Tag Archives: mortgage

Wednesday’s Academic Roundup

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Friday’s Government Reports Roundup

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MERS Victorious

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Montgomery_County_Courthouse_Pennsylvania_-_Douglas_Muth

Montgomery County, PA Courthouse

The U.S. Court of Appeals for the Third Circuit ruled in favor of MERS in Montgomery County v. MERSCORP, (August 3, 2015, No. 15-1219) (Barry, J.). MERS, for the uninitiated,

is a national electronic loan registry system that permits its members to freely transfer, among themselves, the promissory notes associated with mortgages, while MERS remains the mortgagee of record in public land records as “nominee” for the note holder and its successors and assigns. MERS facilitates the secondary market for mortgages by permitting its members to transfer the beneficial interest associated with a mortgage—that is, the right to repayment pursuant to the terms of the promissory note—to one another, recording such transfers in the MERS database to notify one another and establish priority, instead of recording such transfers as mortgage assignments in local land recording offices. It was created, in part, to reduce costs associated with the transfer of notes secured by mortgages by permitting note holders to avoid recording fees. (4, footnote omitted)

I, along with others, had filed an amicus brief in this case. The court states that

We acknowledge the arguments of the Recorder and her amici contending that MERS has a harmful impact on homeowners, title professionals, local land records, and various public programs supported in part by the fees collected by Pennsylvania’s recorders of deeds. In this appeal, however, we are not called upon to evaluate how MERS impacts various constituencies or to adjudicate whether MERS is good or bad. Just as the Seventh Circuit observed in Union County, while the Recorder is critical of MERS in several respects, “[her] appeal claims only that MERSCORP is violating [state law] by failing to record its transfer of mortgage debts, thus depriving the county governments of recording fees. That claim—the only one before us—has no merit.” 735 F.3d at 734-35. (13)

MERS has had a lot of success in cases like this, but the fact remains that it was implemented in a flawed fashion with little to no input from a broad range of constituencies. Regulators and legislators should pay renewed attention to MERS to ensure that the ownership and servicing of residential mortgages are tracked in a way that protects consumers from abusive behavior by sophisticated mortgage market players who rely on opaque mechanisms like MERS.

First-Time Homebuyers, You’re Okay

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Couple Looking at Home

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.

Wednesday’s Academic Roundup

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Optimizing Mortgage Availability

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"Barack Obama speaks to press in Diplomatic Reception Room 2-25-09" by Pete Souza - https://www.whitehouse.gov/blog/09/02/25/Overhaul/. Licensed via ttps://commons.wikimedia.org/wiki/File:Barack_Obama_speaks_to_press_in_Diplomatic_Reception_Room_2-25-09.jpg#/media/File:Barack_Obama_speaks_to_press_in_Diplomatic_Reception_Room_2-25-09.jpg

The United States Government Accountability Office (GAO) has issued a report, Mortgage Reforms: Actions Needed to Help Assess Effects of New Regulations. The GAO did this study to predict the effects of the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) regulations. The GAO found

Federal agency officials, market participants, and observers estimated that the qualified mortgage (QM) and qualified residential mortgage (QRM) regulations would have limited initial effects because most loans originated in recent years largely conformed with QM criteria.

  • The QM regulations, which address lenders’ responsibilities to determine a borrower’s ability to repay a loan, set forth standards that include prohibitions on risky loan features (such as interest-only or balloon payments) and limits on points and fees. Lenders that originate QM loans receive certain liability protections.
  • Securities collateralized exclusively by residential mortgages that are “qualified residential mortgages” are exempt from risk-retention requirements. The QRM regulations align the QRM definition with QM; thus, securities collateralized solely by QM loans are not subject to risk-retention requirements.

The analyses GAO reviewed estimated limited effects on the availability of mortgages for most borrowers and that any cost increases (for borrowers, lenders, and investors) would mostly stem from litigation and compliance issues. According to agency officials and observers, the QRM regulations were unlikely to have a significant initial effect on the availability or securitization of mortgages in the current market, largely because the majority of loans originated were expected to be QM loans. However, questions remain about the size and viability of the secondary market for non-QRM-backed securities.

This last bit — questions about the non-QRM-backed market — is very important.

Some consumer advocates believe that there should not be any non-QRM mortgages. I disagree. There should be some sort of market for mortgages that do not comply with the strict (and, in the main, beneficial) QRM limitations.

Some homeowners will not be eligible for a plain vanilla QM/QRM mortgage but could still handle a mortgage responsibly. The mortgage markets would not be healthy without some kind of non-QRM-backed securities market for those consumers.

So far, that non-QRM market has been very small, smaller than expected. Regulators should continue to study the effects of the new mortgage regulations to ensure that they incentivize making the socially optimal amount of non-QRM mortgage credit available to homeowners.

Wednesday’s Academic Roundup

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