Tag Archives: standardization

American Bankers on Mortgage Market Reform

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The American Bankers Association has issued a white paper, Mortgage Lending Rules: Sensible Reforms for Banks and Consumers. The white paper contains a lot of common sense suggestions but its lack of sensitivity to consumer concerns greatly undercuts its value. It opens,

The Core Principles for Regulating the United States Financial System, enumerated in Executive Order 13772, include the following that are particularly relevant to an evaluation of current U.S. rules and regulatory practices affecting residential mortgage finance:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; and

(f) make regulation efficient, effective, and appropriately tailored.

The American Bankers Association offers these views to the Secretary of the Treasury in relation to the Directive that he has received under Section 2 of the Executive Order.

 Recent regulatory activity in mortgage lending has severely affected real estate finance. The existing regulatory regime is voluminous, extremely technical, and needlessly prescriptive. The current regulatory regimen is restricting choice, eliminating financial options, and forcing a standardization of products such that community banks are no longer able to meet their communities’ needs.

 ABA recommends a broad review of mortgage rules to refine and simplify their application. This white paper advances a series of specific areas that require immediate modifications to incentivize an expansion of safe lending activities: (i) streamline and clarify disclosure timing and methodologies, (ii) add flexibility to underwriting mandates, and (iii) fix the servicing rules.

 ABA advises that focused attention be devoted to clarifying the liability provisions in mortgage regulations to eliminate uncertainties that endanger participation and innovation in the real estate finance sector. (1, footnote omitted)

Its useful suggestions include streamlining regulations to reduce unnecessary regulatory burdens; clarifying legal liabilities that lenders face so that they can act more freely without triggering outsized criminal and civil liability in the ordinary course of business; and creating more safe harbors for products that are not prone to abuse.

But the white paper is written as if the subprime boom and bust of the early 2000s never happened. It pays not much more than lip service to consumer protection regulation, but it seeks to roll it back significantly:

ABA is fully supportive of well-regulated markets where well-crafted rules are effective in protecting consumers against abuse. Banks support clear disclosures and processes to assure that consumers receive clear and comprehensive information that enables them to understand the transaction and make the best decision for their families. ABA does not, therefore, advocate for a wholesale deconstruction of existing consumer protection regulations . . . (4)

If we learned anything from the subprime crisis it is that disclosure is not enough.  That is why the rules.  Could these rules be tweaked? Sure.  Should they be dramatically weakened? No. Until the ABA grapples with the real harm done to consumers during the subprime era, their position on mortgage market reform should be taken as a special interest position paper, not a white paper in the public interest.

S&P on Jumbos

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Last week, I discussed an up beat S&P report on the overall RMBS market. Today I discuss and S&P report on the jumbo mortgage market. This report sees much slower growth in the private-label jumbo residential mortgage-backed securities market. It opens,

U.S. housing has been recovering, and residential mortgage collateral performance continues to improve, a trend that we expect to continue in 2015. However, housing finance still faces challenges and relies on government support. Private capital has been slow to reenter the residential mortgage market, and nonagency securitization volume remains relatively small, with diversity and growth mostly coming from nontraditional transactions in recent years. Standard & Poor’s Ratings Services believes nonagency securitization—-utilizing private capital–could be a key contributor to a more healthy housing finance market while limiting risk to taxpayers.

A revival in the U.S. nonagency residential mortgage-backed securities (RMBS) market has not followed measured recoveries in the broader economy, employment, and housing. RMBS not guaranteed by one of the government-sponsored enterprises (GSEs)–such as Fannie Mae or Freddie Mac–hit a high of $1.2 trillion in 2006, but we expect that figure to be near $50 billion in 2015, up approximately $12 billion from 2014. Clearly, even with the ongoing recoveries in the overall economy and housing market, nonagency U.S. RMBS-related issuance remains negligible in the $10 trillion housing finance market.

We believe the slow pace of non-agency securitization reflects a market still grappling with the changing economics of complying with new regulations, a lack of standardization in nonagency securitization provisions, anticipated interest rate hikes in mid-2015, and a cautious investor base in newly originated nonagency RMBS. Considerable clarity has emerged regarding new regulations this year, but other limiting factors persist.

Hopefully, S&P has correct identified the cause of the slow growth in this sector. But we need to be vigilant to ensure that there is not a more fundamental problem with the jumbo private-label MBS market. it is vital that this sector of the market develops in order to provide a private capital alternative to the existing market which depends to a very large extent on government guarantees.

Consumer Protection in RMBS 3.0

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The Structured Finance Industry Group has issued RMBS 3.0:  A Comprehensive Set of Proposed Industry Standards to Promote Growth in the Private Label Securities Market.  This “green paper,” frequently referred to as a First Edition, states that RMBS 3.0 is an initiative

established with the primary goal of re-invigorating the “private label” residential mortgage-backed securities (“RMBS”) market.

Initiated by members of SFIG, the project seeks to reduce substantive differences within current market practices through an open discussion among a broad cross-section of market participants. Where possible, participants seek to identify and agree upon best practices. RMBS 3.0 focuses on the following areas related to RMBS:

  • Representations and warranties, repurchase governance and other enforcement mechanisms;
  • Due diligence, disclosure and data issues; and
  • Roles and responsibilities of transaction parties and their communications with investors. (1 footnotes omitted)

RMBS 3.0 is expected to

1. Create standardization where possible, in a manner that reflects widely agreed upon best practices and procedures.
2. Clarify differences in alternative standards in a centralized and easily comprehendible manner to improve transparency across RMBS transactions.
3. Develop new solutions to the challenges that impede the emergence of a sustainable, scalable and fluid post-crisis RMBS market.
4. Draft or endorse model contractual provisions, or alternative “benchmark” structural approaches, where appropriate to reflect the foregoing.(2)

There is much of interest in this attempt at self-regulation by the now quiescent but formerly roaring private-label market. But I think that readers of this blog would be interested in its approach to consumer protection regulation. First, the green paper refers to it as “consumer compliance.” (See, e.g., 23) Unsurprisingly, the paper is only concerned with protecting industry participants from liability for violations of consumer protection/consumer compliance laws. It pays no lip service to the spirit of consumer protection — promoting sustainable credit on transparent terms. That’s fine given the constituents of the SFIG, but it only confirms the importance of active consumer protection regulators and enforcement agencies who will look beyond rote compliance with regulations. The private-label industry is capable of rapid change once it gets going, change that can outpace regulations. Someone has to keep an eye on it with an eye toward to the principles that should guide a fair market for consumer credit.