Tag Archives: Government Accountability Office

Muddled Future for Fannie & Freddie

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The United States Government Accountability Office released a report, Objectives Needed for the Future of Fannie Mae and Freddie Mac After Conservatorships.  The GAO’s findings read a bit like a “dog bites man” story — stating, as it does, the obvious:  “Congress should consider legislation that would establish clear objectives and a transition plan to a reformed housing finance system that enables the enterprises to exit conservatorship. FHFA agreed with our overall findings.” (GAO Highlights page) I think everyone agrees with that, except unfortunately, Congress.  Congress has let the two companies languish in the limbo of conservatorship for over eight years now.

Richard Shelby, the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, asked the GAO to prepare this report in order to

examine FHFA’s actions as conservator. This report addresses (1) the extent to which FHFA’s goals for the conservatorships have changed and (2) the implications of FHFA’s actions for the future of the enterprises and the broader secondary mortgage market. GAO analyzed and reviewed FHFA’s actions as conservator and supporting documents; legislative proposals for housing finance reform; the enterprises’ senior preferred stock agreements with Treasury; and GAO, Congressional Budget Office, and FHFA inspector general reports. GAO also interviewed FHFA and Treasury officials and industry stakeholders (Id.)

The GAO’s findings are pretty technical, but still very important for housing analysts:

In the absence of congressional direction, FHFA’s shift in priorities has altered market participants’ perceptions and expectations about the enterprises’ ongoing role and added to uncertainty about the future structure of the housing finance system. In particular, FHFA halted several actions aimed at reducing the scope of enterprise activities and is seeking to maintain the enterprises in their current state. However, other actions (such as reducing their capital bases to $0 by January 2018) are written into agreements for capital support with the Department of the Treasury (Treasury) and continue to be implemented.

In addition, the change in scope for the technology platform for securitization puts less emphasis on reducing barriers facing private entities than previously envisioned, and new initiatives to expand mortgage availability could crowd out market participants.

Furthermore, some actions, such as transferring credit risk to private investors, could decrease the likelihood of drawing on Treasury’s funding commitment, but others, such as reducing minimum down payments, could increase it.

GAO has identified setting clear objectives as a key principle for providing government assistance to private market participants. Because Congress has not established objectives for the future of the enterprises after conservatorships or the federal role in housing finance, FHFA’s ability to shift priorities may continue to contribute to market uncertainty. (Id.)

One finding seems particularly spot on to me. As I wrote yesterday, it appears as if the FHFA is not focusing sufficiently on building the infrastructure to serve secondary mortgage markets other than Fannie and Freddie.  It seems to me that a broader and deeper bench of secondary mortgage market players will benefit the housing market in the long run.

 

The Looming Housing Crisis for Seniors

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Senior Housing in Seattle

TheStreet.com quoted me in Inside the Nation’s Looming Senior Housing Crisis. It opens,

Every day, 10,000 Americans turn 65. That will be true for the next 15 years as the Baby Boomers slide into retirement. Here’s the question: where will they live?

Know that the Social Security Administration said that if you turn 65 today, you will live to 84.3 if you are a man. If you are a woman, it is 86.6. Added SSA: “And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of ten will live past age 95.”

Our retirement savings also are paltry. A Government Accountability Office 2015 study said that average Americans between 55 and 64 had about $104,000 in savings. Many have nothing saved.

In 2015 SSA said the average monthly check it issued was for $1,335.

Will there be enough housing to put a roof over every gray head? How will they pay the rent?

When the Bipartisan Policy Center, a Washington, D.C. think tank, recently looked at senior housing, it said in a detailed report: “The current supply of housing that is affordable to the nation’s lowest-income seniors is woefully inadequate. As more low-income Americans enter the senior ranks, this supply shortage — currently measured in millions of units — will become even more acute.”

The good news: many are scrambling to meet the need. There are efforts to provide low income public housing, private affordable housing, and many companies are engaged in developing senior housing for the affluent.

Public housing has been the traditional go-to for those lacking means, seniors included, and many big cities – such as New York, Philadelphia and Chicago – have extensive inventory of income tested senior housing. But there is nowhere near enough. In much of Chicago, the waiting list for senior public housing is over two years. In New York, it is over four. In Philadelphia the public housing waiting list is presently closed, and said the housing authority, it has 104,000 on the wait list. The Philadelphia Housing Authority added: “Due to low turnover, applicants may not reach the top of the waitlist for ten years.”

“Public housing continues to have extremely long waiting lists, so it is not a practical option for many seniors,” said David Reiss, a professor at Brooklyn Law and an expert on housing.

Republicans Ready for GSE Reform?

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Senator Richard Shelby (R-AL)

Senator Shelby (R-AL), the Chair of the Senate Committee on Banking, Housing and Urban Affairs, sent a letter to the U.S. Government Accountability Office regarding the future of Fannie Mae and Freddie Mac, sometimes known as the “enterprises.” It provides an interesting roadmap of Republican thinking about the appropriate role of the federal government in the mortgage market:

the FHFA [Federal Housing Finance Agency] has taken steps that appear to encourage a more active, rather than a reduced, role in the mortgage market for the enterprises. These steps include issuing proposed rules regarding the enterprises’ duty to serve, creating principle [sic] write-down requirements, lowering down-payment requirements, allowing allocation of revenues to the national housing trust fund despite the enterprise having no capital, and other actions. Moreover, the development of the common securitization platform, a joint venture established by the enterprises at the FHFA’s direction, raises a number of questions about the FHFA’s stated goal to gradually contract the enterprises’ dominant presence in the marketplace.

Initially, the purpose of the FHFA’s efforts, such as the common securitization platform, was to facilitate greater competition in the secondary mortgage market, but now it appears that the FHFA is no longer taking steps to enable the platform to be used by entities other than the enterprises.  Likewise, lowering the down-payment requirement for mortgages guaranteed by the enterprises will make the enterprises more competitive with others in the mortgage market, not less. Overall, these FHFA actions raise questions about the goals of the conservatorship and whether its ultimate purpose has changed.

To better understand the impact of these changes, I ask that the GAO study and report the extent to which the FHFA’s actions described above could influence:

  • The enterprises’ dominance in residential mortgage markets;
  • A potential increase in the cost of entry for future competitors to the enterprises;
  • Current and future financial demands on the Treasury;
  • Possible options for modifying the enterprises’ structures (1)

As I have stated previously, Congress and the Obama Administration have allowed the FHFA to reform Fannie and Freddie on its own, with very little oversight. Indeed, the only example of oversight one could really point to would be the replacement of Acting Director DeMarco with Director Watt, a former Democratic member of Congress. It is notable that Watt has continued many of the policies started by DeMarco, a Republican favorite. That being said, Shelby is right to point out that Watt has begun taking some modest steps that Democrats have favored, such as funding the housing trust fund and implementing a small principal-forgiveness program.

Housing finance reform is the one component of the post-financial crisis reform agenda that Congress and the Executive have utterly failed to address. It is unlikely that it will be addressed in the near future. But perhaps the FHFA’s independent steps to create a federal housing finance infrastructure for the 21st century will galvanize the political branches to finally act and implement their own vision, instead of ceding all of their power to the unelected leaders of an administrative agency.

 

Nonbank Mortgage Servicers and the Foreclosure Crisis

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The United States Government Accountability Office has issued a report, Nonbank Mortgage Servicers: Existing Regulatory Oversight Could Be Strengthened. The GAO found that

The share of home mortgages serviced by nonbanks increased from approximately 6.8 percent in 2012 to approximately 24.2 percent in 2015 (as measured by unpaid principal balance). However, banks continued to service the remainder (about 75.8 percent). Some market participants GAO interviewed said nonbank servicers’ growth increased the capacity for servicing delinquent loans, but they also noted challenges. For example, rapid growth of some nonbank servicers did not always coincide with their use of more advanced operating systems or effective internal controls to handle their larger portfolios—an issue identified by the Consumer Financial Protection Bureau (CFPB) and others.

Nonbank servicers are generally subject to oversight by federal and state regulators and monitoring by market participants, such as Fannie Mae and Freddie Mac (the enterprises). In particular, CFPB directly oversees nonbank servicers as part of its responsibility to help ensure compliance with federal laws governing mortgage lending and consumer financial protection. However, CFPB does not have a mechanism to develop a comprehensive list of nonbank servicers and, therefore, does not have a full record of entities under its purview. As a result, CFPB may not be able to comprehensively enforce compliance with consumer financial laws. In addition, the Federal Housing Finance Agency (FHFA) is the safety and soundness regulator of the enterprises. As such, it has indirect oversight of third parties that do business with the enterprises, including nonbanks that service loans on the enterprises’ behalf. However, in contrast to bank regulators, FHFA lacks statutory authority to examine these third parties to identify and address deficiencies that could affect the enterprises. GAO has previously determined that a regulatory system should ensure that similar risks and services are subject to consistent regulation and that a regulator should have sufficient authority to carry out its mission. Without such authority, FHFA may lack a supervisory tool to help it more effectively monitor third parties’ operations and the enterprises’ actions to manage any associated risks.

As with many GAO reports, this one provides a lot of information about a very obscure, but important, subject. In this case, the report provides a good overview of the servicing industry since the financial crisis. The report also highlights the risks to consumers and the financial industry that result from the rapid expansion of the servicing market share of nonbanks.

One of the disturbing aspects of the foreclosure crisis was the sense that the servicing sector couldn’t do a better job of assisting borrowers, even if it wanted to, because it did not have the resources to meet the challenge. Changes implemented since then, driven in large part by the CFPB, may make things better during the next such crisis. But this report does not give one the sense that they will be all that much better. The GAO report rightly calls for further work to be done to ensure that the industry is prepared to meet the challenges that are sure to come its way.

Friday’s Government Reports Roundup

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Friday’s Government Reports

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  • The Government Accountability Office (GAO) has released a report, Affordable Rental Housing, which points out that there are initiatives on the state, local and federal level which address this issue, however they are not always well coordinated, often overlap, and there is “incomplete information to assess performance.” Without sufficient information, the GAO argues it is impossible for Congress or other agencies to set appropriate spending priorities and assess performance.  GOA’s recommendation is for the U.S. Department of Housing and Urban Development to work with state and local entities to develop a coordinated assessment and reporting structure.
  • Also from the GAO, Pay for Success: Collaboration Among Federal Agencies Would be Helpful as Governments Explore New Financing Mechanisms is a report which describes Social Impact Bonds (SIBs).  SIBs are a mechanism by which investors pay for social outcomes and receive an agreed upon return based on the success of the program or as GAO put it, “contracting for social outcomes.”  According to the GAO SIBs can be useful in reducing the cost of providing social services while improving success.  While the use of SIBs has been limited so far the Office of Management and Budget has been encouraging Federal Agencies to test their potential effectiveness.  This GAO report analyzes SIBs that have already been piloted, for example the Department of Labor awarded $24 Million in grants in 2013 to reduce recidivism in New York and Massachusetts.  One fear is that SIBs could create perverse incentives. SIBs could eventually be used to finance affordable housing development.

Shaking up the Title Industry

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The United States Court of Appeals for the 9th Circuit issued an opinion in Edwards v. The First American Corporation et al., No. 13-555542 (Aug. 24, 2015) that may shake up how the title insurance industry works. As the court notes,

The national title insurance industry is highly concentrated, with most states dominated by two or three large title insurance companies. See U.S. Gov’t Accountability Office, Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers 3 (Apr. 2007). A “factor that raises questions about the existence of price competition is that title agents market to those from whom they get consumer referrals, and not to consumers themselves, creating potential conflicts of interest where the referrals could be made in the best interest of the referrer and not the consumer.” Id. Kickbacks paid by the title insurance companies to those making referrals lead to higher costs of real estate settlement services, which are passed on to consumers without any corresponding benefits. (9)

The Real Estate Settlement Procedures Act (RESPA) is intended to eliminate illegal kickbacks in the real estate industry. In this case, the 9th Circuit has reversed the District Court’s denial of class certification in a case in which home buyers alleged that First American engaged in a scheme of paying title agencies for referring title insurance business to First American in violation of RESPA. The reversal does not get to the merits of the underlying claims, but it does open up a can of worms for title companies.

The title industry is not only highly concentrated but it is also highly profitable. In some jurisdictions like NY its prices are set by regulation at rates that greatly exceed the actuarial risks they face. Regulators like the NYS Department of Financial Services have begun to pay more attention to the title insurance industry. This is a welcome development, given that title insurance is one of the most expensive closing costs a homeowner faces when buying a home or refinancing a mortgage.