Tag Archives: VA

Bringing Housing Finance Reform over the Finish Line

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photo by LarryWeisenberg

Mike Milkin at Milkin Institute Global Conference

The Milkin Institute have released Bringing Housing Finance Reform over the Finish Line. It opens,

The housing finance reform debate has once again gained momentum with the goal of those involved to move forward with bipartisan legislation in 2018 that results in a safe, sound, and enduring housing finance system.

While there is no shortage of content on the topic, two different conceptual approaches to reforming the secondary mortgage market structure are motivating legislative discussions. The first is a model in which multiple guarantor firms purchase mortgages from originators and aggregators and then bundle them into mortgage-backed securities (MBS) backed by a secondary federal guarantee that pays out only after private capital arranged by each guarantor takes considerable losses (the multiple-guarantor model). This approach incorporates several elements from the 2014 Johnson-Crapo Bill and a subsequent plan developed by the Mortgage Bankers Association. Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs)—would continue as guarantors, but would face new competition and would no longer enjoy a government guarantee of their corporate debt or other government privileges and protections.

The second housing finance reform plan is based on a multiple-issuer, insurance-based model originally proposed by Ed DeMarco and Michael Bright at the Milken Institute, and builds on the existing Ginnie Mae system (the DeMarco/Bright model). In this model, Ginnie Mae would provide a full faith and credit wrap on MBS issued by approved issuers and backed by loan pools that are credit-enhanced either by (i) a government program such as the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA), or (ii) Federal Housing Finance Agency (FHFA)- approved private credit enhancers that arrange for the required amounts of private capital to take on housing credit risk ahead of the government guarantee. Fannie Mae and Freddie Mac would be passed through receivership and reconstituted as credit enhancement entities mutually owned by their seller/servicers.

While the multiple guarantor and DeMarco/Bright models differ in many ways, they share important common features; both address key elements of housing finance reform that any effective legislation must embrace. In the remainder of this paper, we first identify these key reform elements. We then assess some common features of the two models that satisfy or advance these elements. The final section delves more deeply into the operational challenges of translating into legislative language specific reform elements that are shared by or unique to one of the two models. Getting housing finance reform right requires staying true to high-level critical reform elements while ensuring that technical legislative requirements make economic and operational sense.  (2-3, footnotes omitted)

The report does a good job of outlining areas of broad (not universal, just broad) agreement on housing finance reform, including

  • The private sector must be the primary source of mortgage credit and bear the primary burden for credit losses.
  • There must be an explicit federal backstop after private capital.
  • Credit must remain available in times of market stress.
  • Private firms benefiting from access to a government backstop must be subject to strong oversight. (4-5)

We are still far from having a legislative fix to the housing finance system, but it is helpful to have reports like this to focus us on where there is broad agreement so that legislators can tackle the areas where the differences remain.

Taking Down Barriers to Homeownership

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Laurie Goodman and her colleagues at the Urban Institute’s Housing Finance Policy Center have released a report, Barriers to Accessing Homeownership Down Payment, Credit, and Affordability. The Executive Summary states that

Saving for a down payment is a considerable barrier to homeownership. With rising home prices, rising interest rates, and tight lending standards, the path to homeownership has become more challenging, especially for low-to-median-income borrowers and first-time homebuyers. Yet most potential homebuyers are largely unaware that there are low–down payment and no–down payment assistance programs available at the local, state, and federal levels to help eligible borrowers secure an appropriate down payment. This report provides charts and commentary to articulate the challenges families face saving for down payments as well as the options available to help them. This report is accompanied by an interactive map.

Barrier 1. Down Payments

• Consumers often think they need to put more down than lenders actually require. Survey results show that 53 percent of renters cite saving for a down payment as an obstacle to homeownership. Eighty percent of consumers either are unaware of how much lenders require for a down payment or believe all lenders require a down payment above 5 percent. Fifteen percent believe lenders require a 20 percent down payment, and 30 percent believe lenders expect a 20 percent down payment.

• Contrary to consumer perceptions, borrowers are not actually putting down 20 percent. The national median loan-to-value (LTV) ratio is 93 percent. The Federal Housing Administration (FHA) and US Department of Veterans Affairs (VA) typically offer lower down payment options than the government-sponsored enterprises (GSEs), from 0 to 3.5 percent. As the share of FHA and VA lending has increased considerably in the post-crisis period (since 2008), the median LTV ratio has increased as well.

*    *    *

Barrier 2. The Credit Box

• Access to homeownership is not limited by down payments alone. Credit access is tight by historical standards. Accordingly, the median credit score of new purchase mortgage originations has increased considerably in the post-crisis period. The median credit score for purchase mortgages is 779, compared with the pre-crisis median of 692. Credit scores of FHA borrowers have historically been lower; the current median credit score is 671.

*    *    *

Barrier 3. Affordability

• Because of home price appreciation in the past five years, national home price affordability has declined. Low interest rates have aided affordability. If interest rates reach 4.75 percent, national affordability will return to historical average affordability.

*    *    *

Access to Down Payment Assistance

• Low–down payment mortgages and other down payment assistance programs provide grants or loans to potential homeowners all over the country. There are 2,144 active programs across the country, and 1,295 agencies and housing finance agencies offering them at the local, state, and national levels. One of the major challenges of the offerings in each state is that they are not standard, eligibility requirements vary, and not all lenders offer the programs. Pricing for the programs also vary, so counseling and consumer education about the programs is necessary to ensure consumers understand how the program works and any additional costs that may be incurred.

*    *    *

• Eligibility for down payment assistance programs is determined by such factors as loan amount, homebuyer status, borrower income, and family size. Assistance is available for many loan types including conventional, FHA, VA, and US Department of Agriculture (USDA) loans. The share of people eligible for assistance in select MSAs ranges from 30 to 52 percent, and the eligible borrowers could qualify for 3 to 12 programs with down payment assistance ranging from $2,000 to more than $30,000.

Because of the tight credit environment, many borrowers have been shut out of the market and have not been able to take advantage of low interest rates and affordable home prices. As the credit box opens, educating consumers about low–down payment mortgages and down payment assistance is critical to ensuring homeownership is available to more families. (V-VI, emphasis removed)

Storm-Induced Delinquencies

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The Urban Institute’s Housing Finance Policy Center has released its November 2017 Housing Finance at a Glance Chartbook. The Introduction looks out how this summer’s big storms have pushed up delinquency rates:

The Mortgage Bankers Association recently released the results of its National Delinquency Survey (NDS) for Q3 2017. The non-seasonally adjusted NDS data for Q3 2017 showed a significant increase in delinquency rates across all past due categories (30-59 days, 60-89 days and 90 days and over). The increase was largest–and most noteworthy–for the 30-59 day category, spiking by 57 basis points from 2.27 percent in Q2 2017 to 2.84 percent in Q3. The D60 rate increased by a much smaller 12 basis points, from 0.74 to 0.86 percent, while the D90 rate increased the least, by 9 basis points, from 1.20 to 1.29 percent. The rise in delinquencies was broad based, affecting FHA, VA and Conventional channels with FHA D30 seeing the largest increase (4.57 to 5.92 percent).
While early payment delinquency rates were expected to increase in the wake of the storms Harvey, Irma and Maria for the affected states, the magnitude of increase in the D30 rate is quite remarkable. The reported Q3 2017 D30 rate is the highest in nearly four years. The 57 basis points increase in a single quarter was also the largest in recent history. The last time D30 rate increased by more than 50 bps in one quarter was in Q4 2000, when it rose by 61 bps. In comparison, both D60 and D90 rates, while slightly higher in Q3, are well within their recent range.
MBA’s state level NDS data confirms that storms were a major driver behind the increase. For Florida, the non-seasonally adjusted D30 rate more than doubled from 2.12 to 4.64 percent, the highest ever D30 rate recorded. The D30 rate for Puerto Rico also nearly doubled from 4.98 to 9.12 percent, while Texas D30 rate increased from 5.05 to 7.38 percent. The increase in FL and PR was larger than in TX because of the statewide impact of hurricanes Irma and Maria. In contrast Harvey’s impact was limited to Houston and surrounding areas. The increase in the D90 rate is not storm-related as not enough time has elapsed since the storms made landfall (Harvey made landfall in Houston on August 25, Irma made landfall in Florida on September 9, and Maria made landfall in Puerto Rico on September 20).
Besides storms, there are other factors that are driving the D30 rate higher. As the figure shows, there is a very strong seasonal pattern associated with 30 day delinquencies. The D30 rate typically witnesses an uptick in the second half of each calendar year after declining in the first half because of tax refunds. Another reason for the Q3 increase is that the last day of September was a Saturday, which means that payments received on this day were not processed until Monday Oct 2nd and were identified as past due (mortgage payments are due on the 1st of the month; D30 rate is based on mortgages unpaid as of 30th of the month).
There is one more thing worth pointing out. Many borrowers affected by recent storms have received forbearance plans that allow them to defer mortgage payments for a few months. Under the NDS methodology, these borrowers are considered delinquent. Many will likely resume making monthly payments once they regain their financial footing or after forbearance ends. Others unable to afford payments could get a loan modification. Therefore, although it will take several quarters before the eventual impact of storms on delinquency rates becomes clear, many borrowers who are currently 30-days delinquent might not enter D60 or D90 status.
While the Chartbook does not look at the longer term impact of climate change on mortgage markets, it is clear that policy makers need to account for it in terms of mortgage servicing, flood insurance, land use and building code regulation.

Insuring Sustainable Housing

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photo by Mark Moz

I posted Insuring Sustainable Housing to SSRN (and BePress). The abstract reads,

Today’s FHA suffered from many of the same unrealistic underwriting assumptions that have done in so many lenders during the 2000s. It had also been harmed, like other lenders, by a housing market as bad as any seen since the Great Depression. As a result, the federal government announced in 2013 that the FHA would require the first bailout in its history. At the same time that it faced these financial challenges, the FHA has also come under attack for the poor execution of some of its policies to expand homeownership. Leading commentators have called for the federal government to stop employing the FHA to do anything other than provide liquidity to the low end of the mortgage market. These arguments rely on a couple of examples of programs that were clearly failures but they fail to address the FHA’s long history of undertaking comparable initiatives. This article takes the long view and demonstrates that the FHA has a history of successfully undertaking new homeownership programs. At the same time, the article identifies flaws in the FHA model that should be addressed in order to prevent them from occurring if the FHA were to undertake similar initiatives in the future.

This short article is drawn from Underwriting Sustainable Homeownership: The Federal Housing Administration and The Low Down Payment Loan, 50 GA. L. REV. 1019 (2016).

Rethinking FHA Insurance

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The Congressional Budget Office issued a report on Options to Manage FHA’s Exposure to Risk from Guaranteeing Single-Family Mortgages. FHA insurance stands out from other forms of mortgage insurance because it guarantees all of a lender’s loss, rather than just a portion of it. It is certainly a useful exercise to determine whether the FHA could reduce its exposure to those potential credit losses while also making home loans available to people who would otherwise have difficulty accessing them. This report evaluates the options available to the FHA:

The Federal Housing Administration (FHA) insures the mortgages of people who might otherwise have trouble getting a loan, particularly first-time homebuyers and low-income borrowers seeking to purchase or refinance a home. During and just after the 2007–2009 recession, the share of mortgages insured by FHA grew rapidly as private lenders became more reluctant to provide home loans without an FHA guarantee of repayment. FHA’s expanded role in the mortgage insurance market ensured that borrowers could continue to have access to credit. However, like most other mortgage insurers, FHA experienced a spike in delinquencies and defaults by borrowers.

Recently, mortgage borrowers with good credit scores, large down payments, or low ratios of debt to income have started to see more options in the private market. The Congressional Budget Office estimates that the share of FHA-insured mortgages going to such borrowers is likely to keep shrinking as credit standards in the private market continue to ease. That change would leave FHA with a riskier pool of borrowers, creating risk-management challenges similar to the ones that contributed to the agency’s high levels of insurance claims and losses during the recession.

This report analyzes policy options to reduce FHA’s exposure to risk from its program to guarantee single-family mortgages, including creating a larger role for private lenders and restricting the availability of FHA’s guarantees. The options are designed to let FHA continue to fulfill its primary mission of ensuring access to credit for first-time homebuyers and low-income borrowers.

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What Policy Options Did CBO Analyze?

Many changes have been proposed to reduce the cost of risk to the federal government from FHA’s single-family mortgage guarantees. CBO analyzed illustrative versions of seven policy options, which generally represent the range of approaches that policymakers and others have proposed:

■ Guaranteeing some rather than all of the lender’s losses on a defaulted mortgage;

■ Increasing FHA’s use of risk-based pricing to tailor up-front fees to the riskiness of specific borrowers;

■ Adding a residual-income test to the requirements for an FHA-insured mortgage to better measure borrowers’ ability to repay the loan (as the Department of Veterans Affairs does in its mortgage guarantee program);

■ Reducing the limit on the size of a mortgage that FHA can guarantee;

■ Restricting eligibility for FHA-insured mortgages only to first-time homebuyers and low- to moderate-income borrowers;

■ Requiring some borrowers to receive mortgage counseling to help them better understand their financial obligations; and

■ Providing a grant to help borrowers with their down payment, in exchange for which FHA would receive part of the increase in their home’s value when it was sold.

Although some of those approaches would require action by lawmakers, several of the options could be implemented by FHA without legislation. In addition, certain options could be combined to change the nature of FHA’s risk exposure or the composition of its guarantees. CBO did not examine the results of combining options.

What Effects Would the Policy Options Have?

Making one or more of those policy changes would affect FHA’s financial position, its role in the broader mortgage market, and the federal budget. All of the options would improve the agency’s financial position by reducing its exposure to the risk of losses on the mortgages it insures (see Table 1). The main reason for that reduction would be a decrease in the amount of mortgages guaranteed by FHA. CBO projects that under current law, FHA would insure $220 billion in new single-family mortgages in 2018. The options would lower that amount by anywhere from $15 billion to $77 billion (see Figure 1). Some options would also reduce FHA’s risk exposure by decreasing insurance losses as a percentage of the value of the guaranteed mortgages. (1-2)

GSE Investors Propose Reform Blueprint

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Moelis & Company, financial advisors to some of Fannie and Freddie investors including Paulson & Co. and Blackstone GSO Capital Partners, has release a Blueprint for Restoring Safety and Soundness to the GSEs. The blueprint is a version of a “recap and release” plan that greatly favors the interests of Fannie and Freddie’s private shareholders over the public interest. The blueprint contains the following elements:

1. Protects Taxpayers from Future Bailouts. This Blueprint protects taxpayers by restoring safety and soundness to two of the largest insurance companies in the United States, Fannie Mae and Freddie Mac. This is achieved by (a) rebuilding a substantial amount of first-loss private capital, (b) imposing rigorous new risk and leverage-based capital standards, (c) facilitating the government’s exit from ownership in both companies, and (d) providing a mechanism to substantially reduce the government’s explicit backstop commitment facility over time.

2. Promotes Homeownership and Preserves the 30-Year Mortgage. This Blueprint ensures that adequate mortgage market liquidity is maintained, the GSE debt markets continue to function without interruption, and the affordable 30-year fixed-rate conventional mortgage remains widely accessible for every eligible American.

3. Repositions the GSEs as Single-Purpose Insurers. Given the substantial reforms implemented by the Federal Housing Finance Agency (“FHFA”) since 2008, the GSEs can now be repositioned and safely operated as single-purpose insurers, bearing mortgage credit risk in exchange for guarantee fees with limited retained investment portfolios beyond that necessary for securitization “inventory” and loan purchases.

4. Enables Rebuild of Equity Capital while Winding Down the Government Backstop. The Net Worth Sweep served the purpose of dramatically accelerating the payback of Treasury’s investment in both companies. The focus must now turn to protecting taxpayers by rebuilding Fannie Mae’s and Freddie Mac’s equity capital and winding down the government’s backstop.

5. Repays the Government in Full for its Investment during the Great Recession. Treasury has retained all funds received to date during the conservatorships. The government has recouped the entire $187.5 billion that it originally invested, plus an additional $78.3 billion in profit, for total proceeds of $265.8 billion. Treasury’s profits to date on its investment in the GSEs are five times greater than the combined profit on all other investments initiated by Treasury during the financial crisis.

6. Produces an Additional $75 to $100 Billion of Profits for Taxpayers. Treasury can realize an estimated $75 to $100 billion in additional cash profits by exercising its warrants for 79.9% of each company’s common stock and subsequently selling those shares through secondary offerings. This monetization process, which follows the proven path of Treasury’s AIG and Ally Bank (GMAC) stock dispositions, could bring total government profits to $150 to $175 billion, the largest single U.S. government financial investment return in history.

7. Implements Reform Under Existing Authority. This Blueprint articulates a feasible path to achieving the Administration’s GSE reform objectives with the least amount of execution risk. It can be fully implemented during the current presidential term by FHFA in collaboration with Treasury utilizing their existing legal authorities. Congress could build on these reforms to develop an integrated national housing finance policy that accounts for the Federal Housing Administration, the Department of Veterans Affairs, and Rural Housing Service, and emphasizes (i) affordable housing, (ii) safety and soundness, and (iii) universal and fair access to mortgage credit for all Americans. (1)

As can be seen from the last paragraph, GSE investors are trying to use the logjam in the Capitol to their own advantage. They are arguing that because Congress has not been able to get real reform bill passed, it makes sense to implement a reform plan administratively. There is nothing wrong with such an approach, but this plan would benefit investors more than the public.

My takeaway from this blueprint is that the longer Fannie and Freddie remain in limbo, the more likely it is that special interests will win the day and the public interest will fall by the wayside.

Mortgage Moves in 2017

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MortgageLoan.com quoted me in Three Mortgage Moves o Consider in 2017. It opens,

How much do you think about your mortgage? Probably not much at all.

But financial professionals say that homeowners can save money, lower the amount of interest they pay each year and maybe free up some extra cash, all by tweaking their mortgages, whether they are paying off a conventional loan, FHA mortgage or VA loan.

If you’ve gotten into the habit of ignoring your mortgage, it’s time to take a look at what is probably your biggest financial obligation. Here are three suggestions from mortgage lenders and financial pros to use your mortgage to better your finances in 2017.

Going Short-Term

Are you paying off a 30-year, fixed-rate mortgage? It might be time to refinance that loan, not for the benefit of lower interest rates but to turn your mortgage into one with a shorter term.

Turning your loan from a 30-year version to a 15-year one will result in a higher monthly mortgage payment. But you’ll also dramatically reduce the amount of interest you’ll have to pay over the life of your loan. Mortgage rates with 15-year, fixed-rate loans are lower than the ones attached to longer-term loans, too.

“Going shorter term is a big financial benefit,” said Jason Zimmer, president of Lockport, Illinois-based Parlay Mortgage. “The 15-year loan is where you want to go. You can save so much money.”

Look at the financial difference: Say you are paying off a 30-year, fixed-rate mortgage of $250,000 at an interest rate of 4.09 percent. Your monthly payment, not including property taxes or insurance, will be about $1,200. But you’ll pay a total of $184,000 in interest if you take the entire 30 years to pay off your loan.

But say you now owe $225,000 on that same loan. If you refinance that amount to a 15-year, fixed-rate mortgage with an interest rate of 3.33 percent, your monthly payment, not including taxes and insurance, will jump to just under $1,600. But if you take the full 15 years to pay off this loan, you’ll only pay about $61,000 in interest, a huge savings from that 30-year loan.

“Lots of people don’t consider a 15-year, fixed-rate mortgage for a refinance because they knew they could not afford one when they bought their house in the first place,” said David Reiss, professor of law at Brooklyn Law School in New York City. “But if you have had your house for more than a couple of years, and your income has increased in the interim, refinancing into a 15-year, fixed-rate mortgage can be a great way to get a lower interest rate and pay a lot less interest in the long run.”