Tag Archives: Federal Housing Admininistration

Common Mortgage Myths

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image by Nevit Dilmen

Newsday quoted me in Don’t Fall For These 4 Common Mortgage Myths. It reads,

With the spring home buying season just around the corner, it’s a good time to separate fiction from fact.

Here are four common mortgage myths.

Myth: Home buyers must put down 20 percent.

Fact: “While that may have been true a long time ago, there are a number of alternatives. Federal Housing Administration-insured loans can have 3.5 percent down payments. Fannie Mae and Freddie Mac both have programs with 3 percent down payments. One major lender has come up with a program with a 1 percent-down mortgage, but there are some significant restrictions on who qualifies for that program,” says David Reiss, a law professor specializing in real estate at Brooklyn Law School.

Myth: My bank knows me, loves me and will give me a deal.

Fact: “Mortgage lending is regulated by nationwide underwriting standards that all lenders must follow. Since virtually all lenders obtain money to lend from the secondary mortgage markets, the mortgage rate one can obtain will be virtually the same regardless of the lender chosen,” says Warren Goldberg, president of Mortgage Wealth Advisors in Plainview.

Myth: Prequalification means you’re approved and will get the loan.

Fact: “Pre-qualification is not a binding agreement. Lenders may require additional information before issuing the loan. Pre-qualification gives you an idea of how much you can borrow before you start looking at homes and shows sellers that you’re committed and can afford the home,” says Bob Donovan, Bank of America’s divisional sales executive for the metropolitan region in Manhattan.

Myth: I’ll close in 30 days.

Fact: “That’s rare now. The turnaround from application to closing is about 50 days,” says Sam Heskel, CEO of Nadlan Valuation in Brooklyn.

 

The Republican Housing Platform

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photo by DonkeyHotey

The Republican Party adopted its platform earlier this week.  The short housing platform is worth reading in its entirety:

Responsible Homeownership and Rental Opportunities

Homeownership expands personal liberty, builds communities, and helps Americans create wealth. “The American Dream” is not a stale slogan. It is the lived reality that expresses the aspirations of all our people. It means a decent place to live, a safe place to raise kids, a welcoming place to retire. It bespeaks the quiet pride of those who work hard to shelter their family and, in the process, create caring neighborhoods.

The Great Recession devastated the housing market. U.S. taxpayers paid billions to rescue Freddie Mac and Fannie Mae, the latter managed and controlled by senior officials from the Carter and Clinton Administrations, and to cover the losses of the poorly-managed Federal Housing Administration. Millions lost their homes, millions more lost value in their homes.

More than six million households had to move from homeownership to renting. Rental costs escalated so that today nearly 12 million families spend more than 50 percent of their incomes just on rent. The national homeownership rate has sharply fallen and the rate for minority households and young adults has plummeted. So many remain unemployed or underemployed, and for the lucky ones with jobs, rising rents make it harder to save for a mortgage.

There is a growing sense that our national standard of living will never be as high as it was in the past. We understand that pessimism but do not share it, for we believe that sound public policies can restore growth to our economy, vigor to the housing market, and hope to those who are now on the margins of prosperity.

Our goal is to advance responsible homeownership while guarding against the abuses that led to the housing collapse. We must scale back the federal role in the housing market, promote responsibility on the part of borrowers and lenders, and avoid future taxpayer bailouts. Reforms should provide clear and prudent underwriting standards and guidelines on predatory lending and acceptable lending practices. Compliance with regulatory standards should constitute a legal safe harbor to guard against opportunistic litigation by trial lawyers.

We call for a comprehensive review of federal regulations, especially those dealing with the environment, that make it harder and more costly for Americans to rent, buy, or sell homes.

For nine years, Fannie Mae and Freddie Mac have been in conservatorship and the current Administration and Democrats have prevented any effort to reform them. Their corrupt business model lets shareholders and executives reap huge profits while the taxpayers cover all loses. The utility of both agencies should be reconsidered as a Republican administration clears away the jumble of subsidies and controls that complicate and distort home-buying.

The Federal Housing Administration, which provides taxpayer-backed guarantees in the mortgage market, should no longer support high-income individuals, and the public should not be financially exposed by risks taken by FHA officials. We will end the government mandates that required Fannie Mae, Freddie Mac, and federally-insured banks to satisfy lending quotas to specific groups. Discrimination should have no place in the mortgage industry.

Zoning decisions have always been, and must remain, under local control. The current Administration is trying to seize control of the zoning process through its Affirmatively Furthering Fair Housing regulation. It threatens to undermine zoning laws in order to socially engineer every community in the country. While the federal government has a legitimate role in enforcing non-discrimination laws, this regulation has nothing to do with proven or alleged discrimination and everything to do with hostility to the self-government of citizens. (4)

Here are some of the policy proposals that I think it gets right: abolishing Fannie and Freddie in their current form as hybrid public/private corporations; implementing regulation that promotes responsible underwriting and protects against predatory lending; and banning discrimination in the credit markets.

There is a lot of coded language in the platform, however. And that coded language may be inconsistent with some of those goals. For instance, the opposition to the Obama Administration’s attempts to reduce de facto segregation in the housing markets through such initiatives as the Affirmatively Furthering Fair Housing regulation undercuts the claim that the party opposes discrimination in the housing market.

It will be a long, strange trip to the November election. The direction of federal housing policy must be counted as one of important issues at stake.

Reiss on New Mortgage Regime

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Loans.org quoted me in a story, CFPB Rules Reiterate Current and Future Lending Practices. It reads in part,

David Reiss, professor of law at the Brooklyn Law School, said there could be other long-term effects due to this high DTI ratio since the lending rules will likely remain for several decades.

If the rules remain intact, the high DTI number can still be lowered at a later time. For instance, if few defaults occur when the bar is set at 43 percent, the limit might increase. Conversely, if a large number of defaults occur, the limit will decrease even further.

Reiss hopes that the agencies overseeing the rule will make these changes based on empirical evidence.

“I’m hopeful that regulation in this area will be numbers driven,” he said.

Despite the wording, Bill Parker, senior loan officer at Gencor Mortgage, said that lenders are technically “not required to ensure borrowers can repay their loans.” He said lenders are legally required to make a “good faith effort” for reviewing documents and facts about the borrower and indicating if he or she can repay the debt.

“If they do so, following the directives of the CFPB, then they are protected against suit by said borrower in the future,” Parker said. “If they can’t prove they investigated as required, then they lose the Safe Harbor and have to prove the borrower has not suffered harm because of this.”

The statute of limitations for the CFPB law is three years from the start of loan payments. After that time period, the lender is no longer required to provide evidence of loan compliance.

Even though the amendment could impact the current lending market, experts told loans.org that the CFPB’s standards will make a greater impact on the future of the housing industry.

Reiss believes that the stricter rules will create a sustainable lending market.

Reiss on Fannie and Freddie Buyout

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Law360 quoted me in Fairholme Changes The Game For Fannie And Freddie (behind a paywall).  It reads in part,

Fairholme Capital Management LLC’s plan to buy Fannie Mae’s and Freddie Mac’s insurance businesses will likely turn out to be more symbolic gesture than successful deal, experts say, but the hedge fund’s bold move could increase interest in privatization of the entities and potentially encourage other bidders to join the fray.

*     *     *

Some experts believe this emphasis on the ownership stakes of Fairholme and other hedge funds will be a major turnoff for the White House, the Federal Housing Finance Agency and the Treasury.

“It’s a very good idea, but the question is, will it keep the government and taxpayers off the hook? And will it bring in sufficient private capital to provide a vibrant residential mortgage market?” said David Reiss, a real estate finance professor at Brooklyn Law School. “Of course they’re looking to maximize their return, so the question has to be, what’s the angle that they’re playing?”

The angle, experts and analysts say, is likely connected to claims Fairholme and other hedge funds have made recently against the federal government, accusing it of devaluing their shares of Fannie and Freddie in order to reap all the GSEs’ mounting profits.

Fairholme and Perry Capital LLC both sued the government over its management of Fannie and Freddie this summer.

In July, Perry Capital accused the Treasury of wrongfully altering stock purchasing agreements with Fannie and Freddie, which allegedly allowed it to illegally speed up the liquidation of the companies and reap more than $200 billion over the next decade.

Two days later, Fairholme and insurance holding company W.R. Berkley Corp. sued the federal government, alleging it had acted unconstitutionally when it altered its bailout deal for the GSEs to keep the companies’ profits for itself.

Fairholme’s proposal assumes that their shares have the value they claim they have in their lawsuit, Reiss said. If the deal were to move forward, valuation of Fairholme’s stake could be a major sticking point.

*     *     *

“It begins the conversation as to whether you can have effectively a buyout of the federal government from Fannie and Freddie, which is a healthy thing, I think,” Reiss said.

American Dream/American Nightmare

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I will be presenting “How Low Is Too Low? The Federal Housing Administration and the Low Down Payment Mortgage” at the 2013 Meeting of the Canadian Law and Economics Association next week in Toronto. I just came back from an interesting conference at the Cleveland Fed where I was on a panel devoted to the FHA. The other two panelists presented some disturbing findings about default rates for FHA mortgages.

The two panelists were

Edward J. Pinto, Resident Fellow, American Enterprise Institute, How the FHA Hurts Working-Class Families

Joseph Tracy, Executive Vice President and Senior Advisor to the President, Federal Reserve Bank of New York, Interpreting the Recent Developments in Housing Markets

Pinto’s summary is as follows:

The Federal Housing Administration’s mission is to be a targeted provider of mortgage credit for low- and moderate-income Americans and first-time home buyers, leading to homeownership success and neighborhood stability. But is the FHA achieving this mission? This paper reports on a comprehensive study that shows the FHA is engaging in practices resulting in a high proportion of low- and moderate-income families losing their homes. Based on an analysis of the FHA’s FY 2009 and 2010 books of business, the FHA’s lending practices are inconsistent with its mission. The findings indicate: An estimated 40 percent of the FHA’s business consists of loans with either one or two subprime attributes—a FICO score below 660 or a debt ratio greater than or equal to 50 percent (based on loans insured during FY 2012). The FHA’s underwriting policies encourage low- and moderate-income families with low credit scores or high debt burdens to make risky financing decisions—combining a low credit score and/or a high debt ratio with a 30-year loan term and a low down payment. A substantial portion of these loans has an expected failure rate exceeding 10 percent. Across the country, 9,000 zip codes with a median family income below the metro area median have projected foreclosure rates equal to or greater than 10 percent. These zips have an average projected foreclosure rate of 15 percent and account for 44 percent of all FHA loans in the low- and moderate-income zips.

Tracy reported that rates of defaults by households rather than by mortgages gave a truer picture of the FHA’s success because many FHA borrowers would refinance into another FHA loan. Thus, to study defaults by mortgages covers up the real rate of default.

I believe that their studies were preliminary and have not gone through peer review, but both of them reported extraordinary default rates for certain types of FHA mortgages.

Pinto and his empirical work are very controversial so I cannot endorse his findings. But I can say that if he got it only somewhat right about predictable and ridiculously high default rates for some categories of borrowers, the FHA must immediately defend the underwriting of such loans or change its practices. It would be criminal to have predictable default rates in excess of 20% for any population. Such a rate transforms the American Dream of homeownership into an American Nightmare of foreclosure far, far too often.