Tag Archives: Wall Street Journal

Jumbo Mortgage Deals Ahead

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huge_fish

The Wall Street Journal quoted me in Attention, Jumbo-Mortgage Shoppers: Deals Ahead (behind paywall). It opens,

With more lenders offering jumbo loans, borrowers have more bargaining power to negotiate the best terms.

During the first quarter of this year, 20.3% of all first mortgages originated were jumbo loans, according to Guy Cecala, CEO and publisher of trade publication Inside Mortgage Finance. That’s up from 18.9% last year and 5.5% in 2009, just after the financial crisis.

“At the end of the day, it’s all just supply and demand for capital,” says Doug Lebda, founder and CEO of LendingTree, an online financing marketplace. “Over 60% of people still don’t think they can shop for loans—even rich people. But everything is negotiable.”

Since only a small percentage of jumbo loans are sold to investors, the “vast majority are winding up on bank balance sheets,” according to Michael Fratantoni, chief economist of the Mortgage Bankers Association. But because these loans are held in a lender’s portfolio and aren’t subject to the guidelines of investors purchasing them—as opposed to conforming loans, which must comply with hard-and-fast parameters established by Fannie Mae and Freddie Mac—terms and underwriting standards vary widely.

“Borrowers may find more flexibility with lenders that keep mortgages on their own books,” says David Reiss, a Brooklyn Law School professor who specializes in real estate. “These lenders can usually take a more individualized approach to underwriting than a lender that sells its mortgages off to be securitized with a whole bunch of other mortgages.”

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Here are a few things to consider when negotiating a jumbo loan:

• Prepare before applying. “Jumbo lenders are focusing on borrowers with good credit and resources,” said Brooklyn Law School’s Mr. Reiss. Before applying, borrowers should clean up their credit report and keep debt in check. Lenders look at total debt-to-income ratio and overall credit to determine how strong a buyer is; the stronger the buyer, the more the negotiating power.

• Create a relationship. “If you’re a substantial borrower with a substantial relationship with a bank—one of our wealth clients—the guidelines might get a bit more flexible,” saysPeter Boomer, executive vice president of PNC Mortgage, a division of PNC Bank NA.

• Don’t hesitate to negotiate. “They are the customer, and the lender is not doing them a favor,” says Mr. Lebda, of LendingTree. “People are ecstatic when they get approved for a mortgage, but they actually need to think about it the other way—that the lender should be ecstatic for giving them a loan.”

Best Real Estate Investing Advice Ever

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I was interviewed on the Best Real Estate Investing Advice Ever with Joe Fairless podcast. The interview, How to Negotiate the Interest Rate on Your Mortgage Down…A LOT, went live today. The teaser for the show reads,

Today’s Best Ever guest shares just how important it is to do you due diligence with everything. From negotiating the interest rate on your mortgage rate down to an unheard of number, to learning about different zoning codes and what they mean to you.

The interview runs about half an hour. I always like to be invited to speak on a long-form program because I can go into greater depth about things that I think are important. I also got a chance to discuss some topics that usually only come up in my Real Estate Practice class.

The Best Ever Real Estate Investing Advice Ever show is one of the highest rated investing podcasts on iTunes, up there with Suze Orman, Jim Cramer, Marketplace, Motley Fool, NPR and the Wall Street Journal. The show is sold with some hype, but it was a substantive discussion, geared to the newish real estate investor. All in all, this was a fun interview to do.

 

 

Reiss on Financial Crisis Litigation

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Law360 quoted me in Feds’ Moody’s Probe Marks Closing Of Financial Crisis Book (behind a paywall). It opens,

A reported investigation into Moody’s Investors Service’s ratings of residential mortgage-backed securities during the housing bubble era could be the beginning of the last chapter in the U.S. Department of Justice’s big financial crisis cases, attorneys say.

Federal prosecutors are reportedly making their way through the ratings agencies for their alleged wrongdoings prior to the financial crisis after wringing out more than $100 billion from banks and mortgage servicers for their roles in inflating the housing bubble. But the passage of time, the waning days of the Obama administration and the few remaining rich targets likely means that the financial industry and prosecutors will soon put financial crisis-era enforcement actions behind them, said Jim Keneally, a partner at Harris O’Brien St. Laurent & Chaudhry LLP.

“I do look at this as sort of the tail end of things,” he said.

With the ink not yet dry on a rumored $1.375 billion settlement between the Justice Department, state attorneys general and Standard & Poor’s Ratings Services, prosecutors have already reportedly turned their attention to the ratings practices at S&P’s largest rival, Moody’s, in the period leading up to the 2008 financial crisis, according to The Wall Street Journal.

The federal government and attorneys general in 19 states and Washington, D.C., had launched several suits since the financial crisis accusing S&P of assigning overly rosy ratings to mortgage-backed securities and other bond deals that ended up imploding amid a wave of defaults, causing a cascade of investor losses that amounted to billions of dollars.

Although S&P originally elected to fight the government, it ultimately elected to settle. The coming $1.375 billion settlement arrives on top of an earlier $77 million settlement with the U.S. Securities and Exchange Commission and the attorneys general of New York and Massachusetts over similar claims.

Moody’s is reportedly next in line, with Justice Department investigators reportedly having had several meetings with officials from the ratings agency that looked into whether the Moody’s Corp. unit had softened its ratings of subprime RMBS in order to win business as the housing bubble inflated.

Both the Justice Department and Moody’s declined to comment for this story.

The pursuit of Moody’s as the S&P case wraps up follows a pattern that the Justice Department set with big bank settlements for the financial crisis.

“You would expect that they would sweep through, so to speak,” said Thomas O. Gorman, a partner with Dorsey & Whitney LLP.

After reaching a $13 billion deal with JPMorgan Chase & Co. in November 2014, the Justice Department quickly turned its attention to Citigroup Inc. and Bank of America Corp., which reached their own multibillion-dollar settlements last summer.

Now prosecutors are in talks with Morgan Stanley about another large settlement, according to multiple reports.

All of those deals follow the $25 billion national mortgage settlement from 2012 that targeted banks’ pre-crisis mortgage servicing practices.

Time may be catching up with the Justice Department more than six years following the height of the crisis, even after the Justice Department began employing novel uses of the Financial Institutions Reform, Recovery and Enforcement Act, a 1989 law passed following the savings and loan crisis, Keneally said.

Using FIRREA extended the statute of limitations on financial crisis-era cases, allowing for prosecutors to develop their cases and take a systematic approach. Even that statute may have run its course, as it pertains to the crisis.

“The passage of time is such that you have evidence that no longer exists,” Keneally said.

Politics may also play a role as the financial crisis recedes from memory and the next holder of the presidency potentially looks to move forward, he said.

“We’re getting to the end of the Obama administration,” Keneally said. “I think it’s going to be hard for any administration to ramp things up again.”

And that has some wondering whether the Obama administration and the Justice Department under Attorney General Eric Holder followed the correct path.

“The Justice Department and the states’ attorneys general collected far more in their penalties and settlements than anyone could have imagined before the financial crisis,” said Brooklyn Law School professor David Reiss.

Those large settlements may give investors and top management pause when it comes to questionable activity. However, because no traders or other top banking personnel went to prison, questions remain about what deterrent effect those settlements will have on individuals.

“Big institutions are now probably deterred from some of this behavior, but are individuals who work on these institutions deterred?” Reiss said.

Reiss on Payday Lending Regs

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CRM Buyer quoted me in CFPB May Rein In Payday Lending. The story opens,

The Consumer Financial Protection Bureau is considering various approaches to reforming the payday loan industry, The Wall Street Journal reported on Sunday.

The bureau is concerned about the short-term, high-rate debt consumers take on, sources said.

States typically have been responsible for regulating payday loan company practices. If the CFPB should take action, it would be the first time federal regulations were applied to this niche in the financial sector.

Consumer advocates have long been calling for some restraints to be imposed on providers of these loans. Interest rates tend to be astronomical, and borrowers frequently are unable to repay the loans within the prescribed time period. What happens more often than not is that they roll their loans into the next pay period, committing to a never-ending series of high-interest, short-term contracts.

The CFPB reportedly is considering approval of a “vanilla” type of short-term loan with underwriting criteria that would establish whether the borrower actually would be able to repay it — an approach similar to the mortgage qualification requirements put in place after the financial crash.

That is not the only model reportedly under consideration, however, and the CFPB might waive such underwriting requirements for borrowers who don’t tap payday advance loans very often, the Journal reported.

Pushback can be expected from the industry, which has been under fire for years. The payday lenders’ argument is straightforward: With so many Americans living from paycheck to paycheck, their services are necessary to meet emergencies.

Defanging the Predator

“There is clearly a demand for payday lending by unbanked consumers who have needs for short-term credit but do not have access to credit cards, home equity loans or other loan products,” said David Reiss, professor of law at Brooklyn Law School.

“At the same time, payday lending repayment terms are often seen as onerous and predatory, with annual interest rates that run in the hundreds of percent and with many customers stuck in a cycle where they roll over their high cost debt from one month to the next, accruing more interest and fees along the way,” he told CRM Buyer.

Given the mission of the Consumer Financial Protection Bureau, Reiss said, it is natural for it to attempt to develop a regulatory structure for the industry that would allow it to function — but not extract predatory profits from its customers.

Misleading CoreLogic Report on Qualified Mortgage Rules

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The Wall Street Journal reported (behind its paywall) uncritically on a recently released CoreLogic report about the supposed impact of the new Qualified Mortgage rules issued last month by the CFPB on the mortgage market.  The report is very flawed.

The report states that “the issuance of final Dodd-Frank related regulations now underway represent a watershed moment that will impact the size of mortgage market [sic] and performance for many years to come.” (3) In particular, it argues that the new CFPB Qualified Mortgage and Qualified Residential Mortgage rules “remove 60  percent of loans.” (4)

The methodology here is superficially sophisticated, employing a

waterfall approach . . . where loans that do not qualify for QM were sequentially removed.  The loan features that do not meet the QM requirements include loans with back-end [Debt To Income] above 43 percent, negative amortizations, interest only, balloons, low or no documentation, and loans with more than a 30 year term. (3)

The report thus implies that the QM regulations will reduce the number of mortgages originated by nearly two thirds.  But the report ignores the obvious dynamics that one would find in a well-functioning market.  Once certain products are banned  (let’s say interest only mortgages), borrowers will have at least three options.  First, they can take the path implied by CoreLogic and exit the mortgage market thereby becoming one of the supposedly 60 percent of loans that are “removed” from the market.  Or, they can seek a mortgage product that complies with the new rules (perhaps an ARM) that will allow them to buy the home of their choice.  Or, they can choose to buy a cheaper house with a mortgage that complies with the rules and is affordable to them.  It is very likely that many borrowers will go with the second or third option, resulting in a different but not severely diminished mortgage market.

Yes, the new rules will change the types of mortgages that are available.  Yes, loans will be more conservatively underwritten to ensure that they are sustainable.  Yes, home prices will need to find a new equilibrium.  But no, CoreLogic, the new rules will not destroy the mortgage market.