Tag Archives: disclosure

American Bankers on Mortgage Market Reform

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The American Bankers Association has issued a white paper, Mortgage Lending Rules: Sensible Reforms for Banks and Consumers. The white paper contains a lot of common sense suggestions but its lack of sensitivity to consumer concerns greatly undercuts its value. It opens,

The Core Principles for Regulating the United States Financial System, enumerated in Executive Order 13772, include the following that are particularly relevant to an evaluation of current U.S. rules and regulatory practices affecting residential mortgage finance:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; and

(f) make regulation efficient, effective, and appropriately tailored.

The American Bankers Association offers these views to the Secretary of the Treasury in relation to the Directive that he has received under Section 2 of the Executive Order.

 Recent regulatory activity in mortgage lending has severely affected real estate finance. The existing regulatory regime is voluminous, extremely technical, and needlessly prescriptive. The current regulatory regimen is restricting choice, eliminating financial options, and forcing a standardization of products such that community banks are no longer able to meet their communities’ needs.

 ABA recommends a broad review of mortgage rules to refine and simplify their application. This white paper advances a series of specific areas that require immediate modifications to incentivize an expansion of safe lending activities: (i) streamline and clarify disclosure timing and methodologies, (ii) add flexibility to underwriting mandates, and (iii) fix the servicing rules.

 ABA advises that focused attention be devoted to clarifying the liability provisions in mortgage regulations to eliminate uncertainties that endanger participation and innovation in the real estate finance sector. (1, footnote omitted)

Its useful suggestions include streamlining regulations to reduce unnecessary regulatory burdens; clarifying legal liabilities that lenders face so that they can act more freely without triggering outsized criminal and civil liability in the ordinary course of business; and creating more safe harbors for products that are not prone to abuse.

But the white paper is written as if the subprime boom and bust of the early 2000s never happened. It pays not much more than lip service to consumer protection regulation, but it seeks to roll it back significantly:

ABA is fully supportive of well-regulated markets where well-crafted rules are effective in protecting consumers against abuse. Banks support clear disclosures and processes to assure that consumers receive clear and comprehensive information that enables them to understand the transaction and make the best decision for their families. ABA does not, therefore, advocate for a wholesale deconstruction of existing consumer protection regulations . . . (4)

If we learned anything from the subprime crisis it is that disclosure is not enough.  That is why the rules.  Could these rules be tweaked? Sure.  Should they be dramatically weakened? No. Until the ABA grapples with the real harm done to consumers during the subprime era, their position on mortgage market reform should be taken as a special interest position paper, not a white paper in the public interest.

Secrets of The Title Insurance Industry

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The New York State Department of Financial Services has proposed two new regulations for the title insurance industry. Premiums for title insurance in New York State are set by regulators, so title insurance companies cannot compete on price. Instead, they compete on service.  “Service” has been interpreted widely to include all sorts of gifts — fancy meals, hard-to-get tickets, even vacations. The real customers of title companies are the industry’s repeat players — often lawyers and lenders who recommend the title company — and they get these goodies.  The people paying for title insurance — owners and borrowers — ultimately pay for these “marketing” costs without getting the benefit of them.

The first regulation is intended to get rid of these marketing costs (or kickbacks, if you prefer). This proposed regulation makes explicit that those costs cannot be passed on to the party ultimately paying for the title insurance. The proposed regulation reads, in part,

(a) As used in this section:

(1) Compensation means any fee, commission or thing of value.

(2) Licensee means an insurance agent, title insurance agent, insurance broker, insurance consultant, or life settlement broker.

(b) Insurance Law section 2119 authorizes a licensee to receive compensation provided that the licensee has obtained a written memorandum signed by the party to be charged, in accordance with such section.

(c) A licensee shall not charge or collect compensation without such a memorandum, nor shall any such licensee charge or receive compensation except as provided in Insurance Law section 2119.

(d) The memorandum shall include the terms and date of the agreement, and the amount of the compensation. Where compensation is permitted, to the extent practical, the licensee shall obtain the written memorandum prior to rendering the services. The licensee shall not stipulate, charge or accept any compensation if the licensee has not fully disclosed the amount or nature of the compensation or the basis for determining the amount of the compensation prior to the service being rendered. (5-6)

The second regulation is intended to ensure that title insurance affiliates function independently from each other.

While these proposed regulations are a step in the right direction, I wonder how effective they will be, given that title companies cannot compete on price. Maybe it would be better to let them do just that, as some other states do . . .

These are mighty technical proposed regulations, but they will have a big impact on consumers. Have no doubt that industry insiders will comment on these regs. Those concerned with the interests of consumers should do so as well.

The Department of Financial Services is accepting comments on these two proposed regulations through June 19th, 2017.

Running Circles around the CFPB

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Lauren Willis has posted The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension to SSRN.  It addresses an important subject — the cat and mouse game of the regulator and the regulated. The abstract reads,

To ensure that consumers understand financial products’ “costs, benefits, and risks,” the Consumer Financial Protection Bureau has been redesigning mandated disclosures, primarily through iterative lab testing. But no matter how well these disclosures perform in experiments, firms will run circles around the disclosures when studies end and marketing begins. To meet the challenge of the dynamic twenty-first-century consumer financial marketplace, the bureau should require firms to demonstrate that a good proportion of their customers understand key pertinent facts about the financial products they buy. Comprehension rules would induce firms to inform consumers and simplify products, tasks that firms are better equipped than the bureau to perform. (74)

The Bureau has worked hard to tackle financial education in a meaningful way, but Willis is right that this is a Herculean task given the profit incentive that financial institutions have to run circles around consumers and the Bureau itself. Willis explains

the feebleness of mandated disclosures, the inherent flaws in the alternatives the CFPB has been pursuing, the advantages firms have over regulators in ensuring their customers’ comprehension, and the CFPB’s legal authority to require customer confusion audits and enforce comprehension rules. I then elaborate on a few examples of how this form of regulation might operate in practice, including these four key elements:

1. Measuring the quality of a valued outcome (comprehension) rather than of an input that is often pointless (mandated or preapproved disclosure);

2. Assessing actual customer comprehension in the field as conditions change over time, rather than imagining what the “reasonable consumer” would understand or testing consumers in the lab or in single-shot field experiments;

3. Requiring firms to affirmatively and routinely demonstrate customer understanding, rather than relying on the bureau’s limited resources to examine firm performance ad hoc when problems arise ; and

4. Giving firms the flexibility and responsibility to effectively inform their customers about key relevant costs, benefits and risks through whatever means the firms see fit, whether that be education or product simplification, rather than asking regulators to dictate how disclosures and products should be designed. (76) (footnotes omitted)

Hopefully the Bureau will take a serious look at Willis’ critique.  It is important, of course, to get consumer financial literacy right in order to benefit consumers directly. But it is also important for the Bureau to get it right in order to protect its reputation as an effective regulator that brings real value to the consumer finance sector.

Hope for the Securitization Market

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The Structured Finance Industry Group has issued a white paper, Regulatory Reform: Securitization Industry Proposals to Support Growth in the Real Economy. While the paper is a useful summary of the industry’s needs, it would benefit from looking at the issue more broadly. The paper states that

One of the core policy responses to the financial crisis was the adoption of a wide variety of new regulations applicable to the securitization industry, largely in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). While many post-crisis analysts believe that the crisis laid bare the need for meaningful regulatory reform, SFIG members believe that any such regulation must: ƒ

  • Reduce risk in a manner such that benefits outweigh costs, including operational costs and inefficiencies; ƒ
  • Be coherent and consistent across the various sectors and across similar risk profiles; ƒ
  • Be operationally feasible from both a transactional and a loan origination basis so as not to compromise provision of credit to the real economy; ƒ
  • Be valued by key market participants; and ƒ
  • Be implemented in a targeted way (i.e. without unintended consequences).

In this paper, we will distinguish between the types of regulation we believe to be necessary and productive versus those that are, at the very least, not helpful and, in some cases, harmful. To support this approach, we believe it is helpful to evaluate financial market regulations, specifically those related to securitization, under three distinct categories, those that are:

1. Transactional in nature; i.e., directly impact the securitization market via a focus on underlying deal structures;

2. Banking rules that include securitization reform within their mandate; and

3. Banking rules that simply do not contemplate securitization and, therefore, may result in unintended consequences. (3)

The paper concludes,

The securitization industry serves as a mechanism for allowing institutional investors to deliver funding to the real economy, both to individual consumers of credit and to businesses of all sizes. This segment of credit reduces the real economy’s reliance on the banking system to deliver such funding, thereby reducing systemic risk.

It is important that both issuers of securitization bonds and investors in those bonds align at an appropriate balance in their goals to allow those issuers to maintain a business model that is not unduly penalized for using securitization as a funding tool, while at the same time, ensuring investors have confidence in the market via “skin in the game” and sufficiency of disclosure. (19)

I think the paper is totally right that we should design a regulatory environment that allows for responsible securitization. The paper is, however, silent on the interest of consumers, whose loans make up the collateral of many of the mortgage-backed and asset-backed securities that are at issue in the bond market. The system can’t be designed just to work for issuers and investors, consumers must have a voice too.

Preparing for Surprise Closing Costs

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photo by Chris Potter

The Wall Street Journal quoted me in Buying a Home? Prepare for Surprise Closing Costs. It opens,

Note to house hunters on a budget: A home’s sale price isn’t really the sale price—there are lots of closing costs and expenses that jack up the final number.

According to online real-estate listings site Zillow, buyers typically pay between 2% and 5% of the purchase price in closing costs. So if a home costs $300,000, that buyer can expect to pay between $6,000 and $15,000. Since the financial crisis, there’s more transparency on the part of lenders when disclosing the costs associated with a mortgage, so buyers know in advance how much they’ll need for the closing. But experts say that might not be enough.

Lender fees are only one part of the total cost of homeownership. Buyers must also pay appraisers, home inspectors and settlement agents, as well as the cost of title insurance, homeowners insurance and property taxes. And the fees don’t stop at the closing. Utilities, regular home maintenance and unexpected repairs add up as well—and can derail even the most experienced buyer.

*     *    *

Here are a few considerations to help you avoid surprises at the closing table.

Stash your cash. There is no real rule of thumb as to how much money buyers should put aside in addition to the balance of the purchase price and closing costs. But the more, the better. “You definitely want an emergency fund,” says David Reiss, a Brooklyn Law School professor who specializes in real estate. “Appliances have a habit of breaking right after you buy a house.”

Close on the last day of the month, or just before. One of the fees due at closing is prepaid interest, the daily interest charge accruing between the closing and the day on which your first mortgage payment is due. Closing on the last day of the month reduces this upfront cost.

Get an estoppel letter from the association. Your real-estate agent or attorney may obtain this letter, which lists the maintenance fee, when it’s due, any required escrows or membership fees and whether a special assessment has been levied. Review this letter carefully, and compare it with the purchase contract to make sure all fees are apportioned accurately between buyer and seller.

Honesty Is Best

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Grant Wood; "Parson Weems' Fable"; 1939; oil on canvas; Amon Carter Museum, Fort Worth, Texas; 1970.43

Grant Wood; “Parson Weems’ Fable”; 1939; oil on canvas; Amon Carter Museum

Trulia quoted me in 6 Things Home Sellers Are Legally Required To Disclose. It opens,

When it comes to selling your home, heed your mother’s advice: Honesty is always the best policy.

Denise Supplee and her husband, Jerry, had been in their new home in Horsham, PA, for just three months when they started to notice something strange in their bathroom. “You could see mold starting to seep through the paint,” says Denise, a co-founder and director of operations of SparkRental.com. “We had a contractor come in and he told us we were lucky,” she says. “It seemed to be an issue kept to the bathroom and occurred most likely because there was no exhaust fan.” The problem: The seller had blatantly painted over existing mold without ever disclosing it to the Supplees. Although the seller made good and paid for the mold removal — a $1,500 cost — the Supplees could have taken them to court for not disclosing the problem before the sale.

It’s a question that plagues many residential sales: As a seller, what do you — and don’t you — need to tell the buyer about your home? “My rule of thumb is this: If you’re not sure if you should disclose something, you probably should,” says Sam Pawlitzki, a real estate agent with Beach Cities Real Estate in Los Angeles, CA. “Think of seller disclosures like a Carfax report.” Plus, the harm in not disclosing something can result in some serious legal and financial woes. Here’s a list of what you legally need to include in your sellers’ disclosure to keep yourself out of hot water.

1. Lead paint

One item is a must when it comes to being upfront with potential buyers: the use of lead-based paint in your home. “If the home was built before 1978, each party in a transaction needs to sign a lead paint disclosure,” says Pawlitzki. “This is a federal law and applies to every state. No matter if you think the lead paint has been removed or not, it still needs to be disclosed.” However, David Reiss, a professor at Brooklyn Law School in Brooklyn, NY, explains, “If you are not aware of a lead-based paint issue in the house, you are not required by the act to investigate whether there is any.”

The State of the Union’s Housing in 2016

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photo by Lawrence Jackson

The Joint Center for Housing Studies of Harvard University has released its excellent annual report, The State of the Nation’s Housing for 2016. It finds,

With household growth finally picking up, housing should help boost the economy. Although homeownership rates are still falling, the bottom may be in sight as the lingering effects of the housing crash continue to dissipate. Meanwhile, rental demand is driving the housing recovery, and tight markets have added to already pressing affordability challenges. Local governments are working to develop new revenue sources to expand the affordable housing supply, but without greater federal assistance, these efforts will fall far short of need. (1)

Its specific findings include,

  • nominal home prices were back within 6 percent of their previous peak in early 2016, although still down nearly 20 percent in real terms. The uptick in nominal prices helped to reduce the number of homeowners underwater on their mortgages from 12.1 million at the end of 2011 to 4.3 million at the end of 2015. Delinquency rates also receded, with the share of loans entering foreclosure down sharply as well. (1)
  • The US homeownership rate has tumbled to its lowest level in nearly a half-century. . . . But a closer look at the forces driving this trend suggests that the weakness in homeownership should moderate over the next few years. (2)
  • The rental market continues to drive the housing recovery, with over 36 percent of US households opting to rent in 2015—the largest share since the late 1960s. Indeed, the number of renters increased by 9 million over the past decade, the largest 10-year gain on record. Rental demand has risen across all age groups, income levels, and household types, with large increases among older renters and families with children. (3)

There is a lot more of value in the report, but I will leave it to readers to locate what is relevant to their own interests in the housing industry.

I would be remiss, though, in not reiterating my criticism of this annual report: it fails to adequately disclose who funded it. The acknowledgments page says that principal funding for it comes from the Center’s Policy Advisory Board, but it does not list the members of the board.

Most such reports have greater transparency about funders, but the interested reader of this report would need to search the Center’s website for information about its funders. And there, the reader would see that the board is made up of many representatives of real estate companies including housing finance giants, Fannie Mae and Freddie Mac; national developers, like Hovnanian Enterprises and KB Homes; and major construction suppliers, such as Marvin Windows and Doors and Kohler. Nothing wrong with that, but disclosure of such ties is now to be expected from think tanks and academic centers.  The Joint Center for Housing Studies should follow suit.