The Consumer Financial Protection Bureau (CFPB) is going to take a little more time before finalizing the “Qualified Mortgage” rule – establishing the guidelines for determining a borrower’s “ability to repay” a residential mortgage. The original comment period ended in July of last year and the agency was expected to issue a final rule by the end of this month.
But agency officials said they want to review more lending data and obtain more information on litigation costs and liability risks created by the new rule. The extended comment period will now end July 9 and a final rule issued “before the end of 2012,” an agency announcement said.
"Through our ability-to-repay rule, we want to ensure that consumers are not set up to fail with mortgages they cannot afford and we want to protect access to affordable credit," CFPB Director Richard Corday said in a press release. "We are committed to gathering solid data to inform this important rule,” he added.
Some industry executives are hoping the focus on litigation concerns indicates the agency may adopt a ‘safe harbor’ for lenders that originate ‘qualified mortgages’ rather than the ‘rebuttable presumption’ advocated by consumer groups, which would create more leeway for borrowers to sue lenders for violating the rule. But many observers drew the opposite conclusion from the information the agency is requesting, suggesting that the CFPB is more likely to allow borrowers to question whether lenders should have approved a loan in the first place.
"I think with asking all these questions about litigation costs, to me it really says that they are gearing up for a release that will involve the rebuttable presumption alternative, " Isaac Boltansky, an analyst with Compass Point Research and Trading, told American Banker.
Jaret Seiberg, a senior policy analyst at Guggenheim Securities agreed. “We think the risk is rising for an adverse ruling in 2013,” he wrote in recent commentary.
The delay in finalizing the Qualified Mortgage rule will almost certainly delay the release of the companion “Qualified Residential Mortgage” or “skin-in-the-game” rules, requiring loan originators to retain 5 percent of the credit risks on any loans that do not meet specified underwriting standards.
The proposed rules established a minimum 20 percent down payment requirement, but industry analysts are predicting that regulators will bend on that restriction, which lenders and consumer advocates alike have waned would prevent many low-income and minority buyers from purchasing homes. An analysis by CoreLogic found that nearly 40 percent of buyers in 2010 made down payments of less than 20 percent.
“They're not talking about 20 percent anymore," Rep. Barney Frank (D-MA) a supporter of the rule, conceded in an interview with Housing Wire. But Frank also defended the need to set the regulatory bar high enough to avoid the lax underwriting that contributed to the mortgage market meltdown.
"We used to make loans without securitizations,” he told Housing Wire. “They [lenders] must not think they're making good loans if they can't hold 5 percent,” he added. "Do they have so little confidence in their judgments that [they think the 5 percent risk retention requirement] would be fatal to them?”
Investors no longer have a corner on the foreclosure market. The National Association of Realtors (NAR) reports that homebuyers – that is, people who actually plan to occupy the homes they purchase – are more willing to consider foreclosures than they have been in the past.
Buyer interest in foreclosure sales has nearly tripled in the past two years, according to the NAR, which identified that trend in a recent telephone survey. Nearly two-thirds of the respondents said they would be likely to purchase a foreclosed property, up from just 25.3 percent two years ago. Most of those prospective buyers (92.3 percent) said they intended to occupy the homes; only about 7 percent were looking for investments.
NAR analysts attributed the growing interest in foreclosures to a combination of changing buyer attitudes and very attractive foreclosure discounts. On that point, respondents were surprisingly realistic about the discounts they could expect, with most predicting foreclosure prices averaging between 10 percent and 30 percent below market. Recent reports put the average at around 29 percent nationally. Respondents were also realistic about likely appreciation rates, predicting gains of not much more than 2 percent annually over the next five years, with younger buyers, on the whole, more conservative (and less optimistic) than older ones.
While interest in foreclosure sales is growing, banks are becoming more willing to accept short sales – in which owners sell their homes for less than they owe on their mortgages – as a means of avoiding foreclosures. Realty Trac estimates that homes in some stage of foreclosure represented more than 25 percent of homes sold in the first quarter, with short sales accounting for about 12 percent of that total – up from 10 percent in the fourth quarter of last year and 9 percent a year ago. Although short sales reached a three-year high in the first quarter, sales of bank-owned properties declined by nearly 15 percent, according to the RealtyTrac report.
The average short sale price in the first quarter was $175,461 – representing a discount of about 21 percent -- 10 percent lower than a year ago and the lowest average in the three years RealtyTrac has been compiling these statistics. REO sale prices were discounted by about 33 percent, but the first quarter average, at $147,995, was only 2 percent lower than the first quarter a year ago.
Massachusetts reported the largest discounts both for short sales (38 percent) and foreclosure sales (45 percent), according to RealtyTrac. The Bay State also logged its largest number of foreclosure petitions in nearly two years – 47 percent more in April than in the same month last year, according to the Warren Group. But the increase does not indicate that conditions are deteriorating, Corey Hopkins, editorial director for the company, emphasized; – only that lenders are acting more aggressively and more quickly to clear the backlog of distressed properties that accumulated the nation’s largest servicers and regulators negotiated their way out of the robo-signing mess.
“Foreclosure activity was so low last year that we’re inevitably seeing a rise in foreclosures across the state,” Hopkins said in a press release, adding, “It’s necessary for a wave of foreclosures to work through the system this year, but it shouldn’t cause panic. In order to return to a healthier market, the backlog of distressed properties needs to be cleared from banks’ books.”
FLOOD INSURANCE REDUX
In what has become a perennial exercise in hurry up and delay, Congress has approved another two-month extension of the federal flood insurance program, avoiding once again the home sale glitches a lapse in the program would create. The latest 60-day extension gives lawmakers until July 30 to approve a more permanent measure overhauling the program, or (as is more likely) kick this legislative can down the road once again.
As part of the deal required to approve the extension, the measure includes a provision eliminating subsidized premiums for second homes and vacation homes, on which the Senate insisted. The Senate leadership, in exchange, agreed to take up a broader reform measure this month.
The House and Senate have agreed on the need to reform the National Flood Insurance Program, overseen by the Federal Emergency Management Association (FEMA), but have not agreed on exactly how to accomplish that goal. The House last year approved a measure reauthorizing the program for five years, but the Senate has neither considered that bill nor introduced an alternative to it.
Congress has approved multiple short-term extensions for the NFIP during the past three years and actually allowed the program to lapse for a few weeks in 2010. Another lapse could be devastating in the current fragile housing market, industry executives have warned. The National Association of Realtors has warned that the inability to obtain insurance, required for homes in flood hazard areas, could threaten as many as 1,300 closings daily.
"If it were to expire, new housing construction would stall, in fact, in many places, just come to a halt, real estate transactions would come to a screaming halt, taxpayers would be on the hook for future disasters," Senate Majority Leader Harry Reid (D-NV) warned in the debate preceding the Senate vote to extend the program.
“We are pleased that the House voted to concur with the Senate’s 60-day NFIP extension,” Ben McKay, senior vice president of federal government relations for the Property Casualty Insurers Association, said in a press statement. “However, this only delays the fundamental debate over the future of the flood insurance program.” McKay said he is “hopeful” the Senate will follow through on its promise and act on a long-term reauthorization and reform measure this month.
Comptroller of the Currency Thomas Curry told the Senate Banking Committee last week that the agency is reviewing what it knew, what it should have known and what it might have done differently to identify and prevent the massive trading losses at JPM-Chase. Those seem to be good questions to ask, and not just about JPM. In a separate review, the Treasury Department’s Inspector General has concluded that OCC examiners also failed to spot evidence of the questionable foreclosure practices that erupted into the robo-signing crisis, because the examiners lacked the guidance and expertise required to identify the problem.
"OCC examination procedures during the period 2008 through 2010 were not sufficient in scope or application to identify significant weaknesses in national banks' foreclosure documentation and processing functions," the Inspector General’s report said. “During this time, the OCC did not consider foreclosure documentation and processing to be an area of significant risk and, as a result, did not focus examination resources on this function."
OCC examiners were focusing at the time on loss mitigation techniques and modification procedures rather than foreclosures, the report found. It didn’t help that most examiners also lacked in depth knowledge of state laws, which govern foreclosures.
OCC officials told the Inspector General that they viewed the failure to identify foreclosure-related risks as “more an error in judgment than of documentation.”
FRAUD RISKS DECLINING
Here’s a bit of good news – mortgage fraud risks appear to be declining. That’s according to the Interthinx quarterly Mortgage Fraud Index, which declined by 4.3 percent in the first quarter compared with the final quarter of The index fell by 3.1 percent year-over-year, dropping below the 140 mark for the first time since he second quarter of 2009, the company reported.
The risks of fraud related to property valuation, the identify of borrowers, and occupancy all declined, but the risks of employment and income fraud – where borrowers misrepresent their employment status, income or both – increased by 4.5 percent for the quarter, by more than 18 percent year-over-year and by 37 percent over the past two years. Interthinx officials say this indicator reflects the increasing difficulty in meeting tighter underwriting guidelines.