Tag Archives: mortgage

How Tight Is The Credit Box?

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Laurie Goodman of the Urban Institute’s Housing Finance Policy Center has posted a working paper, Quantifying the Tightness of Mortgage Credit and Assessing Policy Actions. The paper opens,

Mortgage credit has become very tight in the aftermath of the financial crisis. While experts generally agree that it is poor public policy to make loans to borrowers who cannot make their payments, failing to make mortgages to those who can make their payments has an opportunity cost, because historically homeownership has been the best way to build wealth. And, default is not binary: very few borrowers will default under all circumstances, and very few borrowers will never default. The decision where to draw the line—which mortgages to make—comes down to what probability of default we as a society are prepared to tolerate.

This paper first quantifies the tightness of mortgage credit in historical perspective. It then discusses one consequence of tight credit: fewer mortgage loans are being made. Then the paper evaluates the policy actions to loosen the credit box taken by the government-sponsored enterprises (GSEs) and their regulator, the Federal Housing Finance Agency (FHFA), as well as the policy actions taken by the Federal Housing Administration (FHA), arguing that the GSEs have been much more successful than the FHA. The paper concludes with the argument that if we don’t solve mortgage credit availability issues, we will have a much lower percentage of homeowners because a larger share of potential new homebuyers will likely be Hispanic or nonwhite—groups that have had lower incomes, less wealth, and lower credit scores than whites. Because homeownership has traditionally been the best way for households to build wealth, the inability of these new potential homeowners to buy could increase economic inequality between whites and nonwhites. (1)

Goodman has been making the case for some time that the credit box is too tight. I would have liked to see a broader discussion in the paper of policies that could further loosen credit. What, for instance, could the Consumer Financial Protection Bureau do to encourage more lending? Should it be offering more of a safe harbor for lenders who are willing to make non-Qualified Mortgage loans? The private-label mortgage-backed securities sector has remained close to dead since the financial crisis.  Are there ways to bring some life — responsible life — back to that sector? Why aren’t portfolio lenders stepping into that space? What would they need to do so?

When the Qualified Mortgage rule was being hashed out, there was a debate as to whether there should be any non-Qualified Mortgages available to borrowers.  Some argued that every borrower should get a Qualified Mortgage, which has so many consumer protection provisions built into it. I was of the opinion that there should be a market for non-QM although the CFPB would need to monitor that sector closely. I stand by that position. The credit box is too tight and non-QM could help to loosen it up.

This Is What GSE Reform Looks Like

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Scene from Young Frankenstein

The Federal Housing Finance Agency’s Division of Conservatorship release an Update on Implementation of the Single Security and the Common Securitization Platform. As I had discussed last week, housing finance reform is proceeding apace from within the FHFA notwithstanding assertions by members of Congress that they will take the lead on this. The Update provides some background for the uninitiated:

The Federal Housing Finance Agency’s (FHFA) 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac includes the strategic goal of developing a new securitization infrastructure for Fannie Mae and Freddie Mac (the Enterprises) for mortgage loans backed by 1- to 4-unit (single-family) properties. To achieve that strategic goal, the Enterprises, under FHFA’s direction and guidance, have formed a joint venture, Common Securitization Solutions (CSS). CSS’s mandate is to develop and operate a Common Securitization Platform (CSP or platform) that will support the Enterprises’ single-family mortgage securitization activities, including the issuance by both Enterprises of a common single mortgage-backed security (to be called the Uniform Mortgage-Backed Security or UMBS). These securities will finance the same types of fixed-rate mortgages that currently back Enterprise-guaranteed securities eligible for delivery into the “To-Be-Announced” (TBA) market. CSS is also mandated to develop the platform in a way that will allow for the integration of additional market participants in the future.

The development of and transition to the new UMBS constitute the Single Security Initiative. FHFA has two principal objectives in undertaking this initiative. The first objective is to establish a single, liquid market for the mortgage-backed securities issued by both Enterprises that are backed by fixed-rate loans. The second objective is to maintain the liquidity of this market over time. Achievement of these objectives would further FHFA’s statutory obligation and the Enterprises’ charter obligations to ensure the liquidity of the nation’s housing finance markets. The Single Security Initiative should also reduce the cost to Freddie Mac and taxpayers that has resulted from the historical difference in the liquidity of Fannie Mae’s Mortgage-Backed Securities (MBS) and Freddie Mac’s Participation Certificates (PCs). (1, footnote omitted)

This administratively-led reform of Fannie and Freddie is not necessarily a bad thing, particularly because the executive and legislative branches have not taken up reform in any serious way since the two companies entered conservatorship in 2008. While Congress could certainly step up to the plate now, it is worth understanding just how far along the FHFA is in its transformation of the two companies:

Upon the implementation of Release 2, CSS will be responsible for bond administration of approximately 900,000 securities, which are backed by almost 26 million home loans having a principal balance of over $4 trillion. CSS’S responsibilities related to security issuance, security settlement, bond administration and disclosures were described in the September 2015 Update on the Common Securitization Platform. The Enterprises and investors, along with home owners and taxpayers, will rely on the operational integrity and resiliency of the CSP to ensure the smooth functioning of the U.S. housing mortgage market. (8)

That is, upon the implementation of Release 2, the merger of Fannie and Freddie into Frannie will be complete.

Skinny Budget Sucker Punch

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The Waco Tribune-Herald quote me in Cutting Habitat Could Hurt Local Economy. It reads,

Last summer, through a series of tragic events, one of our longtime church members faced the frightening possibility of homelessness. She had lived with her father for more than 50 years and, following his death, she learned of a crippling reverse mortgage on their home. She couldn’t pay off the mortgage and so she had to find a new place to live.

Our congregation sprang into action. More than 50 people contributed to the purchase of a mobile home, but it required extensive remodeling, so several church members worked over 300 hours to make it livable. One handyman devoted about three months to the project full-time.

On Sept. 21, we presented her with the keys to her new home during worship. It was one of the most uplifting moments I’ve had in 23 years of ministry. This congregation-wide labor of love brought us all closer to one another and closer to God. It was a demonstration of the love of Jesus Christ and it was transformative.

Home ownership changes lives and changes communities. I serve as a board member and volunteer for Waco Habitat for Humanity. Since 1986, Waco Habitat has built and sold 168 homes and completed another 414 home repairs and preservation projects. Over the past three decades, the economic impact of all these services exceeds $6.9 million in greater Waco. In a community that generally tracks about 15 percent higher than the state average for poverty rates and 20 percent lower than the state average for home ownership rates, this impact cannot be overstated. It’s transformative as well.

The “skinny budget” unveiled by the Trump administration on March 16 proposes reducing federal spending on housing programs and assistance by 13 percent. Among other cuts, it seeks to eliminate the Community Development Block Grant Program; Home Investment Partnerships Program; Self-Help Homeownership Opportunity Program; CDFI fund, which administers the New Market Tax Credit program at Treasury; and entire Corporation for National and Community Service, which implements the AmeriCorps program.

One reason I work with Habitat is because it offers a hand up, not a hand out. If these cuts are approved by Congress, they will devastate Habitat’s ability to offer that hand up. Other local housing agencies and organizations will see a similarly crippling effect.

Fortunately, this is just the first pass of the federal budget, and many members of Congress — including many Republicans — have already voiced opposition to it. For instance, Rep. Hal Rogers said: “While we have a responsibility to reduce our federal deficit, I am disappointed that many of the reductions and eliminations proposed in the president’s skinny budget are draconian, careless and counterproductive.”

David Reiss, director of academic programs at the Center for Urban Business Entrepreneurship, echoes this. “Terminating these programs out of the blue is like a sucker punch in the gut of countless communities across the country.”

What Is a HUD Foreclosure?

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Mike Licht

Realtor.com quoted me in What Is a HUD Foreclosure? A Home That’s Below Market Value. It reads,

“Foreclosure” is a scary word with a simple definition: It’s the process of a lender attempting to recoup the balance owed on a loan after the homeowner fails to pay the mortgage. Mortgage lenders can be banks, private institutions, or the Federal Housing Administration. The FHA is the world’s largest insurer of mortgages; FHA loans are managed by the Department of Housing and Urban Development. So any foreclosed house that was purchased with an FHA loan is called a HUD foreclosure. But what exactly is a HUD foreclosure?

What is HUD?

HUD is a federal agency with the mission to help low-income and first-time home buyers. Through mortgage assistance and subsidized housing, it helps make the dream of owning a home a reality for many Americans.

A major division of HUD is the FHA, which is the world’s largest insurer of mortgages.

“A HUD foreclosure is the foreclosure of a loan that was insured by the FHA,” says David Reiss, professor of law and research director at the Center for Urban Business Entrepreneurship
 at Brooklyn Law School
.

When a homeowner defaults on this government-backed loan, HUD pays off the mortgage and becomes the property’s de facto owner. To recoup financial losses, HUD then puts the house on the market.

The benefit of buying a HUD foreclosure

The upside for bargain home hunters is that HUD-owned properties are usually sold well below market value.

While anyone can buy a HUD home, “the agency has a special program for teachers, police officers, firefighters, and EMS personnel called the Good Neighbor Next Door program,” says Reiss.

This program allows people in those professions to purchase a HUD property at a whooping 50% discount if it’s in a “revitalization area” and the owner occupies it for three years. Revitalization areas are neighborhoods with very low income, low homeownership, or a high concentration of foreclosed homes.

How to buy a HUD foreclosure

HUD foreclosures are not sold in the typical manner, according to Reiss. Instead of open houses and offer letters, he explains, HUD foreclosures are sold through a bidding process that favors owner-occupants (people who actually want to live in the house) over investors by giving them priority in bidding.

Prospective owners working with a real estate agent authorized to sell HUD property submit bids but have no idea what the other bids are. If the property fails to sell to an owner-occupant, the HUD foreclosure is then open to investors.

How to find a HUD foreclosure

According to Reiss, HUD maintains the HUD Home Store, an online database that lists all its foreclosures. And unlike some foreclosed properties that may have liens (a notice attached to your property that means you owe a creditor money), HUD homes are for sale lien-free.

When Buyers Change Their Minds

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The Wall Street Journal quoted me in When Home Buyers Change Their Minds (behind paywall). It opens,

The offer was accepted. The mortgage was approved. What happens when the buyer gets cold feet and wants to back out of the deal?

Jason Michael faced this issue about 18 months ago when he listed his three-bedroom home in St. Louis. Mr. Michael, a 36-year-old public-relations executive, asked $130,000 for his home and accepted an offer for $127,000. The buyers posted a $1,000 deposit of “earnest money,” completed inspections, negotiated repairs and were approved for a mortgage.

Then they told Mr. Michael that they had found another house and didn’t want to move ahead with the purchase.

While the contract allowed Mr. Michael to pocket the deposit if the buyers defaulted, they refused to authorize their agent to release it. Only after Mr. Michael threatened to sue did they surrender the $1,000.

“My agent had said that people don’t back out of house purchases—that this won’t happen,” Mr. Michael says. “But now I approach it as if the buyer can back out until the very last minute.” He ultimately decided to rent out the house.

According to an online survey of 2,241 adults conducted for finance website Nerdwallet.com in January, home-buyer’s remorse isn’t uncommon. Nearly half (49%) of homeowners who responded said they would do something differently if they had to go through the process again. Broken down by age group, 61% of Generation Xers (the mid-1960s through the 1970s) and 57% of millennial homeowners (born in the early 1980s through about 2004) indicated they had regrets. Many wished they had bought a bigger home or saved more money before buying.

*     *      *

Here are a few things to consider if you might want to back out of your real-estate contract. Buyers and sellers should consult a qualified real-estate attorney for advice.

• Craft carefully. Rather than having a mortgage contingency allowing you to obtain a mortgage “at prevailing rates,” specify that the mortgage rate can be no more than 4%, for example. Or, consider making the contract contingent on the mortgage actually being funded by the lender. “This extends the contingency all the way to the closing,” says David Reiss, a Brooklyn Law School professor who specializes in real estate.

• Sharpen your negotiation skills. Even if you can’t back out legally, try to negotiate a reduction or return of the deposit with the seller. In a market where prices are rising and the homeowner can get a higher price for their home, there might be a chance to come to terms.

• Remember the broker. Even if the seller lets the buyer off the hook, he may still be liable to the broker for the commission. Contracts state that the commission is due when the broker finds a ready, willing and able buyer. Many brokers will work with the seller in this situation, Mr. Haber says, but it is an issue that needs to be addressed.

 

Is There a Bipartisan Fix for Fannie and Freddie?

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photo by DonkeyHotey

The Hill published my latest column, Congress May Have Finally Found a Bipartisan Fix to Fannie and Freddie. It reads,

It is welcome news to hear that Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) are looking to craft a bipartisan solution to the problem of Fannie Mae and Freddie Mac. The two massive mortgage companies have been in conservatorship since 2008 when they were on the verge of failing. At that time, nobody, just nobody, believed that they would still be in conservatorship nearly a decade later.

But here we are. Resolving this situation is of great importance to the financial well-being of the nation. These two companies guarantee trillions of dollars worth of mortgages and operate like black boxes, run by employees who don’t have a clear mission from their multiple masters in government.

This is the recipe for some kind of crisis.Maybe they will not underwrite their mortgage-backed securities properly. Maybe they will undertake a risky hedging strategy. We just don’t know, but there is reason to think that gargantuan organizations that have been in limbo for ten years may have developed all sorts of operational pathologies.

There have been a couple of serious attempts in the Senate to craft a long-term solution to this problem, but it was not a high priority for the Obama Administration and does not yet appear to be a high priority for the Trump Administration. Deep ideological divisions over the appropriate role of the government in the mortgage have also stymied progress on reform.

Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, leads a faction that wants to dramatically reduce the role of the government in the mortgage market. Sen. Elizabeth Warren (D-Mass.) leads a faction that wants to ensure that the government plays an active role in making homeownership, and housing more generally, more affordable to low- and moderate-income households. At this point, it is not clear whether a sufficiently broad coalition could be cobbled together to overcome the opposition to a compromise at the two ends of the spectrum.

2017 presents an opportunity to push reform forward, however. The terms of the conservatorship were changed in 2012 to require that the Fannie and Freddie reduce their capital cushion to zero by the end of this year. That means that if Fannie or Freddie has even one bad quarter and suffers losses, something that is bound to happen sooner or later, they would technically require a bailout from Treasury.

Now, such a bailout would not be such a terrible thing from a policy perspective as Fannie and Freddie have paid tens of billions of dollars more to the Treasury than they received in the bailout. But politically, a second bailout of Fannie or Freddie would be toxic for those who authorize it.

Some are arguing that we should kick the can down the housing finance reform road once again, by allowing Fannie and Freddie to retain some of their capital to protect them from such a scenario. But Corker and Warner seem to want to use the Dec. 31, 2017 end date to focus minds in Congress. They, along with some other colleagues, have warned Fannie and Freddie’s conservator, Federal Housing Finance Agency Director Mel Watt, not to increase the capital cushion for the two companies. They claim that it is Congress’ prerogative to make this call.

The conventional wisdom is that the stars have not aligned to make housing finance reform politically viable in the short term. The conventional wisdom is probably right because the housing finance system is working well enough for now. Mortgage rates are very low and while access to credit is a bit tight, it is not so tight that it is making headlines. So perhaps Senators Corker and Warner are right to use the fear factor of future bailouts as a goad to action.

Housing finance reform requires statesmanship because there are no short-term gains that will accrue to the politicians that lead it. And the long-term gains will be very diffuse – nobody will praise them for the crises that were averted by their actions to create a housing finance system fit for the 21st century. But this work is of great importance and far-thinking leaders on both sides of the aisle should support a solution that takes Fannie and Freddie out of the limbo of conservatorship.

It will require compromise and an acceptance of the fact that the perfect is the enemy of the good. But if compromise is reached, it may help to avoid another catastrophe that will be measured in the hundreds of billions of dollars. And it will ensure that we have a mortgage market that meets the needs of America’s families.

Prepaying Your Mortgage

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photo by www.aag.com

Newsday quoted me in Paying off Your Mortgage Early Might not Make Sense (behind paywall). It opens,

There are few greater feelings than making that last mortgage payment. Some people feel better still if they pay it off early. But sometimes it doesn’t make sense to pay off your mortgage early.

First things first: Be sure you have adequate emergency savings before you put extra money into paying off the mortgage early. Then consider what’s the best use of any extra money you have.

While taking a shorter-term mortgage or prepaying principal saves you tons in interest, remember that mortgage interest is typically tax deductible.

Warren Goldberg, founder of Mortgage Wealth Advisors in Melville, offers an example. If you had a 5 percent interest rate on your 30-year fixed mortgage, depending on your tax bracket, your equivalent, after-tax interest rate might only be 3.3 percent. Even in today’s tumultuous market, it’s not difficult to earn a return greater than 3.3 percent after taxes.

“By paying the minimum on your mortgage and investing the balance, your money can be working for you. Your investments can be earning more than the interest you are paying,” says Goldberg.

David Reiss, a professor at Brooklyn Law School specializing in real estate, agrees: “If you have not maxed out your retirement savings, it might make sense to direct your extra funds to tax-advantaged retirement accounts. You could end up being better off overall as those accounts grow tax-free over time.”