Tag Archives: FHA

Reiss on The Future of the Private Label Securities Market

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I have posted The Future of the Private Label Securities Market to SSRN (as well as to BePress). I wrote this in response to the Department of Treasury’s request for input on this topic. The abstract reads,

The PLS market, like all markets, cycles from greed to fear, from boom to bust. The mortgage market is still in the fear part of the cycle and recent government interventions in it have, undoubtedly, added to that fear. In recent days, there has been a lot of industry pushback against the government’s approach, including threats to pull out of various sectors. But the government should not chart its course based on today’s news reports. Rather, it should identify fundamentals and stick to them. In particular, its regulatory approach should reflect an attempt to align incentives of market actors with government policies regarding appropriate underwriting and sustainable access to credit. The market will adapt to these constraints. These constraints should then help the market remain healthy throughout the entire business cycle.

Conservative Underwriting or Regulatory Uncertainty?

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Jordan Rappaport (Federal Reserve Bank of Kansas City) and Paul Willen (Federal Reserve Bank of Boston) have posted a Current Policy Perspectives,Tight Credit Conditions Continue to Constrain The Housing Recovery. They write,

Rather than cutting off access to mortgage credit for a subset of households, ongoing credit tightness more likely takes the form of strict underwriting procedures applied to all households. Lenders require conservative appraisals, meticulous documentation, and the curing of even the slightest questions of title. To the extent that these standards constitute sound lending practices, adhering to them is a positive development. But the level of vigilance suggests that regulatory uncertainty may also be playing a role.

Since the housing crisis, the FHA, the Federal Housing Finance Agency, the Consumer Financial Protection Bureau, and other government and private organizations have been continually developing a new regulatory framework. Lenders fear that departures from the evolving standards will result in considerable costs, including the forced buyback of loans sold to Fannie and Freddie and the rescinding of FHA mortgage guarantees. The associated uncertainty has caused lenders to act as if strict interpretations of possible restrictive future standards will apply. (2-3)

The authors raise an important question: has the federal government distorted the mortgage market in its pursuit of past wrongdoing and its regulation of behavior going forward? Anecdotal reports such as those about Chase’s withdrawal from the FHA market seem to suggest that the answer is yes. But it appears to me that Rappaport and Willen may be jumping the gun based on the limited data that they analyze in their paper.

Markets cycle from greed to fear, from boom to bust. The mortgage market is still in the fear part of the cycle and government interventions are undoubtedly fierce (just ask BoA). But the government should not chart its course based on short-term market conditions. Rather, it should identify fundamentals and stick to them. Its enforcement approach should reflect clear expectations about compliance with the law. And its regulatory approach should reflect an attempt to align incentives of market actors with government policies regarding appropriate underwriting and sustainable access to credit. The market will adapt to these constraints. These constraints should then help the market remain vibrant throughout the entire business cycle.

Armed, Unarmed or Harmed by Knowledge?

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I posted Armed, Unarmed or Harmed by Knowledge? A Comment on the FHA’s Housing Counseling Pilot Program to SSRN (and to BePress). The abstract reads,

The FHA has requested input on its Homeowners Armed with Knowledge (HAWK) for New Homebuyers pilot program. This comment letter argues that housing counseling is not a proven solution to the problem it is meant to solve, excessive defaults by FHA borrowers. HAWK is a traditional housing counseling program but the scholarly literature casts into doubt the efficacy of such programs. It would be better to take time to research which counseling strategies, if any, are proven to be effective. This is true for the FHA but also for other government agencies, such as the Consumer Financial Protection Bureau, that have devoted significant resources to unproven financial counseling programs.

This comment was submitted to the FHA in response to its request for input on its Homeowners Armed with Knowledge (HAWK) for New Homebuyers program.

Regular readers of this blog will be familiar with my take on this topic as the comment is adapted from blog posts that have addressed various financial education topics.

Reiss on Mortgage Insurance Proposal

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Law360 quoted me in FHFA Capital Rules Will Squeeze Older Mortgage Insurers (behind a paywall). It opens,

The Federal Housing Finance Agency on Thursday released proposals that would impose higher capital requirements on private mortgage insurers doing business with Fannie Mae and Freddie Mac, but experts say insurers with bubble-era mortgages in their portfolios may find it tough to meet the new mandates.

The new standards will force mortgage insurers to determine the amount of cash and other liquid assets they retain to cover potential payouts using more of a risk-based formula than they have up to this point, meaning that the riskier the mortgage, the more capital will be required.

Because of that, mortgage insurers that were in business during the housing bubble era and have older loans on their books will be hit harder than insurers that have only post-financial crisis loans on their books, said Paul Hastings LLP partner Kevin Petrasic.

“The older vintage mortgages have more challenging issues than the newer mortgages,” he said.

Fannie Mae and Freddie Mac are barred from backing mortgages where the borrower has contributed less than a 20 percent down payment without getting private mortgage insurance to make up the difference. The insurance on those mortgages absorbs any losses before Fannie Mae and Freddie Mac do in the case of default, in essence putting private money before taxpayer money.

During the financial crisis, private mortgage insurers paid out billions of dollars on bad mortgages even as Fannie Mae and Freddie Mac took on over $180 billion in federal bailout money in the fall of 2008, when they were put under the FHFA’s conservatorship.

However, the financial crisis also saw many of the larger mortgage insurers fail under the weight of the huge number of claims they had to cover, contributing to Fannie and Freddie’s collapses.

“The history of the mortgage insurance industry is a history of good profits during good times and catastrophic losses in bad times,” said Brooklyn Law School professor David Reiss. “It seems like what the FHFA is doing is saying we don’t want the taxpayer on the hook during the next period of catastrophic losses.”

That is exactly what the FHFA says it intends with its new regulations, part of a so-called strategic plan to strengthen Fannie Mae and Freddie Mac and to bring more private money into the mortgage market.

What Should the 21st Century Mortgage Market Look Like?

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Treasury is requesting Public Input on Development of Responsible Private Label Securities (PLS) Market.  Comments are due on August 8, 2014. The request for information wants input on the following questions:

1. What is the appropriate role for new issue PLS in the current and future housing finance system? What is the appropriate interaction between the guaranteed and non-guaranteed market segments? Are there particular segments of the mortgage market where PLS can or should be most active and competitive in providing a channel for funding mortgage credit?

2. What are the key obstacles to the growth of the PLS market? How would you address these obstacles? What are the existing market failures? What are necessary conditions for securitizers and investors to return at scale?

3. How should new issue PLS support safe and sound market practices?

4. What are the costs and benefits of various methods of investor protection? In particular, please address the costs and benefits of requiring the trustee to have a fiduciary duty to investors or requiring an independent collateral manager to oversee issuances?

5. What is the appropriate or necessary role for private industry participants to address the factors cited in your answer to Question #2? What can private market participants undertake either as part of industry groups or independently?

6. What is the appropriate or necessary role for government in addressing the key factors cited in your answer to Question #2? What actions could government agencies take? Are there actions that require legislation?

7. What are the current pricing characteristics of PLS issuance (both on a standalone basis and relative to other mortgage finance channels)? How might the pricing characteristics change should key challenges be addressed? What is the current and potential demand from investors should key challenges be addressed?

8. Why have we seen strong issuance and investor demand for other types of asset-backed securitizations (e.g., securitizations of commercial real estate, leveraged loans, and auto loans) but not residential mortgages? Do these or other asset classes offer insights that can help inform the development of market practices and standards in the new issue PLS market?

These are all important questions that go way beyond Treasury’s portfolio and touch on those of the FHFA, the FHA and the CFPB to name a few. Nonetheless, it is important that Treasury is framing the issue so broadly because it gets to the 10 Trillion Dollar Question:  Who Should Be Providing Mortgage Credit to American Households?

Some clearly believe that the federal government is the only entity that can do so in a stable way and certainly history is on their side.  Since the Great Depression,when the Home Owners Loan Corporation, the Federal Housing Administration and Fannie Mae were created, the federal government has had a central role in the housing finance market.

Others (including me) believe that private capital can, and should, take a bigger role in the provision of mortgage finance. There is some question as to how much capacity private capital has, given the size of the residential mortgage market (more than ten trillion dollars). But there is no doubt that it can do more than the measly ten percent share or so of new mortgages that it has been originating in recent years.

Treasury should think big here and ask — what do we want our mortgage finance to look like for the next eight or nine decades? Our last system lasted for that long, so our next one might too. The issue cannot be decided by empirical means alone. There is an ideological component to it. I am in favor of a system in which private capital (albeit heavily-regulated private capital) should be put at risk for a large swath of residential mortgages and the taxpayer should only be on the hook for major liquidity crises.

I also favor a significant role for government through the FHA which would still create a market for first-time homebuyers and low- and moderate-income borrowers. But otherwise, we would look to private capital to price risk and fund mortgages to the extent that it can do so.  Round out the system with strong consumer protection regulation from the CFPB, and you have a system that may last through the end of the 21st century.

Comments are due August 8th, so make your views known too!

Input on Housing Counseling

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HUD has issued a Notice, Federal Housing Administration (FHA): Homeowners Armed With Knowledge (HAWK) for New Homebuyers (Docket No. FR-5786-N-01).

HAWK is a pilot that will

provide FHA insurance pricing incentives to first-time homebuyers who participate in housing counseling and education that covers how to evaluate housing affordability and mortgage alternatives, to better manage their finances, and to understand the rights and responsibilities of homeownership. The goals of the HAWK for New Homebuyers pilot (HAWK Pilot) are to test and evaluate program designs that meet these objectives:

•To improve the loan performance of participants and reduce claims paid by FHA’s Mutual Mortgage Insurance Fund (MMIF).

• To expand the number of families who improve their budgeting skills and housing decisions through access to HUD-approved housing counseling agency services; and

• To increase access to sustainable home mortgages for homebuyers underserved by the current market. (27896)

I have already noted that HAWK is based upon some pretty sketchy research about the efficacy of housing counseling. The Notice presents additional research (in footnotes 5-8) that supports its goals, but I have to say that it seems cherry picked to me. The notice says, for instance, “some studies show” and “Several major studies have recently noted a correlation . . ..” But the Notice does not seem to contextualize these studies at all. A meta-analysis (see here too) of financial education initiatives is decidedly less optimistic.

It seems that the FHA and the CFPB have gone whole hog on counseling even though the evidence is not there to support such strong support. On the bright side, HAWK is a pilot program and the FHA will evaluate it to see whether it meets its goal of “improving loan performance.” (27903) I am just worried a bit worried though, because the FHA’s materials seem to show an unwarranted bias toward counseling that a review of the relevant literature does not seem to bear out.

The HAWK Notice requests comments by July 14, 2014, so you’d better act fast if you have something to say!

Reiss in CSM on Rental Policy

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The Christian Science Monitor quoted me in Census Outlines ‘Poverty Areas’: Which States Hit Hardest? It reads in part,

The number of US residents living in “poverty areas” has jumped significantly since 2000, according to a Census Bureau report released Monday.

According the 2000 Census, less than 1 in 5 people lived in poverty areas. But more recently, 1 in 4 residents have lived in these areas, according to census data collected from 2008 to 2012.

The Census Bureau defines a poverty area as any census tract with a poverty rate of 20 percent of more.

Sociologists and other analysts point to the Great Recession, in particular housing and job challenges, as well as slow and uneven growth since the recession.

“With the advent of the financial crisis and the bursting of the housing bubble, many people lost their homes and thus needed to rent or move in with relatives,” says Cheryl Carleton, an economics professor at Villanova University near Philadelphia. “[I]ndividuals need to move where they can afford to live … which is going to be in areas where public housing is available or housing prices and rental rates are low, which is more likely to be in a ‘poverty area.’ ” Professor Carleton made her comments via e-mail.

*     *     *

Law professor David Reiss suggests that changes to homeownership policies could help.
“Federal and state housing programs could do more to support a market for well-maintained rental units for low-income households,” e-mails Professor Reiss, who teaches at Brooklyn Law School. “Many low-income households have difficulty maintaining homeownership because of irregular incomes and low wealth.”