Tag Archives: Department of the Treasury

Treasury’s Take on Housing Finance Reform

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Treasury Secretary Mnuchin Being Sworn In

The Department of the Treasury released its Strategic Plan for 2018-2022. One of its 17 Strategic Objectives is to promote housing finance reform:

Support housing finance reform to resolve Government-Sponsored Enterprise (GSE) conservatorships and prevent taxpayer bailouts of public and private mortgage finance entities, while promoting consumer choice within the mortgage market.

Desired Outcomes

Increased share of mortgage credit supported by private capital; Resolution of GSE conservatorships; Appropriate level of sustainable homeownership.

Why Does This Matter?

Fannie Mae and Freddie Mac have been in federal conservatorship for nine years. Taxpayers continue to stand behind their obligations through capital support agreements while there is no clear path for the resolution of their conservatorship. The GSEs, combined with federal housing programs such as those at the Federal Housing Administration and the Department of Veterans Affairs, support more than 70 percent of new mortgage originations. Changes should encourage the entry of greater private capital in the U.S. housing finance system. Resolution of the GSE conservatorships and right-sizing of federal housing programs is necessary to support a more sustainable U.S. housing finance system. (16)

The Plan states that Treasury’s strategies to achieve these objectives are to engage “stakeholders to develop housing finance reform recommendations.” (17) These stakeholders include Congress, the FHFA, Fed, SEC, CFPB, FDIC, HUD (including the FHA), VA, Fannie Mae, Freddie Mac, the Association of State Banking Regulators as well as “The Public.” Treasury further intends to disseminate “principles and recommendations for housing finance reform” and plan “for the resolution of current GSE conservatorships.” (Id.)

This is all to the good of course, but it is at such a high level of generality that it tells us next to nothing. In this regard, Trump’s Treasury is not all that different from Obama and George W. Bush’s. Treasury has not taken a lead on housing finance reform since the financial crisis began. While there is nothing wrong with letting Congress take the lead on this issue, it would move things forward if Treasury created an environment in which housing finance reform was clearly identified as a priority in Washington. Nothing good will come from letting Fannie and Freddie limp along in conservatorship for a decade or more.

Dodd-Frank Repeal Unappealing for Homeowners

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photo by Gage Skidmore

Congressman Jeb Hensarling

The Hill published my latest column, Why Repealing Dodd-Frank Is Unappealing if You Own a Home. It opens, 

President Trump has made it clear that he wished to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act. Just two weeks after his inauguration, he issued an executive order to get the ball rolling by means of agency action, an effort that will be led by the Department of the Treasury. Trump will have lots of allies in Congress as he pursues this agenda. A recent memo by House Financial Services Chairman Jeb Hensarling (R-Texas) to his committee’s leadership team outlines a legislative path that leads to much the same goal.

One of the key components of the Dodd-Frank regulatory regime was the newly-created Consumer Financial Protection Bureau (CFPB). The bureau is responsible for administering a range of consumer protection regulations, some of which predate Dodd-Frank and some of which were mandated by it. Homeowners should sit up and take notice because a lot of protections they can now take for granted will be stripped away if this push is successful.

Many of these regulations protect homeowners as they obtain mortgages for their homes. Others protect homeowners over the life of the mortgages, particularly when they are having trouble keeping up with their mortgage payments because of those common life events that still knock us for a loop when they happen to us: job loss, divorce, medical bills, a death in the family.

Hensarling’s memo makes clear the extent to which he wants to weaken the CFPB. Among many other things, he wants to eliminate the bureau’s consumer education functions, bar it from commencing actions involving unfair, deceptive or abusive acts and practices, end its practice of tracking consumer complaints, and stop if from monitoring and conducting research on the consumer credit market.

Before the financial crisis, homeowners suffered from a range of abusive and predatory behaviors that were prevalent in the mortgage industry for years and years. Lenders would lend without regard to a borrower’s ability to repay a loan, so long as there was sufficient equity in the home to make the lender whole after a foreclosure. Dodd-Frank’s ability-to-repay rule keeps lenders from doing that now. Lenders would make loans that had large balloon payments at the end of the term, forcing unsophisticated borrowers to refinance with all of the fees and costs that that entails. The lenders would look at those refinancing costs as another profit center. Dodd-Frank’s qualified mortgage rule banned those abusive balloon payments for the most part.

While Hensarling claims that Dodd-Frank “clogs the arteries of capitalism,” he seems to forget that unfettered capitalism nearly gave us a fatal heart attack just 10 years ago, when the subprime mortgage crisis led us to the brink of a second Great Depression. He seems to forget that predatory mortgage lending is not only bad for the individuals affected by it, but also for the housing market and economy in general. Housing prices did not just fall for those with unsustainable mortgages—they fell for all of us.

The push to get rid of the CFPB is not being driven by the consumer finance industry. The industry has learned to live with the bureau. It has come to see that there are some benefits that accrue from primarily dealing with one regulator, in place of the patchwork of regulators that was the norm before Dodd-Frank. Rather, the push is being driven by an unfettered free market ideology that is out of step with the workings of the modern economy.

Getting rid of the CFPB will be bad for homeowners. They will no longer be able to assume that a mortgage they receive is one that has payments they can make month-in and month-out. They will need to treat lenders as predators because predatory lending will certainly return to the mortgage market. Caveat emptor.

Spreading Mortgage Credit Risk

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photo by A Syn

The Federal Housing Finance Agency has released the Single-Family Credit Risk Transfer Progress Report. Important aspects of Fannie and Freddie’s future are described in this report. It opens,

Since 2012, the Federal Housing Finance Agency (FHFA) has set as a strategic objective that Fannie Mae and Freddie Mac share credit risk with private investors. While the Enterprises have a longstanding practice of sharing credit risk on certain loans with primary mortgage insurers and other counterparties, the credit risk transfer transactions have taken further steps to share credit risk with private market participants. Since the Enterprises were placed in conservatorship in 2008, they have received financial support from the U.S. Department of the Treasury under the Senior Preferred Stock Purchase Agreements (PSPAs). The Enterprises’ credit risk transfer programs reduce the overall risk to taxpayers under these agreements.

These programs have made significant progress since they were launched in 2012 and credit risk transfer transactions are now a regular part of the Enterprises’ businesses. This progress is reflected in FHFA’s 2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions (2016 Scorecard), which sets the expectation that the Enterprises will transfer risk on 90 percent of targeted single-family, 30-year, fixed-rate mortgages. FHFA works with the Enterprises to ensure that credit risk transfer transactions are conducted in an economically sensible way that effectively transfers risk to private investors.

This Progress Report provides an overview of how the Enterprises share credit risk with the private sector, including through primary mortgage insurance and the Enterprises’ credit risk transfer programs. The discussion includes year-end 2015 data, a discussion of which Enterprise loan acquisitions are targeted for the credit risk transfer programs, and an overview of investor participation information. (1, footnotes omitted)

This push to share credit risk with private investors is a significant departure from the old Fannie/Freddie business model and it should do just what it promises: reduce taxpayer exposure to credit risk for the trillions of dollars of mortgages the two companies guarantee through their mortgage-backed securities. That being said, this is a relatively new initiative and the two companies (and the FHFA, as their conservator and regulator) have to navigate a lot of operational issues to ensure that this transfer of credit risk is priced appropriately.

There are also some important policy issues that have not been settled. The FHFA has asked for feedback on a series of issues in its Single-Family Credit Risk Transfer Request for Input, including,

  • how to “develop a deeper mortgage insurance structure” (RfI, 17)
  • how to develop credit risk transfer strategies that work for small lenders (RfI, 18)
  • how to price the fees that Fannie and Freddie charge to guarantee mortgage-backed securities (RfI, 19)

Congress has abdicated its responsibility to implement housing finance reform, so it is left up to the FHFA to make it happen. Indeed, the FHFA’s timeline has this process being finalized in 2018. The only way for the public to affect the course of reform is through the type of input the FHFA is now seeking:

FHFA invites interested parties to provide written input on the questions listed [within the Request for Input] 60 days of the publication of this document, no later than August 29, 2016. FHFA also invites additional input on the topics discussed in this document that are not directly responsive to these questions.

Input may be submitted electronically using this response form. You may also want to review the FHFA’s update on Implementation of the Single Security and the Common Securitization Platform and its credit risk transfer page as it has links to other relevant documents.

Uses & Abuses of Online Marketplace Lending

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photo by Kim Traynor

 

The Department of the Treasury has issued a report, Opportunities and Challenges in Online Marketplace Lending. Online marketplace lending is still in its early stages, so it is great that regulators are paying attention to it before it has fully matured. This lending channel may greatly increase options for borrowers, but it can also present opportunities to fleece them. Treasury is looking at this issue from both sides. Some highlights of the report include,

 

 

  • There is Opportunity to Expand Access to Credit: RFI [Request for Information] responses suggested that online marketplace lending is expanding access to credit in some segments by providing loans to certain borrowers who might not otherwise have received capital. Although the majority of consumer loans are being originated for debt consolidation purposes, small business loans are being originated to business owners for general working capital and expansion needs. Distribution partnerships between online marketplace lenders and traditional lenders may present an opportunity to leverage technology to expand access to credit further into underserved markets.
  • New Credit Models and Operations Remain Untested: New business models and underwriting tools have been developed in a period of very low interest rates, declining unemployment, and strong overall credit conditions. However, this industry remains untested through a complete credit cycle. Higher charge off and delinquency rates for recent vintage consumer loans may augur increased concern if and when credit conditions deteriorate.
  • Small Business Borrowers Will Likely Require Enhanced Safeguards: RFI commenters drew attention to uneven protections and regulations currently in place for small business borrowers. RFI commenters across the stakeholder spectrum argued small business borrowers should receive enhanced protections.
  • Greater Transparency Can Benefit Borrowers and Investors: RFI responses strongly supported and agreed on the need for greater transparency for all market participants. Suggested areas for greater transparency include pricing terms for borrowers and standardized loan-level data for investors.

*     *     *

  • Regulatory Clarity Can Benefit the Market: RFI commenters had diverse views of the role government could play in the market. However, a large number argued that regulators could provide additional clarity around the roles and requirements for the various participants. (1-2)

As we move deeper and deeper into the gig economy, the distinction between a consumer and a small business owner gets murkier and murkier. Thus, this call for greater protections for small business borrowers makes a lot of sense.

Online marketplace lending is such a new lending channel, so it is appropriate that the report ends with a lot of questions:

  • Will new credit scoring models prove robust as the credit cycle turns?
  • Will higher overall interest rates change the competitiveness of online marketplace lenders or dampen appetite from their investors?
  • Will this maturing industry successfully navigate cyber security challenges, and adapt to appropriately heightened regulatory expectations? (34)

We will have to live through a few credit cycles before we have a good sense of the answers to these questions.

Luxury Real Estate and Transparency

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photo by tpsdave

Law360 quoted me in Atty-Client Privilege At Stake In Real Estate Bill (behind a paywall). It opens,

The push to reveal the individuals involved in anonymous real estate deals has moved from title insurers to attorneys and real estate agents, but lawyers say requiring them to reveal the names of clients they help set up limited liability companies and other vehicles could weaken attorney-client privilege.

Reps. Carolyn Maloney, D-N.Y., and Peter King, R-N.Y., plan to reintroduce legislation this week that would require states to collect the beneficial ownership information for limited liability companies and other vehicles used in real estate transactions, or to have the U.S. Department of the Treasury step in if states are unable to meet the requirement, in order to prevent criminals, corrupt government officials and terrorists from using real estate purchases to launder funds.

Doing so would close a loophole that allows attorneys to advise clients without meeting the same reporting requirements as banks and would help prevent potentially illicit funds from making their way into real estate markets, Maloney said. But it also has the potential for putting attorneys in the uncomfortable position of reporting clients to the government in cases where there may not be a criminal violation, said Marc Landis, the managing partner of Phillips Nizer LLP.

“This will certainly be an area where client confidentiality and attorney-client privilege will be weakened in ways that they have not been previously,” he said.

Lawyers in real estate transactions came under renewed attention after the transparency advocacy group Global Witness and the CBS News program “60 Minutes” released a blockbuster report Sunday night that showed several New York law firms providing information to an individual posing as an adviser to a minister from an African government who was looking to buy a Gulfstream jet, a yacht and a New York brownstone without the money being detected.

According to the report, which used hidden cameras, 12 of 13 lawyers provided assistance when asked how to set up shell companies and other vehicles to avoid attaching a name to the purchases. One of those 12 later said he wouldn’t participate in the transactions.

The Global Witness report found that the attorneys — none of whom signed the group’s investigator as a client — broke no laws in providing the advice they did. And that’s a problem that Maloney wants to address.

“This is unacceptable, criminal, scandalous, and it has to stop,” she said on a conference call with reporters.

The New York Democrat’s solution to the problem is to require states to force attorneys, real estate agents and other advisers on a transaction to include the name of the beneficial owner of an LLC or trust on forms submitted to the state. If the state will not or cannot implement such a system, the Treasury Department, through the Financial Crimes Enforcement Network, would require that disclosure.

In a similar move, FinCEN last month announced that title insurers would temporarily be required to provide the names of beneficial owners of LLCs that high-net-worth individuals use to purchase luxury real estate in Miami and Manhattan without mortgages.

Maloney’s bill, which she is introducing for a third time, will expand such reporting and make it permanent.

“We’re going after the loophole. We’re going after the real estate transactions. We’re going after the realtors and some lawyers that are setting these things up,” she said.

According to Brooklyn Law School professor David Reiss, Maloney’s bill, the Incorporation Transparency and Law Enforcement Assistance Act, has struck a good balance between giving law enforcement the power to root out illicit funds in high-end real estate and not infringing too much on attorney-client privilege.

“The attorney-client privilege is one of the oldest of the privileges recognized by courts, and in the aggregate it provides great benefits to society because it promotes open communications between clients and their lawyers. The privilege is not a shield for illegal behavior, though,” he said.

Friday’s Government Reports Roundup

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Reiss in Newsday on Stimulus Program

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Newsday quoted me in State Faults Venture Capital Firm (registration required for full access).  The story reads in part,

New York State officials say Canrock Ventures, a venture capital firm in Brookville, failed to notify them of potential conflicts of interest when it invested taxpayer money in local technology startups.

An official with Empire State Development, the state’s primary business-aid agency, said under the terms of a written agreement with the state, Canrock should have convened a “valuation committee” to review its proposed investments of federal funds in four computer software startups.

The four businesses were co-founded by a Canrock partner, and the venture firm holds sizable stakes in them. The official requested anonymity.

Mark Fasciano, the Canrock partner, said yesterday that he disclosed all of Canrock’s holdings and his roles in the companies to the state at the start of the investment process.

*     *      *

Canrock’s 2013 contract with New York State, obtained by Newsday under the state Freedom of Information Law, stipulates that conflicts of interest are to be weighed by a valuation committee.

The Empire State Development official said the committee is composed of two state representatives and a Canrock representative, and can only been convened by the venture firm, not New York State.

“They [Canrock] have to disclose potential conflicts of interest to the valuation committee,” the official said last month. “They did not meet that requirement.”

*     *      *

Valuation committees were also included in the state contracts of six other venture firms investing Innovate NY money. None of the six called valuation committee meetings to handle conflicts of interest “because no conflicts had arisen,” an Empire State Development spokesman said.

Some experts questioned whether the valuation committees were effective.

David Reiss, a law professor and research director for Brooklyn Law School’s Center for Urban Business Entrepreneurship, said, “a self-reporting system,” such as the valuation committees, would only deter fraud if the probability of getting caught is high and the consequences are grave.

 “The likelihood of getting caught here sounds pretty low,” he said.