Since the beginning of this year, financial industry executives have been trying to assess the impact of the mortgage-related rules the Consumer Financial Protection Bureau has been issuing in a steady and widening stream. Now they are wondering which of those rules will remain in place and considering the prospect that the agency’s structure and powers may be radically changed.
Those questions stem from a federal appeals court ruling that the recess appointments President Obama made to the National Labor Relations Board (NLRB) were invalid because the Senate was technically still in session. The same reasoning will apply to CFPB Director Richard Cordray, who was also appointed during that recess, to avoid what would have been a tough battle to win Senate confirmation.
Congressional observers are speculating that lawmakers who opposed his nomination will use the court decision as leverage to reshape the CFPB, which they opposed bitterly when it was included in the Dodd-Frank Financial Reform legislation, and tried to hamstring by refusing to consider any nominees to head the agency – hence President Obama’s recess appointment of Cordray.
Although the Obama Administration is expected to appeal the decision on the recess appointments, the CFPB, the NLRB and other affected agencies will remain in legal limbo during that lengthy process, raising questions not only about their past decisions but about any future decisions and future rulemaking they undertake.
Because of that prospect, some industry observers predict that President Obama will cut a deal to secure Cordray’s nomination (which he has resubmitted) in exchange for structural changes in the agency that Republicans have sought.
Primary among those changes is the creation of a bipartisan commission to oversee the agency, which critics say has too much power and too little Congressional oversight ― a point House Financial Services Committee Chairman Jeb Hensarling (R-TX) emphasized in a press statement.
"Congress and the Administration should take this opportunity to make common sense reforms to the CFPB so it is transparent and accountable to the American people” Hensarling said. “At a bare minimum, the CFPB should be governed by a bipartisan commission — which is how other federal agencies charged with consumer or investor protection operate."
In the most recent of what will likely be multiple strategic moves on both sides, several Republican Senators have submitted a bill that would block the transfer of any funding from the Federal Reserve to the CFPB until a director has been confirmed.
While Republican lawmakers are predicting that Obama will be compelled to make some concessions on the CFPB, some analysts are saying that outcome isn’t inevitable. For one thing, they note, the court decision on recess appointments involved only the NLRB – it did not specifically name the CFPB. “So while the NLRB case creates a very unfavorable precedent for the CFPB, there's no jurisdiction and no specific finding that Richard Cordray was inappropriately appointed,” Thomas Vartanian, a partner in Dechert, LLP, told American Banker.
Additionally, Vartanian and others note, Cordray’s nomination is still pending in the Senate, where Democrats have signaled they are still prepared to fight for it.
"I don't see the president withdrawing Cordray, and I don't see them doing anything but continuing to take this on a fight," Mark Calabria, director of financial regulation studies at the Cato Institute, a conservative think tank, told American Banker. "The president has done a very good job on the issue, painting Republicans as anti-consumer, and I don't think Republicans have done a very good job at responding to that criticism,” he added. “If there's a shift to where the public sees this issue as about the Constitution and executive power, then I think that starts playing against the president. But I don't think we're there yet."
FIXING A ‘BROKEN’ SYSTEM
The wrangling over the President Obama’s recess appointments is kicking up considerable legal dust, but it appears unlikely to slow the flood of regulations flowing from the Consumer Financial Protection Bureau (CFPB). Continuing its focus on the mortgage market, the agency has published comprehensive rules governing mortgage servicing practices ranging from the way loan officers are compensated, to how they communicate with borrowers and the procedures they must follow when they foreclose.
The goal is “to fix a broken system” and to ensure that borrowers are treated fairly and “with dignity,” CFPB Director Richard Cordray said during a recent field hearing introducing the new rules.
One of the major symptoms of that ‘broken’ system, Cordray and others contend, was a compensation structure that encouraged loan originators to “steer” borrowers toward higher-cost, higher-risk loans. The rules prohibit linking compensation to the interest rate or other loan term. They also bar “dual compensation” arrangements, in which originators are paid both by the borrower and a third party.
The rules also establish uniform foreclosure procedures, targeting the abuses that led to a multi-billion-dollar settlement agreement involving the nation’s largest loan servicers. Among other key provisions, the new regulations:
- Prohibit “dual tracking” – a common practice in which servicers proceeded with foreclosures while simultaneously negotiating loan modifications with delinquent borrowers.
- Require servicers to wait until loans are at least 120 days delinquent before beginning a foreclosure action.
- Require services to follow a “fair review process” that includes notifying borrowers of loss mitigation options, such as a loan modification, before initiating a foreclosure.
- Notify borrowers in writing if their modification requests are denied, explaining the reason for the denial and informing them of their possible right to appeal.
"Many servicers failed to provide the basic level of customer service that borrowers deserve, costing them money and dumping them into foreclosure," Cordray said at the field hearing. "Dealing with sloppy mortgage servicing became a frustrating nightmare….Our new rules… are designed to give strong protections to struggling borrowers. In this market, as in every other, consumers have the right to expect information that is clear, timely, and accurate,” he added. “[And] when it comes to mortgage servicing, they also deserve a fair process. This is all the more true given the high stakes for consumers and the central importance of homeownership in our society.”
Although more restrictive in some respects, the rules were generally in line with what industry executives had expected, raising concerns they have expressed in the past, about compliance costs and administrative burdens that some say will force smaller companies out of the servicing business.
Although the uniform standards will generally benefit the industry, a report by Fitch Ratings concluded, the compliance requirements “will further increase compliance costs….extend timelines, and potentially drive further consolidation within mid- to smaller servicers.”
"So many of these changes go right to the pocketbook,” Diane Pendley, managing director at Fitch, told Housing Wire. “I would not be surprised if we don't see an additional group of servicers, or their parent firms, making the decision that the liabilities, the oversight and the costs make it prohibitive for them to stay in the business."
San Bernardino Country, which attracted national attention last year when lawmakers said they were considering using eminent domain as a tool to deal with underwater mortgages have attracted attention anew with their decision not to pursue that plan.
Members of the Joint Powers Authority ― a commission appointed to consider the idea on behalf of the county and two of its cities ― unanimously rejected the proposal, which called for seizing delinquent loans and reducing the principal balance so borrowers could avoid foreclosure.
Commission members cited lack of public support and concerns about threatened litigation and the potential harm to the housing and mortgage markets as the primary reasons for their decision.
"It introduced risk into the market that we couldn't quantify," Greg Devereaux, who chaired the five-member commission, told the Los Angeles Times. "It wasn't a decision that a board like this should make unless there was overwhelming support in the community for going forward with that solution, and assuming that risk; that support never materialized."
Chicago Mayor Rahm Emanuel has also publicly rejected the idea, which is being floated nationally by Mortgage Resolution Partners (MRP), a California investment firm that has proposed eminent domain as a tool that can help local communities deal with the economic damage foreclosures inflict on neighborhoods and municipalities. The company would serve as an intermediary, collecting fees for syndicating the loans local governments seize.
MRP officials said they were disappointed by the San Bernardino decision but continue to explore the idea with more than 30 other jurisdictions nationwide.
Mortgage industry executives, on the other hand, were relieved by the outcome of the San Bernardino deliberations, which they had been monitoring closely, fearful that the idea, once implemented, may spread.
"We are encouraged" by the no vote, Timothy Cameron, managing director and head of the Asset Management Group of the Securities Industry and Financial Markets Association. "The unprecedented, potential use of eminent domain would cause severe damage to struggling housing markets and is likely unconstitutional on its face," Cameron told the LA Times.
An improving housing market is spurring an increase in home buying and a surge in fraudulent mortgage applications. Kroll Factual Data reported a 1.1 percent increase in the applications it reviewed in the third quarter of last year compared with the second quarter but he increase was as high as 50 percent in some of the markets the company targeted. And while fraud alerts varied considerably in different MSAs, Kroll said, increases appeared in most areas of the country.
“This spike in potential fraud is troubling, coming at the same time the mortgage industry is beginning to turn the corner," Kroll President Rod Bazzani said in a press release. “The fact that red flags are rising in every area of the country highlights the continued need for lenders to remain vigilant,” he added.
One New England MSA – Providence-Fall River-Warwick, RI – was among the 10 markets with the sharpest increases in fraud, ranking ninth with an 18 percent jump between the second and third quarters. Two Connecticut MSAs – Bridgeport-Milford and Stanford – were among the top 10 reporting the largest quarterly declines in fraud alerts. Bridgeport ranked second, with a decline of 18.59 percent, behind Champaign-Urbana, ILL with a decline of nearly 20 percent.
Flint, MI had the worst fraud experience, reporting an increase of more than 50 percent. Columbia, MO and Lancaster, PA ranked second and third with increases of 29.7 percent and 28.83 percent, respectively.
Another analysis, measuring mortgage fraud related to property valuation, identity, occupancy and employment/income, but not limited specifically to loan application fraud, found that fraud reports declined nationally in the third quarter, falling to the lowest level in the past two years. This index, compiled by Interthinx, was 7.7 percent below the second quarter and 4.5 percent lower than the same quarter in 2011.
Purchasers of new homes, who had embraced a ‘smaller is better’ philosophy during the housing downturn have apparently decided that bigger is better again. After declining for five years, the average size of newly built homes increased by 3.7 percent in 2011 compared with the previous year, according to data compiled by the Census Bureau.
A recent survey by PulteGroup confirmed that trend, finding homebuyers in all age groups expressing a preference for larger homes. That includes baby boomers, now at an age and stage where conventional wisdom suggests they should be thinking about down-sizing. Only 28 percent of respondents 55 and older said they expect their next home to be smaller.
“Across all demographics…,[respondents] said they want their next house to be the same size or larger,” Valerie Dolenga, a spokesman for PulteGroup, told DS News. “An overwhelming majority – 84 percent – said they don’t intend to downsize. I don’t think the McMansion is dead,” she added. “People want that square footage.”
Younger households need space to accommodate growing families; for baby boomers, Dolenga said, the issue is “stuff.”
“They have a lot of stuff …they don’t want to let go of…and stuff has to have a place to go.”