Gimme More Mortgage Data!

People are always talking about the value of data about web browsing habits. They don’t talk nearly enough about the value of data about mortgage shopping habits. Regulators and researchers do not know nearly enough about how borrowers and lenders interact in the mortgage business — and the stakes are high, given that a home is often the biggest investment that a household ever makes. The Consumer Financial Protection Bureau is seeking to make some modest improvements to the federal government’s existing data collection pursuant to the Home Mortgage Disclosure Act (HMDA) through a proposed rule.

Under this proposed rule,

financial institutions generally would be required to report all closed-end loans, open-end lines of credit, and reverse mortgages secured by dwellings. Unsecured home improvement loans would no longer be reported. Thus, financial institutions would no longer be required to ascertain an applicant’s intended purpose for a dwelling-secured loan to determine if the loan is required to be reported under Regulation C, though they would still itemize dwelling-secured loans by different purpose when reporting. Certain types of loans would continue to be excluded from Regulation C requirements, including loans on unimproved land and temporary financing. Reverse mortgages and open-end lines of credit would be identified as such to allow for differentiation from other loan types. Further, many of the data points would be modified to take account of the characteristics of, and to clarify reporting requirements for,different types of loans. The Bureau believes these proposals will yield more consistent and useful data and better align Regulation C with the current housing finance market. (79 F.R. 51733)
This seems like a reasonable proposal. It increases the amount of information that is to be collected about important consumer products such as reverse mortgages.  At the same time, it releases lenders from having to determine borrowers’ intentions about how they will use their loan proceeds, something that can be hard to do and to document well.
There is more to the proposed rule than this, so take a look at it and consider commenting on it. Comments are due by October 29, 2014.

Housing Goals and Housing Finance Reform

The Federal Housing Finance Agency issued a proposed rule that would establish housing goals for Fannie and Freddie for the next three years. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required that Fannie and Freddie’s regulator set annual housing goals to ensure that a certain proportion of the companies’ mortgage purchases serve low-income households and underserved areas. Among other things, the proposed rule would “establish a new housing subgoal for small multifamily properties affordable to low-income families,” a subject that happens to be near and dear to my heart.(54482)

This “duty to serve” is very controversial, at the heart of the debate over housing finance reform. Many Democrats oppose housing finance reform without it and many Republicans oppose reform with it. Indeed, it was one of the issues that stopped the Johnson-Crapo reform bill dead in its tracks.

While this proposed rule is not momentous by any stretch of the imagination, it is worth noting that the FHFA, for all intents and purposes, seems to be the only party in the Capital that is moving housing finance reform forward in any way.

Once again, we should note that doing nothing is not the same as leaving everything the same. As Congress fails to strike an agreement on reform and Fannie and Freddie continue to limp along in their conservatorships, regulators and market participants will, by default, be designing the housing finance system of the 21st century. That is not how it should be done.

Comments are due by October 28, 2014.

Good Data Makes Good Mortgages

The CFPB issued a proposed rule about increasing the quality of information that lenders report about mortgage applications. The press release regarding the proposed rule states that these changes will ease the reporting burden on lenders, and that may very well be true. But the contested part of these rules relate to the type of information to be collected:

  • Improving market information: In the Dodd-Frank Act, Congress directed the Bureau to update HMDA regulations by having lenders report specific new information that could help identify potential discriminatory lending practices and other issues in the marketplace. This new information includes, for example: the property value; term of the loan; total points and fees; the duration of any teaser or introductory interest rates; and the applicant’s or borrower’s age and credit score.
  • Monitoring access to credit: The Bureau is proposing that financial institutions provide more information about underwriting and pricing, such as an applicant’s debt-to-income ratio, the interest rate of the loan, and the total discount points charged for the loan. This information would help regulators determine how the Ability-to-Repay rule is impacting the market, and would also help the Bureau monitor developments in specific markets such as multi-family housing, affordable housing, and manufactured housing. The proposed rule would also require that covered lenders report, with some exceptions, all loans related to dwellings, including reverse mortgages and open-end lines of credit.

Lenders are not going to like this, because this new information may be used against them in a variety of ways — in Fair Housing lawsuits, by the CFPB in enforcement actions, by members of Congress seeking to increase credit access to various constituencies.

I like this because regulators and academic researchers have been hamstrung by limited and stale data on the fast-moving mortgage market. The mortgage market is often driven by the short-term profit-seeking of private actors and by special interests pushing their agendas with the Executive and Legislative Branches.  Good data can inform good decision-making that can ensure that the housing finance system is vibrant and provides sustainable credit for households over the long term.

Comments on the proposed rule are due by October 22, 2014.

 

A Shared Appreciation for Underwater Mortgages

New York State’s Department of Financial Services has proposed a rule that would allow for “shared appreciation” of a property’s value if an underwater loan is refinanced. The Department states that this will provide a helpful option for underwater homeowners facing foreclosure. If a homeowner were to take a shared appreciation mortgage, he or she would get a principal reduction (and thus lower monthly payments) in exchange for giving up as much as fifty percent of the increase in the home’s value, payable when the property is sold or the mortgage is satisfied.

The precise formula for the holder of the mortgage is as follows:

The Holder’s share of the Appreciation in Market Value shall be limited to the lesser of:

1. The amount of the reduction in principal (deferred principal), plus interest on such amount calculated from the date of the Shared Appreciation       Agreement to the date of payment based on a rate that is applicable to the Modified Mortgage Loan; or

2. Fifty percent of the amount of Appreciation in Market Value. Section 82-2.6(b).

The principal balance of a shared appreciation mortgage “shall be no greater than: (i) an amount which when combined with other modification factors, such as lower interest rate or term extension, results in monthly payments that are 31% or less of the Mortgagor’s DTI; or (ii) 100% of the Appraised Value.” Section 82-2.11(i). The proposed regulation contains mandatory disclosures for the homeowner, including some examples of how a shared appreciation mortgage can work.

How does this all play out for the homeowner? We should note that similarly situated homeowners can be treated differently in a variety of ways. Here are a few examples. First, two similarly situated homeowners with different incomes can receive different principal balances because of the DTI limitation contained in section 82-2.11(i). Second, similarly situated homeowners can receive different principal balances because their houses appraise for different amounts. And third, different rates of appreciation of homes can make two similarly situated homeowners give up very different absolute dollars in appreciated value.

All of this is to say that homeowners will have to consider many variables in order to evaluate whether a share appreciation mortgage is a good option for them. They should also know that what is a good deal for one homeowner may not be a good deal for a similarly situated one. It is unlikely that the mandatory disclosures will be sufficient to explain this to them in all of its complexity. It is not even clear that loan counselors could do a great job with this either.

I am not arguing that the share appreciation mortgage is a bad innovation. But I do think that lenders will be able evaluate when offering one is a good deal for them while homeowners may have trouble evaluating when accepting one is a good deal on their end. I would guess that many may take one for non-economic reasons — I want to keep my home — and just take their chances as to how it all will play out financially.

If QRM = QM, then FICO+CLTV > DTI ?@#?!?

The long awaited Proposed Rule that addresses the definition of Qualified Residential Mortgages has finally been released, with comments due by October 30th. The Proposed Rule’s preferred definition of a QRM is the same as a Qualified Mortgage. There is going to be a lot of comments on this proposed rule because it indicates that a QRM will not require a down payment. This is a far cry from the 20 percent down payment required by the previous proposed rule (the 20011 Proposed Rule).

There is a lot to digest in the Proposed Rule. For today’s post, I will limit myself to a staff report from the SEC, Qualified Residential Mortgage: Background Data Analysis on Credit Risk Retention, that was issued a couple of days ago about the more restrictive definition of QRM contained in the 2011 Proposed Rule.  The report’s main findings included

  • Historical loans meeting the 2011 proposed QRM definition have significantly lower SDQ [serious delinquency] rates than historical loans meeting the QM definition, but applying this definition results in significantly lower loan volume than QM.
  • FICO and combined loan-to-value (CLTV) are strong determinants of historical loan performance, while the effect of debt-to-income (DTI) is much lower.
  • Adding FICO or CLTV restrictions to the QM definition reduces SDQ rates faster than the loss of loan volume: max ratios achieved at 760 FICO and 55% CLTV. (2)

Certainly, some readers’ eyes have glazed over by now, but this is important stuff and it embodies an important debate about underwriting.  Is it better to have an easy to understand heuristic like a down payment requirement? Or is it better to have a sophisticated approach to underwriting which looks at the layering of risks like credit score, loan to value ratio, debt to income ratio and other factors?

The first approach is hard to game by homeowners, lenders and politicians seeking to be “pro-homeowner.” But it can result in less than the optimal amount of credit being made available to potential homeowners because it may exclude those homeowners who do not present an unreasonable risk of default but who do not have the resources to put together a significant down payment.

The second approach is easier to game by lenders looking to increase market share and politicians who put pressure on regulated financial institutions to expand access to credit. But it can come closer to providing the optimal amount of credit, balancing the risk of default against the opportunity to become a homeowner.

It would be interesting if the final definition of QRM were able to encompass both of these approaches somehow, so that we can see how they perform against each other.