Tag Archives: regulatory environment

Fintech and Mortgage Lending

Posted on by
image by InvestmentZen, www.investmentzen.com

The Trump Administration released its fourth and final report on Nonbank Financials, Fintech, and Innovation in its A Financial System That Creates Economic Opportunity series. The report differs from the previous three as it does not throw the Consumer Financial Protection Bureau under the bus when it comes to the regulation of mortgage lending.

The report highlights how nonbank mortgage lenders, early adopters of fintech, have taken an immense amount of market share from traditional mortgage lenders like banks:

Treasury recognizes that the primary residential mortgage market has experienced a fundamental shift in composition since the financial crisis, as traditional deposit-based lender-servicers have ceded sizable market share to nonbank financial firms, with the latter now accounting for approximately half of new originations. Some of this shift has been driven by the post-crisis regulatory environment, including enforcement actions brought under the False Claims Act for violations related to government loan insurance programs. Additionally, many nonbank lenders have benefitted from early adoption of financial technology innovations that speed up and simplify loan application and approval at the front-end of the mortgage origination process. Policymakers should address regulatory challenges that discourage broad primary market participation and inhibit the adoption of  technological developments with the potential to improve the customer experience, shorten origination timelines, facilitate efficient loss mitigation, and generally deliver a more reliable, lower cost mortgage product. (11)

I am not sure that the report has its causes and effects exactly right. For instance, why would banks be more disincentivized than other financial institutions because of False Claims Act lawsuits? Is the argument that banks have superior lending opportunities that are not open to nonbank mortgage lenders? If so, is that market segmentation such a bad thing? 

That being said, I think the report is right to highlight the impact of fintech on the contemporary mortgage lending environment. Consumers will certainly benefit from a shorter and more streamlined mortgage application process.

Hope for the Securitization Market

Posted on by

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.

Mortgage Market, Hiding in Plain Sight

Posted on by

David Jackmanson

I blogged about the Center for Responsible Lending’s take on the 2014 Home Mortgage Disclosure Act (HMDA) data yesterday.  The mere act of aggregating this data reveals so much about the state of the mortgage market. Today I am digging into it a bit on my own.

There is a lot of good stuff in the analysis of the HMDA data released by the Federal Financial Institutions Examination Council (FFIEC). I found the discussion of the effects of the Qualified Mortgage and Ability to Repay rules most interesting:

The HMDA data provide little indication that the new ATR and QM rules significantly curtailed mortgage credit availability in 2014 relative to 2013. For example, despite the QM rule that caps borrowers’ DTI ratio for many loans, the fraction of high-DTI loans does not appear to have declined in 2014 from 2013. However, as discussed in more detail later, there are significant challenges in determining the extent to which the new rules have influenced the mortgage market, and the results here do not necessarily rule out significant effects or the possibility that effects may arise in the future. (4)

This analysis is apparently reacting to those who have claimed that the new regulatory environment is restricting lending too much. The mortgage market is generally too complicated for simple assertions like “new regulations have restricted credit too heavily” or “not enough” There are so many relevant factors, such as changes in the interest rate environment, the unemployment rate and the change in the cost of housing, to be confident about the effect of the change in regulations, particularly over a short time span. But the FFIEC analysis seems to have it right that the new regs did not have such a great impact when they went into effect on January 1, 2014, given the similarities in the 2013 and 2014 data. This reflects well on the rule-writing process for the QM and ATR rules. Time will tell whether and how they will need to be tweaked.

While the discussion of the new rules was comforting, I found the discussion of FHA mortgages disturbing: “The higher-priced fraction of FHA home-purchase loans spiked from about 5 percent in early 2013 to about 40 percent after May 2013 and continued at monthly rates between 35 and 52 percent through 2014, for an annual average incidence of about 44 percent in 2014.” (15) Higher-priced first-lien loans are those with an APR that is at least one and a half percentage points higher than the average prime offer rate for loans of a similar type.

The FHA often provides the only route to homeownership for first-time, minority and lower-income homebuyers, but it must be monitored to make sure that it is insuring mortgages that homeowners can pay month in and month out. If FHA mortgages are not sustainable for the long run, they are likely to do homebuyers more harm than good.