read, it yields a pretty important insight for first-time homebuyers: you’re okay, just the way you are! The abstract reads,
This paper examines the loan performance of Fannie Mae and Freddie Mac first-time homebuyer mortgages originated from 1996 to 2012. First-time homebuyer mortgages generally perform worse than repeat homebuyer mortgages. But first-time homebuyers are younger and have lower credit scores, home equity, and income than repeat homebuyers, and therefore are comparatively less likely to withstand financial stress or take advantage of financial innovations available in the market. The distributional make-up of first-time homebuyers is different than that of repeat homebuyers in terms of many borrower, loan, and property characteristics that can be determined at the time of loan origination. Once these distributional differences are accounted for in an econometric model, there is virtually no difference between the average first-time and repeat homebuyers in their probabilities of mortgage default. Hence, the difference between the first-time and repeat homebuyer mortgage defaults can be attributed to the difference in the distributional make-up of the two groups and not to the premise that first-time homebuyers are an inherently riskier group. However, there appears to be an inherent difference in the prepayment probabilities of first-time and repeat homebuyers holding borrower, loan, and property characteristics constant. First-time homebuyers are less likely to prepay their mortgages compared to repeat homebuyers even after accounting for the distributional make-up of the two groups using information known at the time of loan origination.
So, just to be clear, being a first-time homebuyer is not inherently risky. Rather, the risks arising from transactions involving first-time homebuyers are the same as those involving repeat homebuyers: loan characteristics, property characteristics and other borrower characteristics.
Monday’s Adjudication Roundup
- The CFPB increased PHH Corp.’s penalty to $109 million from $6.4 million on appeal, while upholding an administrative judge’s ruling that the firm was involved in a mortgage insurance kickback scheme.
- A class of PHH borrowers have been granted cert to the U.S. Supreme Court alleging that PHH Corp. violated the Real Estate Settlement Procedures Act.
- NY Court of Appeals bars mortgage-backed securities suit for $330 million against Deutsche Bank AG due to a six-year statute of limitations that started when the contract was signed.
- Nomura Holdings Inc. is appealing $806 million verdict in suit brought by the Federal Housing Finance Agency for selling bad mortgage-backed securities to Fannie Mae and Freddie Mac.
- The Securities and Exchange Commission brought suit against a New York broker for $4.1 million for allegedly selling unregistered securities through several entities.
Wednesday’s Academic Roundup
- Section 1031 Exchanges: Death of a Related-Party Exchange – Did ‘Butler’ Do It?, by Bradley T. Borden & Alan S. Lederman, Daily Tax Report Journal, Vol. 75, No. 1, 2015.
- The Future of Fannie and Freddie, by Mark A. Calabria, David J. Reiss, Lawrence J. White, Mark A. Willis, & Michael E. Levine, New York University Journal of Law and Business, Vol. 10, No. 339, 2014.
- The Home Selling Problem: Theory and Evidence, by Antonio Merlo, François Ortalo-Magné & John Rust, International Economic Review, Vol. 56, Issue 2, pp. 457-484, 2015.
- Investors Effect on Household Real Estate Affordability, by Sebastien Gay, Kreisman Working Papers Series in Housing Law and Policy No. 22.
