- HUD releases report of its activities, for instance, to assess its efforts on homelessness, housing vouchers, energy efficiency in multifamily housing.
- The Government Accountability Office releases report, which finds that “qualified mortgage (QM) and qualified residential mortgage (QRM) regulations are unlikely to have a significant effect on the availability or securitization of mortgages in the current market.”
- CFPB releases “2015 Plain Writing Act Compliance Report”, which gives information about what documents executive agencies are required to use plain language in.
- CFPB releases report on eClosings, finding that they can benefit consumers.
Tag Archives: QM
Optimizing Mortgage Availability
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.
What’s Behind Rising Mortgage Bond Issuance?
GlobeSt.com quoted me in What Else Is Behind Rising Mortgage Bond Issuance, Demand?. It opens,
Investor demand for mortgage bonds, both that have agency backing and not, is quite high these days.
Last week Bloomberg reported that issuance of home-loan securities that don’t have government backing reached more than $32 billion this year, compared to $18 billion a year ago, citing data compiled by Bloomberg and Bank of America Corp. These securities include rental-home bonds, a relatively new asset class that developed after the recession.
Agency and GSE securities are also in high demand, as a recent report from the Mortgage Bankers Association indicates. The level of commercial/multifamily mortgage debt outstanding increased by $40.4 billion in the first quarter of 2015 — a 1.5% increase over the fourth quarter of 2014. Said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research with the report’s release: “Multifamily mortgages continued to grow even more quickly than the market as a whole, with banks increasing their portfolios by $8 billion and agency and GSE portfolios and MBS increasing their holdings by $10 billion.”
There are a number of economic-based drivers behind the demand for mortgage bonds of course: the fundamentals in the real estate space and the low interest rates that have driven investors to consider all manner of securities to eek out yield.
However, there is another possibility to consider as well and that is that the changing financial regulations are driving both issuance and investment.
On one hand, mortgages and private-label mortgage backed securities are much more regulated per Dodd-Frank and its Qualified Mortgage and Qualified Residential Mortgage rules, according to David Reiss, professor of Law and research director of the Center for Urban Business Entrepreneurship (CUBE) at Brooklyn Law School. On the other, post-crisis rules put in place for mortgage bonds have made these securities far more attractive for banks to hold as various news reports suggest.
For example, new rules have made ratings on mortgage bonds less crucial, allowing US lenders to use an alternative approach to calculating capital requirements, according to another recent article in Bloomberg. In essence, these rules allow lenders to reduce the amount needed for junk-rated mortgage bonds that are trading at discounts.
In addition, banks are finding that “treasury debt and MBS pass-throughs meet regulators’ standards much more easily than other assets”, according to a report by Deutsche Bank analysts Steven Abrahams and Christopher Helwig, per a third recent article in Bloomberg.
Two Opinions
With these facts in mind we turned to two experts to see how much of an impact new regulations are having. As it turned out, they are driving some of the change – but what is actually moving the needle in terms of demand is yet another trend. Read on.
For starters, there are some caveats. It can be misleading to throw the new rental home bonds in the mix in such a comparison, Reiss tells GlobeSt.com. “They are a post-crisis product when Wall Street firms saw that single-family housing prices were so low that they could make money from buying them up in bulk and then renting them out,” he says.
“They are not regulated in the same way as private-label MBS.”
Meanwhile issuers are still navigating Dodd-Frank’s Qualified Mortgage and Qualified Residential Mortgage rules, he says. They “are still trying to figure out how to operate within these rules — and outside of them, with the origination of non-QM mortgages. The market is still in transition with these products.”
As he sees it, the surge in issuance is a reflection of market players trying to understand how to operate in a new regulatory environment. They “are increasing their issuances as they get a better sense of how to do so.”
S&P’s Upbeat Outlook on Mortgage Market
S&P posted U.S. RMBS Roundtable: Mortgage Origination And Securitization In The Post-Qualified Mortgage/Ability-To-Repay Market. The roundtable discussion offers views on many aspects of the 2015 mortgage market, but I found this passage to be particularly interesting:
Originators agreed loans that fall outside of the safe harbor by virtue of interest-only (IO) features have been and will continue to be attractive non-QM lending products. These loans have been originated post-crisis, and originators expect to continue lending to high-quality borrowers with substantial equity in their properties. There was general consensus that IO loans should not have been automatically excluded from QM treatment.
However, large bank depository lenders have shown a desire to originate and hold larger balance IO loans on their balance sheets rather than including them in securitizations. One participant from a major depository institution indicated that, given the increasing IO concentration on those institutions’ balance sheets, there may be a desire to securitize these loans upon meeting balance sheet thresholds. (1)
After Dodd-Frank, there was a lot of concern that the Qualified Mortgage and Ability-to-Repay rules would shut down the mortgage markets. It seems pretty clear to me that lenders are figuring out how to navigate both the plain-vanilla world of the Qualified Mortgage and the exotic world of the non-Qualified Mortgage, with its interest-only and other non-prime products. Lenders are still figuring out how far afield they can roam from a plain-vanilla product, but that is to be expected during a major transition such as the one from the pre- to the post-Dodd-Frank world.
Reiss on Privatization of Fannie and Freddie
BadCredit.org profiled an article of mine in Brooklaw Professor Pushes for Privatization of Fannie Mae/Freddie Mac. The profile opens,
Since the end of the Great Recession, policymakers, academics and economists have been struggling with a very difficult question — what should we do with Fannie Mae and Freddie Mac? Should the government continue its role in providing mortgage credit to millions of American?
Fordham University Associate Professor of Law and Ethics Brent J. Horton made a proposal in his forthcoming paper “For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933“:
“The best way to reduce risk taking at Fannie Mae is to subject its MBS offerings to the disclosure requirements of the Securities Act of 1933,” Horton writes.
However, Brooklyn Law School Professor of Law David Reiss believes “the problems inherent in Fannie Mae’s structure are greater than those that increased disclosure can address.”
In his response, titled “Who Should Be Providing Mortgage Credit to American Households?” Reiss points to increased privatization as one way to address the question of what to do with Fannie Mae and Freddi Mac.
Reiss on Who Should Be Providing Mortgage Credit to American Households?
I have posted a short Response, Who Should Be Providing Mortgage Credit to American Households?, to SSRN (as well as to BePress). The abstract reads,
Who should be providing mortgage credit to American households? Given that the residential mortgage market is a ten-trillion-dollar one, the answer we come up with had better be right, or we may suffer another brutal financial crisis sooner than we would like. Indeed, the stakes are as high as they were in the Great Depression when the foundation of our current system was first laid down. Unfortunately, the housing finance experts of the 1930s seemed to have a greater clarity of purpose when designing their housing finance system. Part of the problem today is that debates over the housing finance system have been muddled by broader ideological battles and entrenched special interests, as well as by plain old inertia and the fear of change. It is worth taking a step back to evaluate the full range of options available to us, as the course we decide upon will shape the housing market for generations to come. This is a Response to Brent Horton, For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933, 89 Tulane L. Rev. __ (forthcoming 2014-2015).
Dodd-Frank Mortgage Rules Readiness Guide
The CFPB issued Version 3.0 of its 2014 CFPB Dodd-Frank Mortgage Rules Readiness Guide “to help financial institutions come into and maintain compliance with the new mortgage rules outlined in Part I of this Guide. . . .. This Guide summarizes the mortgage rules finalized by the CFPB as of August 1, 2014, but it is not a substitute for the rules.” (2)
The Guide provides a helpful overview of the Dodd-Frank rules that relate to the mortgage market, noting that they “amend several existing regulations, including Regulations Z, X, and B.” (3) The guide provides summaries of “rules required under Title XIV of the Dodd-Frank Act” and “the Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA).” (3) These summaries include:
- Ability to Repay
- Qualified Mortgage
- TILA Escrow Requirements
- High-Cost Mortgage and Homeownership Counseling
- Mortgage Servicing
- ECOA Valuations for Loans Secured by a First Lien on a Dwelling
- TILA Appraisals for Higher-Priced Mortgage Loans
- Loan Originator Compensation Requirements
- TILA-RESPA Integrated Disclosure
While this Guide is directed at financial institutions to help them “come into and maintain compliance” with these rules, it also provides a useful overview for everyone else who is trying to understand what the current regulatory environment for the mortgage market looks like. (2)
