Rising Rates and The Mortgage Market

The Urban Institute’s Housing Finance at a Glance Chartbook for March focuses on how rising interest rates have been impacting the mortgage market. The chartbook makes a series of excellent points about current trends, although homeowners and homebuyers should keep in mind that rates remain near historic lows:

As mortgage rates have increased, there has been no shortage of articles explaining the effect of rising rates on the mortgage market. Mortgage rates began their present sustained increase immediately after the last presidential election in November 2016, 20 months ago. Enough data points have become available during thisperiod that we can now measure the effects of rising rates. Below we outline a few.

Refinances: The most immediate impact of rising rates is on refinance volumes, which fall as rates rise. For mortgages backed by Fannie Mae and Freddie Mac, the refinance share of total originations declined from 63 percent in Nov 2016 to 46 percent today (page 11). For FHA, VA and USDA-insured mortgages, the refinance share dropped from 44 percent to 35 percent. In terms of volume, Fannie Mae and Freddie Mac backed refinance volume totaled $390 billion in 2017, down from $550 billion in 2016. For Ginnie Mae, refi volume dropped from $197 billion in 2016 to $136 billion in 2017. Looking ahead, most estimates for 2018 point to a continued reduction in the refi share and origination volumes (page 15).

Originator profitability: Of course, less demand for mortgages isn’t good for originator profitability because lenders need to compete harder to attract borrowers. They do this often by reducing profit margins as rates rise (conversely, when rates are falling and everyone is rushing to refinance, lenders tend to respond by increasing their profit margins). Indeed, since Nov 2016, originator profitability has declined from $2.6 per $100 of loans originated to $1.93 today (page 16). Post crisis originator profitability reached as high as $5 per $100 loan in late 2012, when rates were at their lowest point.

Cash-out share: Another consequence of falling refinance volumes is the rising share of cash-out refinances. The share of cash-out refinances varies partly because borrowers’ motivations change with interest rates. When rates are low, the primary goal of refinancing is to reduce the monthly payment. Cash-out share tends to be low during such periods. But when rates are high, borrowers have no incentive to refinance for rate reasons. Those who still refinance tend to be driven more by their desire to cash-out (although this doesn’t mean that the volume is also high). As such, cash-out share of refinances increased to 63 percent in Q4 2017 according to Freddie Mac Quarterly Refinance Statistics. The last time cash-out share was this high was in 2008.

Industry consolidation: A longer-term impact of rising rates is industry consolidation: not every lender can afford to cut profitability. Larger, diversified originators are more able to accept lower margins because they can make up for it through other lines of business or simply accept lower profitability for some time. Smaller lenders may not have such flexibility and may find it necessary to merge with another entity. Industry consolidation due to higher rates is not easy to quantify as firms can merge or get acquired for various reasons. At the same time, one can’t ignore New Residential Investment’s recent acquisition of Shellpoint Partners and Ocwen’s purchase of PHH. (5)

Mooting The CFPB Constitutional Challenge

Law360 quoted me in DC Circ. May Skip CFPB Fight After Cordray’s Exit. It opens,

The legal battle over who will temporarily lead the Consumer Financial Protection Bureau comes as the D.C. Circuit is considering whether the bureau’s structure is constitutional, and experts say the fight over its leadership could lead the appeals court to punt on the constitutional question.

The full D.C. Circuit has been considering an appeal filed by mortgage servicer PHH Corp. to overturn a $109 million judgment entered by former CFPB Director Richard Cordray over alleged violations of anti-kickback provisions of the Real Estate Settlement Procedures Act. PHH’s argument is that the agency’s structure, which includes a single director rather than a commission along with independent funding not appropriated by Congress, is unconstitutional.

But now that a political and legal fight has broken out over who should temporarily lead the CFPB since Cordray has left the bureau, the D.C. Circuit may be even more inclined to find a way to decide the underlying arguments about the CFPB’s enforcement of a decades-old mortgage law without touching the constitutional questions.

“If the D.C. Circuit wants to avoid this question, they certainly have plausible means to do it,” said Brian Knight, a senior research fellow at George Mason University’s Mercatus Center.

The battle over the CFPB’s constitutionality waged by PHH in some ways opened the door for the current conflict over who should serve as the bureau’s acting director.

PHH’s fight with the CFPB stems from Cordray’s decision to jack up a RESPA penalty against the New Jersey-based mortgage company in June 2015.

A CFPB administrative law judge had originally issued a $6.4 million judgement against PHH over alleged mortgage kickbacks, but on appeal Cordray slapped the company with a $109 million penalty.

PHH then took its case to the D.C. Circuit, arguing that the single-director structure at the CFPB, which allowed Cordray to unilaterally hike the penalty, was a violation of the Constitution’s separation of powers clause.

Ultimately, a three-judge panel led by U.S. Circuit Judge Brett Kavanaugh found that the CFPB’s structure was unconstitutional but declined to eliminate the bureau and invalidate its actions. Instead, the panel elected to eliminate a provision that only allowed the president to fire the CFPB director for cause, rather than allowing the director to be fired at will by the president.

The original, now vacated, D.C. Circuit decision also overturned the CFPB’s penalty against PHH. That portion of the decision was unanimous.

The CFPB then sought an en banc review of the decision, with oral arguments held in May. Since then, the CFPB and the industry have waited for a decision.

In fact, the wait for that decision may have allowed Cordray to hang on as long as he did at the CFPB. Trump was expected to fire Cordray soon after taking office, but that never happened, and instead Cordray waited until November to depart the bureau for what many believe will be a run for governor in his home state of Ohio.

Many predicted the D.C. Circuit would go the route of U.S. Circuit Judge Karen L. Henderson, a member of the original panel that ruled in the PHH litigation. Judge Henderson dissented on the constitutional question but supported the decision on RESPA enforcement.

“You arguably don’t have to reach the constitutional question,” said Christopher Walker, a professor at Ohio State University’s Moritz School of Law.

But the D.C. Circuit’s decision comes as two individuals argue over which one of them is the CFPB’s rightful acting director.

Cordray last Friday promoted his chief of staff, Leandra English, to be the CFPB’s deputy director just moments before he formally announced his departure. Cordray and English argue that the 2010 Dodd-Frank Act, which created the CFPB, made the deputy director the acting director in his absence.

Hours later, Trump appointed Office of Management and Budget Director Mick Mulvaney, a fierce CFPB opponent, to be the federal consumer finance watchdog’s acting director under a different federal law.

English sued to block Mulvaney’s appointment, and although the case will continue, a judge on Tuesday rejected her request for a temporary restraining order.

Against that backdrop, the D.C. Circuit may have more of an incentive to lie low on the constitutional questions, said Brooklyn Law School professor David Reiss.

“My reading would be that if they reversed the agency on the RESPA issues, then they may be able to moot the constitutional issues,” he said.

Gorsuch and the State of Administrative Law

photo by Joe Ravi

The United States Supreme Court

I was interviewed by Harold O’Grady on his podcast for the BLS Library Blog about Supreme Court nominee Judge Gorsuch:

This conversation with Brooklyn Law School Professor David Reiss focuses on his recent article Gorsuch, CFPB and Future of the Administrative State. Prof. Reiss talks about the impact that U.S. Supreme Court nominee Judge Neil Gorsuch would have on the future of administrative law and, in particular, on federal consumer protection enforcement if he is confirmed. Prof. Reiss reviews the case PHH v. Consumer Financial Protection Bureau which the United States Court of Appeals, District of Columbia Circuit decided last year. It is likely the case will be appealed to the Supreme Court. If so, Justice Gorsuch may vote to curtail the independence of the Consumer Financial Protection Bureau and limit its enforcement powers. More generally, Prof. Reiss believes that, given previous rulings by Judge Gorsuch in cases dealing with administrative law, a Justice Gorsuch will be a skeptic of agency action and will support greater judicial review of agency actions.

You can find the link to our conversation here.

Business as Usual with the CFPB

photo by Lars Plougmann

Law360 quoted me in CFPB Remains Strong Despite DC Circ. Single-Director Ruling (behind paywall). It reads, in part,

A blockbuster D.C. Circuit ruling Tuesday declaring the Consumer Financial Protection Bureau’s single-director leadership structure unconstitutional is unlikely to have a major effect on the bureau’s day-to-day operations and may make it easier for the agency to fend off critics who claim it lacks accountability, experts say.

The 110-page ruling from a split three-judge panel not only decried the leadership structure that Congress gave the CFPB in the 2010 Dodd-Frank Act, but made a change that allows the president to dismiss the bureau’s director at will, in a case that saw a $109 million judgment against PHH Corp. overturned. That move should provide the CFPB with more direct oversight, the D.C. Circuit said.

The change also does not touch the CFPB director’s power to issue rules and enforcement actions and oversee appeals of any administrative actions that the bureau brings. And because of that, the CFPB will not have to change much of what it does despite the harsh words in the opinion, said Frank Hirsch, the head of Alston & Bird’s financial services litigation team.

“I don’t think that the D.C. Circuit opinion was intended to create fundamental differences. I think the fact that the director can be dismissed at will now is the only substantive change,” he said.

Tuesday’s hotly anticipated ruling laid out in stark language many of the concerns that Republicans in Congress, the consumer financial services industry and other critics have long stated about the CFPB’s structure.

PHH was appealing the bureau’s $109 million disgorgement order over allegations the company referred consumers to mortgage insurers in exchange for reinsurance orders with its subsidiaries and reinsurance fees. The conduct, according to the CFPB, violated the Real Estate Settlement Procedures Act.

Included in PHH’s appeal was a constitutional challenge to the CFPB’s structure.

The opinion, written by U.S. Circuit Judge Brett Kavanaugh, laid out the potential dangers of giving one person the amount of authority that is vested in the CFPB director.

Judge Kavanaugh said that the bureau as constructed, with a single director that can only be fired for cause rather than the traditional multimember commission setup at independent regulatory agencies, vested too much power in one person to make decisions about new regulations, enforcement actions and appeals of those enforcement actions in administrative proceedings.

In its way, the CFPB director has authority rivaled only by the president, the decision said.

“Indeed, within his jurisdiction, the director of the CFPB can be considered even more powerful than the president. It is the director’s view of consumer protection law that prevails over all others. In essence, the director is the President of Consumer Finance,” Judge Kavanaugh wrote.

The judge also described at length why commissions were better for independent regulatory agencies than a single director, even though a single director can move more quickly on enforcement actions and rulemakings. Having a commission means that a director or chair will be constrained in their actions, potentially preventing abuses, the opinion said.

“Indeed, so as to avoid falling back into the kind of tyranny that they had declared independence from, the Framers often made trade-offs against efficiency in the interest of enhancing liberty,” Judge Kavanaugh wrote.

Those words were welcomed by the CFPB’s many critics.

“This is a good day for democracy, economic freedom, due process and the Constitution. The second-highest court in the land has vindicated what House Republicans have said all along, that the CFPB’s structure is unconstitutional,” Rep. Jeb Hensarling, the Texas Republican who chairs the House Financial Services Committee, said in a statement.

Hensarling and other Republicans in Congress have long pushed to put a commission atop the CFPB, and legislation Hensarling has introduced to replace Dodd-Frank includes that change.

Backers of the CFPB have long rejected the argument that the bureau is unaccountable, noting that it is subject to notice and comment for rulemaking, its rules are subject to judicial and other reviews, and the director makes regular appearances before Congress.

But instead of installing a commission or eliminating the CFPB altogether because of the constitutional issue, as had been requested by PHH and other, largely conservative activist groups who filed amici briefs, Judge Kavanaugh simply severed the portion of Dodd-Frank that said the bureau’s director could be fired only for cause.

The result is that now the CFPB director is subject to the same employment standard as a cabinet secretary, and can be fired at the president’s whim.

“The president is a check on and accountable for the actions of those executive agencies, and the president now will be a check on and accountable for the actions of the CFPB as well,” Judge Kavanaugh said, adding that all of the CFPB’s previous decisions taken by its current director, Richard Cordray, remained in place.

*     *     *

But even with that uncertainty hanging over the bureau, it is unlikely that the ruling will have much of an effect on the way the CFPB currently operates.

“The industry and consumer advocates can expect to see much of the same,” said David Reiss, a professor at Brooklyn Law School.

The Fate of the CFPB

photo by Lawrence Jackson

President Obama Nominating Richard Cordray to Lead Consumer Financial Protection Bureau, with Elizabeth Warren

The United States Court of Appeals for the District of Columbia issued a decision in PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177 (October 11, 2016), that found an important aspect of the structure of the CFPB to be unconstitutional:  the insulation of the Director from Presidential supervision. While this decision will almost certainly be appealed, even if it is upheld, it will allow the the CFPB to continue functioning much as it has.

I was interviewed about the decision on NPR’s All Things Considered in a segment titled, Appeals Court Orders Restructuring Of Consumer Financial Protection Bureau (audio available). The transcript reads,

AUDIE CORNISH, HOST:

A federal appeals court has mandated big changes to the Consumer Financial Protection Bureau. The three-judge panel says the consumer watchdog agency is set up in a way that’s unconstitutional. In its ruling, the court says the agency will have to restructure. NPR’s Yuki Noguchi reports.

YUKI NOGUCHI, BYLINE: The suit was brought by a mortgage lender called PHH, which asked the court to invalidate a $109 million enforcement action against it and scrap the agency, too. The D.C. Court of Appeals sent the fine back to the bureau for review.

But it also ruled that the CFPB’s director has too much power to write and enforce rules without enough oversight from another branch of government. The remedy, the panel says, is that the CFPB should fall under the president’s control. And the president should be able to remove the director at will.

The CFPB’s opponents in the financial services industry declared victory. Bill Himpler is executive vice president for the American Financial Services Association.

BILL HIMPLER: Our issue is still with the authority given to a single director. That is, as the court pointed out, not subject to a lot of oversight.

NOGUCHI: Himpler instead supports a CFPB run by a bipartisan commission, similar to others like the Securities and Exchange Commission. David Reiss, a law professor at Brooklyn Law School, says the ruling is not an existential challenge to the CFPB or its past decisions.

DAVID REISS: The decision does not invalidate the CFPB’s actions. This is more about its structure going forward.

NOGUCHI: Reiss says an appeal to the Supreme Court is all but guaranteed. Indeed, the CFPB says it disagrees with the conclusion. In an emailed statement, a spokesperson says the ruling does not change its mission and that it is, quote, “considering options for seeking further review of the court’s decision.”

Dennis Kelleher is CEO of Better Markets, a group that advocates for stronger financial regulation. He says the bureau’s actions on banks have made the financial sector more determined to undercut the agency.

DENNIS KELLEHER: They do not want a consumer watchdog on the Wall Street beat. That’s what this fight is about.

NOGUCHI: The decision was not unanimous on all the issues. Judge Karen Henderson dissented in part, saying the panel overreached in calling the bureau’s structure unconstitutional. Yuki Noguchi, NPR News, Washington.

 

Testing CFPB’s Constitutionality

by Junius Brutus Stearns

Law360 quoted me in PHH Case Poised To Test CFPB’s Constitutionality (behind a paywall). It opens,

A battle over the Consumer Financial Protection Bureau’s interpretation of mortgage regulations in assessing a $109 million penalty against a New Jersey-based mortgage firm has morphed into a fight over the authority vested in the bureau’s director that could reshape the consumer finance watchdog, experts say.

The appeal from PHH Corp. to the D.C. Circuit originally centered on CFPB Director Richard Cordray’s decision to dramatically hike a $6 million mortgage insurance kickback penalty issued by an administrative law judge against a company subsidiary, to the final, $109 million figure. But the judges hearing the case warned the bureau to prepare to answer questions at oral arguments Tuesday about language in the Dodd-Frank Act that says the president could remove the CFPB director only for cause, and about how the court should view an administrative agency led by a single director rather than the more typical commission structure.

Those questions have been hanging over the CFPB since its inception in the 2010 law, and if the D.C. Circuit rules against the bureau, that could fundamentally alter the way the bureau operates, said Jonathan Pompan, a partner at Venable LLP.

Cordray “is potentially going to have to address questions that go to the core of his authority, which really hadn’t been at the forefront of the PHH case until now,” he said.

Challenges to the CFPB’s constitutionality are not new. Everything from the bureau’s single-director rather than commission structure to the agency’s funding through the Federal Reserve’s budget rather than the congressional appropriations process have been constant refrains for the CFPB’s opponents.

Those concerns have been addressed through legislation aimed at curtailing the CFPB’s power, and claims challenging the agency’s constitutionality have been an almost pro forma rite of any litigation involving the bureau.

Up until now, however, those complaints and attempts to curb the CFPB have gone nowhere.

So it was a surprise when the D.C. Circuit last Wednesday told the bureau’s attorneys to be prepared to face questions about whether Dodd-Frank’s provision stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” passed constitutional muster.

The panel, made up of three Republican appointees led by U.S. Circuit Judge Brett M. Kavanaugh, is also seeking answers about potential remedies for any problems that that provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause.

The judges also want to know how any fix to the problem, if they determine there is one, would affect the CFPB director’s authority.

“This is not, by any stretch of the imagination, idle thinking on their part,” said David Reiss, a professor at Brooklyn Law School.

The questions being posed by the D.C. Circuit panel do not pose the same level of threat that the other constitutional challenges the CFPB could potentially face would, but it is certainly a more defining question than what most observers thought the case would be about.

PHH is challenging Cordray’s interpretation of violations under the Real Estate Settlement Procedures Act that allowed him to supersize a $6 million penalty handed down by an administrative law judge, to the $109 million that the CFPB director handed down when PHH appealed.

But the arguments set for Tuesday are expected to go far beyond that issue.

There will be the central question of whether the U.S. Constitution allows Congress to put in restrictions on when the president can fire officials at an administrative agency. The U.S. Supreme Court addressed these issues in the 2010 Free Enterprise Fund v. Public Company Accounting Oversight Board decision, which affirmed a D.C. Circuit ruling that such protections were constitutional.

Judge Kavanaugh cast a dissenting vote in that case, stating that a president should not have to notify Congress as to why the director of an administrative agency is removed.

“If the challenges were going to be taken seriously anywhere, it was probably going to be this panel,” said Brian Simmonds Marshall, policy counsel at Americans for Financial Reform, which seeks tougher banking regulations.

Removing that provision from the statute, should the D.C. Circuit elect to do so, could limit the CFPB’s independence, as well as that of other administrative agencies for which statute requires a reason for the dismissal of officials, he said.

“The CFPB doesn’t have to check with the White House right now before it brings an enforcement action,” Simmonds Marshall said.

Another case that will be heavily scrutinized will be a 1935 Supreme Court decision in Humphrey’s Executor v. U.S., which allowed for restrictions on the removal of Federal Trade Commission commissioners.

The CFPB relied heavily on that case in its filings with the D.C. Circuit, noted Benjamin Saul, a partner at White & Case LLP.

“I’ll be looking for the questions being driven by Judge Kavanaugh and his comments from the bench, particularly on the Humphrey’s case,” Saul said.

Whether the arguments focus mostly on the constitutional questions about the ability to remove the CFPB director or on remedies to fix that could also indicate where the court is headed on these questions, according to Reiss.

“It does sound that they’re searching for remedies that are not earth-shattering remedies,” Reiss said.

Reiss on Big Kickback Penalty

Richard_Cordray

Law360 quoted me in CFPB Ruling Adds New Front In Administrative Law Fight (behind a paywall). The story opens,

Consumer Financial Protection Bureau Director Richard Cordray’s decision last week upholding an administrative ruling against PHH Mortgage Corp. and jacking up the firm’s penalty highlights concerns industry has about the bureau’s appeals process, and it adds to a growing battle over federal agencies’ administrative proceedings.

Cordray’s June 4 decision in the PHH case marked the first time the bureau’s administrative appeals process was put to the test. And the result highlighted both the power that Cordray has as sole adjudicator in such an appeal and his willingness to review a decision independently and go against his enforcement team, at least in part, experts say.

But because PHH has already vowed to appeal the decision, the structure of the CFPB’s appeals process could be put in play, and it could be forced to change — a battle that comes as the U.S. Securities and Exchange Commission is also facing challenges to its administrative proceedings.

The way the CFPB handles administrative appeals “might be one of the issues that the court of appeals might be asked to consider,” said Benjamin Diehl, special counsel at Stroock & Stroock & Lavan LLP.

In the case before Cordray, PHH had been seeking to overturn an administrative law judge’s November 2014 decision that found it had engaged in a mortgage insurance kickback scheme under the Real Estate Settlement Procedures Act, or RESPA.

Cordray agreed with the underlying decision, but he found that Administrative Law Judge Cameron Elliot incorrectly applied the law’s provisions when assessing the penalty PHH should face.

And when Cordray applied those provisions in a way that he found to be correct, PHH’s penalty soared from around $6.4 million to $109 million, according to the ruling.

The reasoning behind Cordray’s decision irked lenders, which say the CFPB director dismissed precedent on mortgage reinsurance, including policies from the U.S. Department of Housing and Urban Development and judicial interpretations of the statute of limitations on RESPA claims.

“If the rules are going to change because an agency can wave a magic wand and change them, that’s disconcerting,” Foley & Lardner LLP partner Jay N. Varon said.

The rise in penalties highlighted both the risk that firms face in an appeal before the CFPB and Cordray’s desire to send a message to companies that he believes violate the law, said David Reiss, a professor at Brooklyn Law School.

“It is unsurprising that Cordray would take a position that is intended to have a significant deterrent effect on those who violate RESPA, and I expect that he wanted to signal as much in this, his first decision in an appeal of an administrative enforcement proceeding,” Reiss said.