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The Consumer Financial Protection Bureau is planning to change the rules of the mortgage lending game in ways large and small.

Preliminary reports indicate that the new rules the agency is proposing will require lenders to charge flat origination fees instead of basing them on the size of the loan, eliminate incentives that encourage originators to steer borrowers to higher-cost loans, and require lenders offering discount points to reduce the loan rate by at least a minimum amount (which the rules will specify) as part of the package.

"We want to bring greater transparency to the market so consumers can clearly see their options and choose the loan that is right for them," Richard Cordray, the agency's director, told reporters recently.

The agency is also expected to propose standardized training and screening procedures – including criminal background checks – for all loan originators, including bank loan officers, independent mortgage brokers and employees of non-bank mortgage companies.

The impending mortgage rules stem from a provision of the 2010 Dodd-Frank financial reform legislation that created the CFPB and directed it, among other tasks, to address mortgage fees and the qualifications of loan originators.

The CFPB is also working on regulations defining “qualified mortgages”—another directive included in the financial reform law and the focus of an intense and ongoing debate that has divided the banking industry. At issue is the extent to which lenders that meet the qualified mortgage standards will be shielded from litigation initiated by borrowers or investors.

The banking industry was initially united in the position that the regulations should provide an absolute “safe harbor” for lenders originating qualifying loans; consumers have argued that borrowers should be able to sue lenders for abusive practices, regardless of whether the “qualified mortgage” standards.

Larger lenders, represented by the influential Clearing House Association, have recently modified their stance, supporting more limited protection (a “rebuttable presumption” rather than a safe harbor) in exchange for a broader definition of qualifying mortgages. In a March 7th letter to Cordray, the trade group said this approach would Clearing House Association, which represents the largest lenders. This step would “combine prudent lending with less litigation, benefiting homeowners, investors and lenders alike.” Leading consumer groups, including the Center for Responsible Lending and the Consumer Federation of America, also signed that letter.

“It’s about ensuring that lenders have a strong incentive to fulfill all the obligations they’re required to fulfill,” Barry Zigas, director of housing policy for the federation, told Bloomberg News in a recent interview. “The consumer who is disadvantaged does have redress,” he added, “but it’s not a casual redress.”

Other industry trade groups insist that broader “safe harbor” protection is essential; without it, they say, lenders will increase loan rates to offset their litigation fears. It really comes down to a big bank-small bank issue, Camden Fine, president of the Independent Community Bankers of America, told Bloomberg.

“Big banks know they have the resources to fight any litigation that may come out of these regulations. Community banks do not.”

HEADLINE SURPRISE

The financial headlines haven’t provide many surprises of late – at least, not many pleasant ones. But here’s one that is worth reporting: “With $2.7B Profit, Fannie Mae Ends Q1 Without Drawing Taxpayer Funds.” That’s not just surprising, it’s astounding, given recent history, which has required massive infusions of federal aid for both Fannie Mae and Freddie Mac since they were placed under federal conservatorship four years ago.

Fannie Mae officials attributed the “significant improvement” in the company’s financial performance to a steady decline in credit-related expenses and to its ability to shed some of the foreclosed properties its REO portfolio.
Freddie Mac also reported a first quarter profit of $577 but it wasn’t enough to offset the dividend due on the government assistance it has received. As a result, the company is seeking an additional $19 million in funding from the Treasury Department.

“In the first quarter, Freddie Mac sharpened its focus on building value for the industry, homeowners and taxpayers by aligning its resources and internal business plans to meet the goals and objectives laid out in our new Conservatorship Scorecard and Strategic Plan,” Chief Executive Officer Charles Haldeman Jr. said in a press statement. “Today, we are executing against that plan, working with our regulator to build a new infrastructure for the housing finance system and establish a path for shifting risk to private investors.”

Far less surprising than Fannie Mae’s return to profitability were reports that the Obama Administration does not plan to unveil its plans for restructuring the housing GSEs “any time soon.” That word came from HUD Secretary Shaun Donovan, who told a Congressional committee the Administration has not set a date for submitting the proposal, on which it has been working for the past two years.

Lawmakers also appear to be in no hurry to tackle reforms, even though Congressional critics have been demanding action on Fannie and Freddie since the government seized them in 2010. The central role the GSEs have played and continue to play in bolstering the housing market since its collapse have made even their harshest critics reluctant to pursue them too aggressively.

The Treasury Department outlined several options for restructuring the GSEs in a white paper drafted more than a year ago and industry analysts say reforms will likely incorporate some of these ideas. But they also agree that significant action isn’t likely from the Administration or Congress until after the November elections.

HOPES RISING

Housing forecasts, at least some of them, are becoming more optimistic. TransUnion is predicting that mortgage delinquency levels are stabilizing after declining for three consecutive quarters. Delinquencies increased in only 8 states while improving in 73 percent of metropolitan areas, according to the company’s first quarter report. Only about one-third of metropolitan areas reported improvements in the final quarter of last year.

"To see that quarter over quarter, and year over year, more homeowners were able to make their mortgage payments is certainly welcome news," Tim Martin, group vice president of U.S. Housing in TransUnion's financial services business unit, told Bloomberg News. Although delinquencies are still well above pre-recession “norm,” he acknowledged, TransUnion thinks the recent downward trend “should mark the start of consistent improvement each quarter," as the economy continues to strengthen and more borrowers are able to refinance through government programs targeting homeowners with negative equity.

Fiserv has equally positive, though modest expectations for home prices, predicting slow, but steady increases in the second half of this year, following a series of disappointing, steeper-than-expected declines. Company analysts see signs of improvement in the fourth quarter Fiserv/Case-Shiller price Indexes, in which prices increased slightly or were unchanged in 70 of the 384 in of the metropolitan areas tracked. Declines in 122 of the markets were small – less than 2 percent.

That leaves 122 metropolitan areas where prices where prices fell by more than 2 percent – with double-digit declines ins several of them, and the index puts average prices 4 percent below their year-ago level. But that “does not tell the full story of stabilization and recovery,” David Stiff, chief economist for Fiserv, said in a report analyzing the data. “Nearly all non-price metrics – existing home sales, rising home order volumes, increased spending on home improvement, a jump in multi-family construction – indicate that the housing sector hit bottom last year and has started along a path of slow recovery,” he noted

The current bottom, if it is one, puts prices about 35 percent below their peak in 2006, creating affordability conditions that, Fiserv predicts, will pull reluctant buyers into the market, helping to firm prices and then pushing them upward by an average of just under 4 percent annually over the next five years.

Consumers, who have been consistently pessimistic about the housing market, are also becoming more hopeful. Fears of continuing price declines eased in Fannie Mae’s April National Housing survey, with respondents now expecting prices to increase by 1.3 percent this year, and more homeowners – 15 percent more than in the March survey – now saying they thinks this is a good time to sell. Nearly 40 percent think mortgage rates are going to rise and a majority also expects rents to increase, which may explain why nearly three-quarters think this is a good time to buy – about the same as in the March survey. Confidence in the economy is also growing, with nearly 37 percent saying they are feeling better about the outlook – up from 35 percent in March and another high point for the survey.

“Overall, consumer views of housing market conditions have become more supportive of home purchases,” Doug Duncan, Fannie Mae’s vice president and chief economist, said in a press statement. But he cautioned that a sustained period of “healthy” hiring activity will be required “to help realize these improved expectations.” Although signs of growing consumer confidence in housing and the economy are welcome, Duncan agreed, the tepid April employment report, he suggested, “supports the view that the housing recovery will remain uneven this year."

FLAWED APPRAISALS

There has been no shortage of explanations for the causes of the economic disaster that has decimated the housing market specifically and real estate values overall. But in the commercial sector, it appears that flawed appraisals played an outsized role.

That’s according to a recent study published by CRE Finance World, which found a gaping discrepancies between the appraised values on which loans were based, and the price at which these properties were eventually sold.

“This study confirms what many of us have thought but heretofore have only known anecdotally: That appraisals are not very accurate,” according to KC Conway, executive managing director at the brokerage firm Colliers International, and , co-author of the study with Brian Olasov, a managing director at the law firm McKenna Long & Aldridge,

The study, published in was published in the winter edition of CRE Finance World, is based on market data covering the period March 2007 through September 2011. The authors found that appraised values exceeded sales prices for 64 percent of the 2,076 properties reviewed, creating an aggregate shortfall of $1.4 billion. The Selling prices exceeded the appraisals in 35.5 percent of the transactions, by a total of $661 million.

In 121 of the transactions, appraised values exceeded selling prices by 100 percent; at the other extreme, the appraisals were less than 70 percent of the sales prices for 132 properties. Far from being the reliable estimates the market needs, the authors said these appraisals more closely resemble “a game of horseshoes… close is good enough.”

The study echoes what critics of the appraisal industry, including many appraisers themselves, have been saying for a long time – the system rewards appraisers who “go along to get along,” providing the numbers necessary to support loan decisions, and accepting the cut-rate fees on which lenders insist, knowing they risk losing business otherwise. That criticism has been loudest among residential appraisers, but industry executives say this study indicates the concerns are equally valid in the commercial sector.

“It is a broken profession in a lot of ways,” John Cicero, a managing principal of the appraisal firm Miller Cicero, told The New York Times. “The appraisal industry has become commoditized, where lenders see appraisals as simply a commodity to be purchased by a vendor and where more emphasis is placed on the price of an appraisal than the expertise of the appraiser…. They actually refer to us as vendors submitting a bid, not educated professionals who are providing an important service,” he added.

Some industry executives questioned the study and its conclusions, noting that a selling price lower than the appraised value does not necessarily prove the appraisal was inaccurate. The study doesn’t consider, for example, why the loans were sold, nor does it indicate whether the sales were market transactions or distressed sales.

Appraisals have to be judged on their own merits, Bill Garber, the director of government and external relations for the Appraisal Institute, told the Times, not as part of an aggregate analysis that fails to make essential distinctions between about properties and the loans involved.

Still, the role of flawed appraisals shouldn’t be downplayed, study co-author Olasov argued. “When you take a look at the 400-plus bank failures that have taken place going back to 2009,” he said in the Times article, the “precipitating” factor was the impact of “declining appraisal values” on real estate portfolios.

DOWNWARD ADJUSTMENT

Unlike the news of Fannie Mae’s first quarter profit (see related item), the latest analysis of homeownership rates shouldn’t surprise anyone – the trend is still down. The Census Bureau reported that the homeownership rate fell to 65.5 percent in the first quarter, a 15-year low, while the proportion of renter households rose to 34.6 percent – a 15-year high.

The statistics reflect a combination of record foreclosures, which have converted many former homeowners into renters, a battered labor market that has left many left many would-be buyers without the income needed to purchase homes, and a battered housing market that has made many prospective buyers who could afford to purchase homes reluctant to buy them.

Home ownership rates are one percentage point below the year-ago level and nearly four percentage points below their 2004 peak of 69 percent. Some analysts suggest that the market peak may have been inflated – by flawed underwriting and misguided efforts to boost ownership rates that put many buyers in homes they couldn’t afford financed with loans they couldn’t sustain. The decline in ownership rates, they suggest, may suggest a return to a level that is both more realistic and more sustainable.

“The way we got to a nearly 70 percent [ownership rate] was to call a lot of people who had no equity in their homes ‘homeowners,’” Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, told Business Week.

Homeownership rates fell in all four census regions in the first quarter, with the steepest decline (1.2 percentage points) in the Northeast. The rate declined by 08 percentage points in the South, 0.5 percentage points in the Midwest and 0.2 percentage points in the West to 59.9 percent. Demographically, ownership rates were highest (almost 81 percent) for older households (65 and older) and lowest, at 38.6 percent, for those 35 and younger. Ownership rates declined year-over-year for all age groups except for the oldest (65 and older), for whom the rate remained unchanged.