The FHFA’s Take on Housing Finance Reform

FHFA Director Watt

Federal Housing Finance Agency Director Watt sent Federal Housing Finance Agency Perspectives on Housing Finance Reform to Senate Banking Chair Michael Crapo (R-ID) and Senator Sherrod Brown of Ohio, the top Democrat on that committee. There are no real surprises in it, but it does set forth a series of housing finance objectives that the FHFA supports:

• Preserve the 30-year fixed-rate, prepayable mortgage;

• End taxpayer bailouts for failing firms;

• Maintain liquidity in the housing finance market;

• Attract significant amounts of private capital to the center of the housing finance system through both robust equity capital requirements and credit risk transfer (CRT) participation;

• Provide for a single government-guaranteed mortgage-backed security that will improve the liquidity of the to-be-announced (TBA) market and promote a fair and competitive funding market for Secondary Market Entities (SMEs);

• Ensure access to affordable mortgages for creditworthy borrowers, sustainable rental options for families across income levels, and a focus on serving rural and other underserved markets;

• Provide a level playing field for institutions of all sizes to access the secondary market;

• Include tools for the regulator to anticipate and mitigate downturns in the housing market, including setting appropriate capital and liquidity requirements for SMEs, having prompt, corrective action authority for SMEs that are weak or troubled, and having authority to adjust CRT requirements as needed; and

• Provide a stable transition path that protects the housing finance market and the broader economy from potential disruptions and ensures that the new housing finance system operates as intended. (1)

The FHFA’s take on housing finance reform seems to be somewhat different from what various members of Congress are reportedly promoting. It is not clear though that the views of the FHFA are all that relevant to the Congressional leaders who are shaping the next housing finance reform bill. Nor do I expect that Director Watt’s views are particularly valued by the Trump Administration, given that he is a former Democratic member of Congress. That being said, Director Watt has always made it clear that it is Congress and not the FHFA that should be charting the path forward for housing finance reform.

While his views on the matter differ from those of some members of Congress, all of the relevant stakeholders seem to agree on the broad contours of what the 21st century’s housing finance infrastructure should look like. There should be an explicit guarantee to support the housing market during liquidity crises.  And the main elements of the current market, such as the thirty year fixed-rate mortgage, should be maintained. Here’s hoping that a bipartisan push can get this done this year.

The Financial Meltdown and Consumer Protection

photo by HTO

Larry Kirsch and Gregory D. Squires have published Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward. According to the promotional material,

Meltdown reveals how the Consumer Financial Protection Bureau was able to curb important unsafe and unfair practices that led to the recent financial crisis. In interviews with key government, industry, and advocacy groups along with deep archival research, Kirsch and Squires show where the CFPB was able to overcome many abusive practices, where it was less able to do so, and why.

Open for business in 2011, the CFPB was Congress’s response to the financial catastrophe that shattered millions of middle-class and lower-income households and threatened the stability of the global economy. But only a few years later, with U.S. economic conditions on a path to recovery, there are already disturbing signs of the (re)emergence of the high-risk, high-reward credit practices that the CFPB was designed to curb. This book profiles how the Bureau has attempted to stop abusive and discriminatory lending practices in the mortgage and automobile lending sectors and documents the multilayered challenges faced by an untested new regulatory agency in its efforts to transform the broken—but lucrative—business practices of the financial services industry.

Authors Kirsch and Squires raise the question of whether the consumer protection approach to financial services reform will succeed over the long term in light of political and business efforts to scuttle it. Case studies of mortgage and automobile lending reforms highlight the key contextual and structural conditions that explain the CFPB’s ability to transform financial service industry business models and practices. Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward is essential reading for a wide audience, including anyone involved in the provision of financial services, staff of financial services and consumer protection regulatory agencies, and fair lending and consumer protection advocates. Its accessible presentation of financial information will also serve students and general readers.

Features

  • Presents the first comprehensive examination of the CFPB that identifies its successes during its first five years of operation and addresses the challenges the bureau now faces
  • Exposes the alarming possibility that as the economy recovers, the Consumer Financial Protection Bureau’s efforts to protect consumers could be derailed by political and industry pressure
  • Offers provisional assessment of the effectiveness of the CFPB and consumer protection regulation
  • Gives readers unique access to insightful perspectives via on-the-record interviews with a cross-section of stakeholders, ranging from Richard Cordray (director of the CFPB) to public policy leaders, congressional staffers, advocates, scholars, and members of the press
  • Documents the historical and analytic narrative with more than 40 pages of end notes that will assist scholars, students, and practitioners

I would not describe the book as objective, given that Senator Elizabeth Warren wrote the forward and the President Obama’s point man on Dodd-Frank, Michael Barr, wrote the afterward. Indeed, it reads more like a panegyric. Nonetheless, the book has a lot to offer to scholars of the CFPB who are interested in hearing from the people who helped to stand up the Bureau.

Assessing The Ability-to-Repay and Qualified Mortgage Rule

photo by Alan Levine

The Consumer Financial Protection Bureau has issued a Request for Information Regarding Ability-to-Repay/Qualified Mortgage Rule Assessment. Dodd-Frank

requires the Bureau to conduct an assessment of each significant rule or order adopted by the Bureau under Federal consumer financial law. The Bureau must publish a report of the assessment not later than five years after the effective date of such rule or order. The assessment must address, among other relevant factors, the rule’s effectiveness in meeting the purposes and objectives of title X of the Dodd Frank Act and the specific goals stated by the Bureau. The assessment also must reflect available evidence and any data that the Bureau reasonably may collect. Before publishing a report of its assessment, the Bureau must invite public comment on recommendations for modifying, expanding, or eliminating the significant rule or order. (82 F.R. 25247)

The Bureau invites the public to submit the following:

  1. Comments on the feasibility and effectiveness of the assessment plan, the objectives of the ATR/QM Rule that the Bureau intends to emphasize in the assessment, and the outcomes, metrics, baselines, and analytical methods for assessing the effectiveness of the rule as described in part IV above;
  2. Data and other factual information that may be useful for executing the Bureau’s assessment plan, as described in part IV above;
  3. Recommendations to improve the assessment plan, as well as data, other factual information, and sources of data that would be useful and available to execute any recommended improvements to the assessment plan;
  4. Data and other factual information about the benefits and costs of the ATR/ QM Rule for consumers, creditors, and other stakeholders in the mortgage industry; and about the impacts of the rule on transparency, efficiency, access, and innovation in the mortgage market;
  5. Data and other factual information about the rule’s effectiveness in meeting the purposes and objectives of Title X of the Dodd-Frank Act (section 1021), which are listed in part IV above;
  6. Recommendations for modifying, expanding, or eliminating the ATR/QM Rule. (82 F.R. 25250)

As with the RESPA Assessment, this ATR/QM Assessment provides “consumers and their advocates, housing counselors, mortgage creditors and other industry representatives, industry analysts, and other interested persons” with the opportunity to help shape how the ATR/QM Rule should work going forward. (Id.)

Comments must be received on or before July 31, 2017.

The Future of Mortgage Default

photo by Diane BassfordThe Consumer Financial Protection Bureau has shared its Principles for the Future of Loss Mitigation. It opens,

This document outlines four principles, Accessibility, Affordability, Sustainability, and Transparency, that provide a framework for discussion about the future of loss mitigation as the nation moves beyond the housing and economic crisis that began in 2007. As the U.S. Department of Treasury’s Home Affordable Modification Program (HAMP) is phased out, the Consumer Financial Protection Bureau (CFPB) is considering the lessons learned from HAMP while looking forward to the continuing loss mitigation needs of consumers in a post-HAMP world. These principles build on, but are distinct from, the backdrop of the Bureau’s mortgage servicing rules and its supervisory and enforcement authority. This document does not establish binding legal requirements. These principles are intended to complement ongoing discussions among industry, consumer groups and policymakers on the development of loss mitigation programs that span the full spectrum of both home retention options such as forbearance, repayment plans and modifications, and home disposition options such as short sales and deeds-in-lieu.

The future environment of mortgage default is expected to look very different than it did during the crisis. Underwriting based on the ability to repay rule is already resulting in fewer defaults. Mortgage investors have recognized the value of resolving delinquencies early when defaults do occur. Mortgage servicers have developed systems and processes for working with borrowers in default. The CFPB’s mortgage servicing rules have established clear guardrails for early intervention, dual tracking, and customer communication; however, they do not require loss mitigation options beyond those offered by the investor nor do they define every element of loss mitigation execution.

Yet, even with an improved horizon and regulatory guardrails, there is ample opportunity for consumer harm if loss mitigation programs evolve without incorporating key learnings from the crisis. While there is broad agreement within the industry on the high level principles, determining how they translate into programs is more nuanced. Further development of these principles and their implementation is necessary to prevent less desirable consumer outcomes and to ensure the continuance of appropriate consumer protections.

The CFPB concludes,

The CFPB believes these principles are flexible enough to encompass a range of approaches to loss mitigation, recognizing the legitimate interests of consumers, investors and servicers. One of the lessons of HAMP is that loss mitigation that is good for consumers is usually good for investors, as well. The CFPB therefore seeks to engage all stakeholders in a discussion of the principles for future loss mitigation.

I have no beef with this set of principles as far as it goes, but I am concerned that it does not explicitly include a discussion of the role of state court foreclosures in loss mitigation. As this blog has well documented, homeowners are facing Kafkaesque, outrageous, even hellish, behavior by servicers in state foreclosure actions. Even if the federal government cannot address state law issues directly, these issues should be included as part of the discussion of the problems that homeowners face when their mortgages go into default.

Good Data for the FHFA

The Federal Housing Finance Agency released a White Paper on the FHFA Mortgage Analytics Platform.  By way of background, the White Paper states that

The Federal Housing Finance Agency (FHFA) maintains a proprietary Mortgage Analytics Platform to support the Agency’s strategic plan. The objective of this white paper is to provide interested stakeholders with a detailed description of the platform, as it is one of the tools the FHFA uses in policy analysis. The distribution of this white paper is part of a larger effort to increase transparency on mortgage performance and the analytical tools used for policy analysis and evaluation within the FHFA.

The motivation to build the FHFA Mortgage Analytics Platform derived from the Agency’s need for an independent empirical view on multiple policy initiatives. Academic empirical studies may suffer from a lack of high quality data, while empirical work from inside the industry typically represents a specific view. The FHFA maintains several vendor platforms from which an independent view is possible, yet these platforms tend to be inflexible and opaque. The unique role of the FHFA as regulator and conservator necessitated platform flexibility and transparency to carry out its responsibilities.

The FHFA Mortgage Analytics Platform is maintained on a continuous basis; as such, the material herein represents the platform as of the publication date of this document. As resources permit, this document will be up dated to reflect enhancements to the platform. (2)

This platform is a very welcome development for exactly the reasons that the White Paper sets forth.  Academics have a very hard time accessing good data on the mortgage markets (its usually expensive, untimely, limited).  Industry interpretations of data typically have agendas.

A sampling of the Platform’s elements include:

  • Performing Unpaid Principal Balance
  • Scheduled Paid Principal Balance
  • Unscheduled Paid Principal
  • Dollars of New 90 Day Delinquencies
  • Non-Performing Balances
  • Property Value of Non-Performing Loans (30-31)

Let us hope that the Platform offers a transparent and flexible tool to track this very dynamic market.