The Federal Housing Finance Agency (FHA) has unveiled a plan for revamping Fannie Mae and Freddie Mac with a near-term goal of making them more efficient and a long-term goal of reducing the housing market’s reliance on the federally-supported mortgage financing giants.
The plan, outlined in a white paper, is to design a mortgage finance system “unfettered by legacy processes and systems and capable of working well with or without various degrees of government involvement. The white paper outlines an incremental approach that calls for scaling back the GSEs in phases, expanding the scope of the changes over time with input from policymakers, regulators and industry executives.
"The release of this white paper is an important step in laying the groundwork for the future structure of the housing finance system," Edward DeMarco, acting director of the FHFA, said in a press release."
However this new mortgage finance system is structured, the FHA says, it would have to include "an operational mechanism that connects capital market investors to borrowers by bundling mortgages into securities and tracking payments," and it would have to continue to perform the role the GSEs have performed in the past – maintaining secondary market liquidity – while encouraging broader participation by the private sector.
"The goal is to offer benefits to the broader housing finance market, while not limiting market choices or valuable independent innovations," the paper explains.
Before the economic downturn and accounting irregularities forced the GSEs into government receivership, critics had long complained that their quasi-governmental structure, allowing them to operate like private companies but with implied federal support, gave Fannie and Freddie an unfair competitive advantage that allowed them to dominate the secondary market. Plans to restructure the companies were put on hold, as they became a centerpiece of Administration efforts to bolster the decimated housing market.
Recent reports indicate that the market continues to rely heavily on government housing finance programs. Government-backed FHA-insured and VA-secured loans represented nearly half of all the mortgages originated last year, according to the most recent analysis of the Home Mortgage Home Mortgage Disclosure Act (HMDA) data by the Federal Reserve (Fed).
FHA loans represented more than 30 percent of the origination total – down 5 percent compared with 2010 but nearly 25 percent higher than in 2007, reflecting lower down payments requirements and less restrictive underwriting standards compared with conventional loans. "Although the total number of home-purchase loans has fallen substantially since 2005, virtually all of the decline has involved conventional lending," the Fed report notes.
The Fed’s HMDA analysis identified other trends consistent with past reports, including higher loan denial rates and a larger percentage of high-cost mortgages for minority borrowers. Some industry executives said the data indicate that lenders are trying to avoid fair lending land mines that could be triggered by making higher-cost loans to higher-risk (low-income) borrowers.
The fact that loan origination and denial rates for minorities and lending totals in minority neighborhoods were relatively flat between 2010 and 2011 reflects both caution and “relative steadiness and stability,” Kevin Petrasic, a partner at Paul Hastings, told American Banker, reasonable responses, he suggested to both the economic downturn and to fair lending concerns.
Consumer advocates read the numbers differently. Denial rates for refinance applications were 40 percent higher for Blacks and 30 percent higher for Hispanics, John Taylor, president of the National Reinvestment Coalition (NCRC) noted, while minorities continue to rely disproportionately on government-sponsored loans. This doesn’t indicate that lenders are behaving cautiously and reasonably, Taylor told American Banker. “[It] suggests that the private market is doing a better job of serving white borrowers than borrowers of color.”
DISCOVERING A REFUND
What’s in your wallet? If the answer is Discover rather than Capital One (the source of that advertising slogan), the answer may be a portion of the $200 million regulators have ordered the company to refund to consumers, as part of the penalty for deceptively marketing credit protection services to them. Discover sold the services to an estimated 4.7 million customers but only those who ordered the services but failed to use them will be eligible for the refunds, the regulators explained.
The Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation slammed the company for telemarketing campaigns that told credit card customers, or allowed them to believe that payment protection and wallet protection services were no-cost benefits, when in fact, Discover added charges for those services to customers’ cards.
While neither admitting nor denying guilt, the company agreed to refund the charges to more than 3.5 million cardholders who purchased credit protection services over the phone and to pay an additional $14 million in civil penalties to banking regulators. The company also agreed to cease misleading telemarketing practices, to fully disclose the costs of the services it offers, and to strengthen its audit and compliance programs.
This is the third major enforcement action the CFPB has initiated this year charging a credit card issuer with unfair marketing practices. A joint action with the Comptroller of the Currency required Capital One to refund $150 million to consumers and pay $60 million in regulatory fines. A separate complaint accusing American Express of violations (improper debt collection practices and age discrimination among them) required that company to pay more than $110 million in fines. "No one should have had any doubt beforehand that the regulators were actively investigating every interaction between card companies and consumers,” Jared Seiberg, an analyst with Guggenheim Securities, said of the American Express consent agreement. “But if you had any doubt, this erases it."
SOFTENING THE EDGES
Fannie Mae and Freddie Mac are softening some of the sharper edges of their new repurchase rules. Clarifying guidance expands the list of loans that will be exempt from the repurchase requirements if borrowers default, to include loans that have performed for 36 consecutive months. The guidance also indicates that the GSEs will review loans for underwriting compliance up front instead of after borrowers have defaulted.
Although the rules will apply prospectively, to loans sold to the GSEs after December 31 of this year, they will address the uncertainty about which lenders have been complaining, David Stevens, president of the Mortgage Bankers Association (MBA), said.
"The plan outlined today should give lenders the confidence they need to help more qualified borrowers," Stevens told Reuters.
"To the extent that the representation and warranty exposures have been limiting access to credit, (the new standards) should help," agreed Julia Gordon, director of housing finance and policy for the Center for American Progress, who was quoted in the same Reuters article. But it is also likely, she said, that the prospect of up-front scrutiny “will make lenders equally uneasy about making loans."
While lenders are generally pleased with the change in the repurchase policy, they are likely to be less thrilled with a 10 basis-point increase in the guarantee fees Fannie and Freddie charge on the single-family mortgages they purchase from loan originators. The increase is part of a broader effort to encourage more private sector participation in the secondary mortgage market (see related item), Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), explained in a press release.
“These changes will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital,” DeMarco said.
As the primary overseer of the GSEs, which are operating under government conservatorship, the FHFA dictates the policies they follow.
This is the third consecutive guarantee fee increase the FHFA has mandated, following increases of 26 basis points in 2010 and 28 basis points in 2011.
ON A ROLL
The Mortgage Electronic Registration System (MERS) appears to be on a roll. After finding itself uncomfortably embroiled in the robo-signing scandal and on the losing end of several law suits alleging foreclosure-related improprieties, MERS has been quietly racking up a series of courtroom victories upholding the electronic origination and loan documentation service it provides.
The Nevada Supreme Court ruled recently that a financial institution can foreclose if it holds the note and obtains a proper mortgage assignment from MERS. MERS officials said the decision in Edelstein v. Bank of New York will establish “a statewide precedent” clarifying the foreclosure authority of a deed of trust beneficiary.
This is the latest in a series of rulings that provide judicial counterweight to decisions holding that a foreclosing entity must physically hold both the note and the mortgage –rulings that invalidated foreclosure actions in which the documentation assigning the mortgages was either nonexistent or unclear. In many of these cases, the originating lenders sold the loans and named MERS as the nominee for the purchasing entity and its successors.
In one recent action favoring MERs (Crutcher v. CitiMortgage), a District Court in Atlanta echoed the Nevada decision, ruling that the registry has the authority to foreclose as long as it is listed in the security deed as nominee for the original lender and any of its successors. The plaintiff borrower argued that only the lender holding the note at the time had the authority to foreclose, but the court disagreed, ruling that "as grantee, MERS has the power of sale and the right to exercise any or all of [Lender’s and Lender’s successors and assigns’] interests, including, but not limited to, the right to foreclose and sell the property; and to take any action required of lender including, but not limited to, releasing and canceling this security instrument."
A district court judge in Arkansas dismissed a class action suit accusing MERS of illegally failing to pay recording fees, ruling that state law does not require the recording of mortgage assignments. An Iowa District Court cited the same rationale in siding with MERS in a similar suit.
"As clearly described in this ruling, recording statutes are intended to give subsequent purchasers and lenders notice of recorded liens and to allow creditors to give notice of their secured interest in the property," Janis Smith, vice president for corporate communications for MERSCORP, the parent of MERS, said in a press release commenting on the Iowa ruling. "Use of the MERSSystem to register mortgage loans fulfills the purpose of the recording statutes,” she added. “MERS mortgages are recorded in the public land records and MERS members pay recording fees when the mortgage is recorded."
MORE GOOD NEWS
The stream of good news about the housing market has continued with two recent reports. The first: Consumer credit scores are improving, or at least, getting less bad than they had been. Only 14.2 percent of consumers had scores in the lowest FICO range (300-549) this year – that’s 1.4 million fewer than last year, according to a recent analysis by the company. The number of consumers in the top range (800 -850) also increased, putting 18.6 percent of them in that category, and suggesting that even with tighter underwriting standards, more borrowers may be able to qualify for mortgages.
Also in the good news category: Housing economists are becoming increasingly optimistic about the outlook for home prices. The consensus view in the most recent Home Price Expectations Survey produced by Zillow anticipates a 2.3 percent increase this year. Just three months ago, the consensus was that prices would continue to decline through year-end. Economists are also predicting that prices will increase steadily through 2016.
“This is further evidence that we’re seeing a true recovery in the housing market,” Zillow’s chief economist, Stan Humphries, told DS News. “Not since mid-2010 – in the midst of the homebuyer tax credits – have we seen this group so bullish on housing. It’s refreshing to see this optimism at a time when the market seems to be making an organic recovery, in the absence of an artificial stimulant like the tax credits.”
Lest we be accused of a Pollyanna complex, we’ll also report this not-so-good news: Pressed by limited employment prospects and the financial pressure created by outstanding student loans, more young adults are continuing to live with their parents instead of establishing households of their own. An analysis of recent Census data by the Minnesota Population Center, found that the number of 26-year-olds living with their parents has increased by 46 percent since 2007. Approximately 25 percent of young adults between the ages of 18 and 30 were living at home last year, an increase of almost 4 percent since 2010, according to this report.
The survey found that most of the young people land their parents don’t object to the multi-generational living arrangement and many said they welcome it – at least for now. But it does not bode well for the housing outlook. The approximately 21 million young adults living with their parents are not in the market to rent apartments or to purchase homes.
