Tag Archives: predatory lending

Foreclosure Echo

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David Reiss CC BY-NC-SA

Linda Fisher recently posted a pdf of The Foreclosure Echo: How the Hardest Hit Have Been Left out of the Economic Recovery, a book she co-authored with Judith Fox. It came out before the pandemic, so you might have missed it. The abstract reads,

This book tells the story of the foreclosure crisis from a new perspective – that of ordinary people who experienced it. This angle has not been thoroughly communicated before now. The authors are legal academics who have worked for decades defending low- to moderate-income people from foreclosure and challenging predatory lending practices. They have a wealth of experience representing people whose American Dream was shattered when they were threatened with losing their homes. Using actual experiences – often examined through a legal lens – supplemented by economic, social science and legal research, The Foreclosure Echo explains how people experienced the crisis and how their lenders and public institutions let them down. The book also details the lingering effects of the crisis – such as vacant and abandoned buildings – and how these effects have magnified inequality. Finally, the book suggests reforms that could help avoid another crisis.

It is a timely read, and it resonates with some of the challenges homeowners will face as the consequences of the pandemic work themselves out in the housing market with the expiration of the various foreclosure moratoria that were in effect during the earlier stages of the pandemic.

Easy Money From Fannie Mae

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The San Francisco Chronicle quoted me in Fannie Mae Making It Easier to Spend Half Your Income on Debt. It reads in part,

Fannie Mae is making it easier for some borrowers to spend up to half of their monthly pretax income on mortgage and other debt payments. But just because they can doesn’t mean they should.

“Generally, it’s a pretty poor idea,” said Holly Gillian Kindel, an adviser with Mosaic Financial Partners. “It flies in the face of common financial wisdom and best practices.”

Fannie is a government agency that can buy or insure mortgages that meet its underwriting criteria. Effective July 29, its automated underwriting software will approve loans with debt-to-income ratios as high as 50 percent without “additional compensating factors.” The current limit is 45 percent.

Fannie has been approving borrowers with ratios between 45 and 50 percent if they had compensating factors, such as a down payment of least 20 percent and at least 12 months worth of “reserves” in bank and investment accounts. Its updated software will not require those compensating factors.

Fannie made the decision after analyzing many years of payment history on loans between 45 and 50 percent. It said the change will increase the percentage of loans it approves, but it would not say by how much.

That doesn’t mean every Fannie-backed loan can go up 50 percent. Borrowers still must have the right combination of loan-to-value ratio, credit history, reserves and other factors. In a statement, Fannie said the change is “consistent with our commitment to sustainable homeownership and with the safe and sound operation of our business.”

Before the mortgage meltdown, Fannie was approving loans with even higher debt ratios. But 50 percent of pretax income is still a lot to spend on housing and other debt.

The U.S. Census Bureau says households that spend at least 30 percent of their income on housing are “cost-burdened” and those that spend 50 percent or more are “severely cost burdened.”

The Dodd-Frank Act, designed to prevent another financial crisis, authorized the creation of a “qualified mortgage.” These mortgages can’t have certain risky features, such as interest-only payments, terms longer than 30 years or debt-to-income ratios higher than 43 percent. The Consumer Financial Protection Bureau said a 43 percent limit would “protect consumers” and “generally safeguard affordability.”

However, loans that are eligible for purchase by Fannie Mae and other government agencies are deemed qualified mortgages, even if they allow ratios higher than 43 percent. Freddie Mac, Fannie’s smaller sibling, has been backing loans with ratios up to 50 percent without compensating factors since 2011. The Federal Housing Administration approves loans with ratios up to 57 percent, said Ed Pinto of the American Enterprise Institute Center on Housing Risk.

Since 2014, lenders that make qualified mortgages can’t be sued if they go bad, so most lenders have essentially stopped making non-qualified mortgages.

Lenders are reluctant to make jumbo loans with ratios higher than 43 percent because they would not get the legal protection afforded qualified mortgages. Jumbos are loans that are too big to be purchased by Fannie and Freddie. Their limit in most parts of the Bay Area is $636,150 for one-unit homes.

Fannie’s move comes at a time when consumer debt is soaring. Credit card debt surpassed $1 trillion in December for the first time since the recession and now stands behind auto loans ($1.1 trillion) and student loans ($1.4 trillion), according to the Federal Reserve.

That’s making it harder for people to get or refinance a mortgage. In April, Fannie announced three small steps it was taking to make it easier for people with education loans to get a mortgage.

Some consumer groups are happy to see Fannie raising its debt limit to 50 percent. “I think there are enough other standards built into the Fannie Mae underwriting system where this is not going to lead to predatory loans,” said Geoff Walsh, a staff attorney with the National Consumer Law Center.

Mike Calhoun, president of the Center for Responsible Lending, said, “There are households that can afford these loans, including moderate-income households.” When they are carefully underwritten and fully documented “they can perform at that level.” He pointed out that a lot of tenants are managing to pay at least 50 percent of income on rent.

A new study from the Joint Center for Housing Studies at Harvard University noted that 10 percent of homeowners and 25.5 percent of renters are spending at least 50 percent of their income on housing.

When Fannie calculates debt-to-income ratios, it starts with the monthly payment on the new loan (including principal, interest, property tax, homeowners association dues, homeowners insurance and private mortgage insurance). Then it adds the monthly payment on credit cards (minimum payment due), auto, student and other loans and alimony.

It divides this total debt by total monthly income. It will consider a wide range of income that is stable and verifiable including wages, bonuses, commissions, pensions, investments, alimony, disability, unemployment and public assistance.

Fannie figures a creditworthy borrower with $10,000 in monthly income could spend up to $5,000 on mortgage and debt payments. Not everyone agrees.

“If you have a debt ratio that high, the last thing you should be doing is buying a house. You are stretching yourself way too thin,” said Greg McBride, chief financial analyst with Bankrate.com.

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“If this is data-driven as Fannie says, I guess it’s OK,” said David Reiss, who teaches real estate finance at Brooklyn Law School. “People can make decisions themselves. We have these rules for the median person. A lot of immigrant families have no problem spending 60 or 70 percent (of income) on housing. They have cousins living there, they rent out a room.”

Reiss added that homeownership rates are low and expanding them “seems reasonable.” But making credit looser “will probably drive up housing prices.”

The article condensed my comments, but they do reflect the fact that the credit box is too tight and that there is room to loosen it up a bit. The Qualified Mortgage and Ability-to-Repay rules promote the 43% debt-to-income ratio because they provide good guidance for “traditional” nuclear American families.  But there are American households where multigenerational living is the norm, as is the case with many families of recent immigrants. These households may have income streams which are not reflected in the mortgage application.

Treasury’s Trojan Horse for The CFPB

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The Procession of the Trojan Horse in Troy by Giovanni Domenico Tiepolo

The Hill posted my latest column, Americans Are Better off with Consumer Protection in Place. It opens,

This month, the Treasury Department issued a report to President Trump in response to his executive order on regulation of the U.S. financial system. While the report does not seek to do as much damage to consumer protection as the House’s Financial Choice Act, it proposes a dramatic weakening of the federal government’s role in the consumer financial services market. In particular, the report advocates that the Consumer Financial Protection Bureau’s mandate be radically constrained.

Republicans have been seeking to weaken the CFPB since it was created as part of the Dodd-Frank Act. The bureau took over responsibility for consumer protection regulation from seven federal agencies. Republicans have been far more antagonistic to the bureau than many of the lenders it regulates. Lenders have seen the value in consolidating much of their regulatory compliance into one agency.

To keep reading, click here.

Banks v. Cities

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The Supreme Court issued a decision in Bank of America Corp. v. Miami, 581 U.S. __ (2017). The decision was a mixed result for the parties.  On the one hand, the Court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending. Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. On the other hand, the Court held that Miami had not shown that the banks’ actions were directly related to injuries asserted by Miami. As a result, the Court remanded the case to the Eleventh Circuit to determine whether that in fact was the case. This case could have big consequences for how lenders and others and other big players in the housing industry develop their business plans.

For the purposes of this post, I want to focus on the banks’ activities of the banks that Miami alleged they engaged in during the early 2000s. It is important to remember the kinds of problems that communities faced before the financial crisis and before the Dodd-Frank Act authorized the creation of the Consumer Financial Protection Bureau. As President Trump and Chairman Hensarling (R-TX) of the House Financial Services Committee continue their assault on consumer protection regulation, we should understand the Wild West environment that preceded our current regulatory environment. Miami’s complaints charge that

the Banks discriminatorily imposed more onerous, and indeed “predatory,” conditions on loans made to minority borrowers than to similarly situated nonminority borrowers. Those “predatory” practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and—when default loomed—unjustified refusals to refinance or modify the loans. Due to the discriminatory nature of the Banks’ practices, default and foreclosure rates among minority borrowers were higher than among otherwise similar white borrowers and were concentrated in minority neighborhoods. Higher foreclosure rates lowered property values and diminished property-tax revenue. Higher foreclosure rates—especially when accompanied by vacancies—also increased demand for municipal services, such as police, fire, and building and code enforcement services, all needed “to remedy blight and unsafe and dangerous conditions” that the foreclosures and vacancies generate. The complaints describe statistical analyses that trace the City’s financial losses to the Banks’ discriminatory practices. (3-4, citations omitted)

Excessively high interest rates, unjustified fees, teaser interest rates and large prepayment penalties were all hallmarks of the subprime mortgage market in the early 2000s. The Supreme Court has ruled that such activities may arise to violations of the Fair Housing Act when they are targeted at minority communities.

Dodd-Frank has barred many such loan terms from a large swath of the mortgage market through its Qualified Mortgage and Ability-to-Repay rules. Trump and Hensarling want to bring those loan terms back to the mortgage market in the name of lifting regulatory burdens from financial institutions.

What’s worse, the  burden of regulation on the banks or the burden of predatory lending on the borrowers? I’d go with the latter.

Kafka and the CFPB

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photo by Ferran Cornellà

Statue of Franz Kafka by Jaroslav Rona

The Hill published my latest column, The CFPB Is a Champion for Americans Across The Country. It opens,

Republicans like Sen. Ted Cruz (R-Texas) have been arguing that consumers should be freed from the Consumer Financial Protection Bureau’s “regulatory blockades and financial activism.” House Financial Services Committee Chairman Jeb Hensarling (R-Texas) accuses the CFPB of engaging in “financial shakedowns” of lenders. These accusations are weighty.

But let’s take a look at the types of behaviors consumers are facing from those put-upon lenders. A recent decision in federal bankruptcy court, Sundquist v. Bank of America, shows how consumers can be treated by them. You can tell from the first two sentences of the judge’s opinion that it goes poorly for the consumers: “Franz Kafka lives. This automatic stay violation case reveals that he works at Bank of America.”

The judge continues, “The mirage of promised mortgage modification lured the plaintiff debtors into a Kafka-esque nightmare of stay-violating foreclosure and unlawful detainer, tardy foreclosure rescission kept secret for months, home looted while the debtors were dispossessed, emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder, for all of which Bank of America disclaims responsibility.”

Homeowners who reads this opinion will feel a pit in their stomachs, knowing that if they were in the Sundquists’ shoes they would also tremble with rage and fear from the way Bank of America treated them: 20 or so loan modification requests or supplements were “lost;” declared insufficient, incomplete or stale; or denied with no clear explanation.

Over the years, I have documented similar cases on REFinBlog.com. In U.S. Bank, N.A. v. David Sawyer et al., the Maine Supreme Judicial Court documented how loan servicers demanded various documents which were provided numerous times over the course of four court-ordered mediations and how the servicers made numerous promises about modifications that they did not keep. In Federal National Mortgage Assoc. v. Singer, the court documents the multiple delays and misrepresentations that the lender’s agents made to the homeowners.

The good news is that in those three cases, judges punished the servicers and lenders for their pattern of Kafka-esque abuse of the homeowners. Indeed, the Sundquist judge fined Bank of America a whopping $45 million to send it a message about its horrible treatment of borrowers.

But a fairy tale ending for a handful of borrowers who are lucky enough to have a good lawyer with the resources to fully litigate one of these crazy cases is not a solution for the thousands upon thousands of borrowers who had to give up because they did not have the resources, patience, or mental fortitude to take on big lenders who were happy to drag these matters on for years and years through court proceeding after court proceeding.

What homeowners need is a champion that will stand up for all of them, one that will create fair procedures that govern the origination and servicing of mortgages, one that will enforce those procedures, and one that will study and monitor the mortgage market to ensure that new forms of predatory behavior do not have the opportunity to take root. This is just what the Consumer Financial Protection Bureau has done. It has promulgated the qualified mortgage and ability-to-repay rules and has worked to ensure that lenders comply with them.

Kafka himself said that it was “the blend of absurd, surreal and mundane which gave rise to the adjective ‘kafkaesque.’” Most certainly that is the experience of borrowers like the Sundquists as they jump through hoop after hoop only to be told to jump once again, higher this time.

When we read a book like Kafka’s The Trial, we are left with a sense of dislocation. What if the world was the way Kafka described it to be? But if we go through an experience like the Sundquists’, it is so much worse. It turns out that an actor in the real world is insidiously working to destroy us, bit by bit.

The occasional win in court won’t save the vast majority of homeowners from abusive lending practices. A regulator like the Consumer Financial Protection Bureau can. And in fact it does.

What’s the CFPB Ever Done for Housing?

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TheStreet.com quoted me in What’s the CFPB Ever Done For Housing? Quite A Lot. It reads, in part,

The Consumer Financial Protection Bureau grew out of the housing market crash of 2008 and subsequent Dodd-Frank legislation. As a watchdog with teeth, the CFPB’s job is to protect homebuyers from the predatory mortgages that helped sink the economy nine years ago. And it worked.

In theory.

Problem is, for some would-be homeowners, the CFPB is an inconvenient middle-man, adding more red tape to an already impossible situation. In short, it isn’t perfect. But with the Trump administration threatening to tear the whole damn thing down, you’ve got to wonder, is the CFPB really doing more harm to the housing market than good?

How we got here

Pre-housing market crash, the mortgage lending world was a vastly different, Wild West sort of landscape. Dodd-Frank and the CFPB entered the scene, in part, for lending oversight in that uncontrolled housing market. For example, once not-uncommon ‘liar loans,’ which were largely based on the borrower’s word and not much else-for instance, someone saying they made $100,000 a year to qualify for a huge home even though they made $30,000-are now illegal thanks to Dodd-Frank and the CFPB. Mortgage companies cashing in at the expensive of uneducated buyers happened, and it happened a lot.

“Just about everybody I talked to prior to 2008 thought the lending climate was out of control,” says Chandler Crouch, broker and owner of Chandler Crouch Realtors in Dallas-Fort Worth. “People were saying it couldn’t last. It just didn’t make sense. Lending requirements were too loose. Everybody, from Wall Street to the banks to the loan officers to the consumers, was being rewarded for making bad decisions. Lending needed to tighten.”

*     *     *

“The CFPB has been criticized for restricting mortgage credit too much with its Qualified Mortgage and ability to repay rules,” says David Reiss, a law professor at Brooklyn Law School who has practiced real estate law since 1998.

This was all done to ensure buyers could afford their home and not end up in foreclosure or short sale (and also avoid another economic collapse). These rules also bar lenders from predatory loans like massive balloon loans and shady adjustable rate mortgages.

*     *     *

Will no CFPB = housing hellscape?

Let’s say the Republicans get their way and the CFPB goes poof. What happens?

“You’d see an expansion of the credit box-more people would be approved for credit,” says Reiss. “To the extent that credit is offered on good terms, that would be a good development. I think you would see more potential homebuyers being approved for mortgages which would drive up home prices in the short term as there would be more competition.”

But then there’s the opportunity for those really bad loans to come swinging back, which harm homeowners would have in the past and also trigger fears of another housing collapse.

“Liar loans would definitely have a comeback if the CFPB and Dodd-Frank were dismantled,” says Reiss. “The Qualified Mortgage and ability to repay rules were implemented as part of the broader Dodd-Frank rulemaking agenda; without those rules, credit would quickly return to its extreme boom and bust cycle, with liar loans a product that would pick up steam just as the boom reaches its heights…We would bemoan them once again as soon as the bust hits its depths.”

Grading Trump’s Economic Performance

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TheStreet.com quoted me in President Trump Grades Out Well in the Eyes of Financial Advisors. I was a contrarian voice in this story:

President Trump has been in the office for a little over a month, and love him or hate him, financial industry specialists seem fairly bullish on his performance from an economic point of view.

That’s the takeaway from a single question posted to a handful of highly-respected U.S. financial advisors – “how would you grade President Trump’s economic performance one month into his term?”

All the advisors contacted by TheStreet stated, in unison, that it’s very early in the Trump presidency, and that events can change on a dime when it comes to key consumer financial issues like jobs, the stock market, gross domestic product, the housing market, and consumer spending.

But the reaction from virtually all the money managers in touch with TheStreet.com was positive, with a healthy share of As graded out. Here are those grades, and why wealth managers are, for now at least, putting. Trump at the head of the class:

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David Reiss, Professor of Law, Brooklyn Law School, Brooklyn, N.Y. – “I give President Trump a first term grade of C- for the housing market. He has indicated that he wants to roll back Dodd-Frank and the Consumer Financial Protection Bureau that it created. That will have a negative impact on homeowners who are protected by Dodd-Frank’s Qualified Mortgage and Ability-to-Repay rules. Trump started the process of rolling back Dodd-Frank with a vague executive order directing Treasury to review financial regulations. If Trump decides to completely gut the homeowner protections contained in Dodd-Frank, his grade will plummet further as predatory lending rears its head once again in the housing market.”

With media mavens, political activists, and even Main Street Americans squaring off over one of the most controversial Presidents in history, the outlook from financial specialists — with the exception of Reiss — on the economy is a bullish one, even if it’s only a month or so into the Trump administration.