Tag Archives: residential

Trump and the Regulation of Real Estate

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I have posted my article, The Trump Administration and Residential Real Estate Finance, which just came out in Westlaw Journal Derivatives to SSRN (and also to BePress). The abstract reads,

An executive order titled “Reducing Regulation and Controlling Regulatory Costs” was one of President Donald Trump’s first executive orders. He signed it Jan. 30, 2017, just days after his inauguration. It states: “It is the policy of the executive branch to be prudent and financially responsible in the expenditure of funds, from both public and private sources. … It is essential to manage the costs associated with the governmental imposition of private expenditures required to comply with federal regulations.” This executive order outlined a broad deregulatory agenda, but it was short on details other than setting a requirement that every new regulation be accompanied by the elimination of two existing ones. A few days later, Trump issued another executive order that was focused on financial services regulation in particular. That order is titled “Core Principles for Regulating the United States Financial System.” It says the Trump administration’s first core principle for financial services regulation is to “empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth.” However, it is also short on details.

Since Trump signed these two broad executive orders, his administration issued two sets of documents that fill in applicable details for financial institutions. The first is a slew of documents that were released as part of the Office of Information and Regulatory Affairs’ Current Regulatory Plan and the Unified Agenda of Regulatory and Deregulatory Actions. The second is a series of Treasury reports — titled “A Financial System That Creates Economic Opportunities” — that are directly responsive to the core principles executive order. While these documents cover a broad range of topics, they offer a glimpse into how this administration intends to regulate — or more properly, deregulate — residential real estate finance in particular. What is clear from these documents is that the Trump administration intends to roll back consumer protection regulation so that the mortgage market can operate with far less government oversight.

Mortgage Servicing Since The Financial Crisis

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photo by Dan Brown

Standard & Poors issued a report, A Decade After The Financial Crisis, What’s The New Normal For Residential Mortgage Servicing? It provides a good overview of how this hidden infrastructure of the mortgage market is functioning after it emerged from the crucible of the subprime and foreclosure crises. It reads, in part,

Ten years after the start of the financial crisis, residential mortgage servicing is finally settling into a new sense of normal. Before the crisis, mortgage servicing was a fairly static business. Traditional prime servicers had low delinquency rates, regulatory requirements rarely changed, and servicing systems were focused on core functions such as payment processing, investor accounting, escrow management, and customer service. Subprime was a specific market with specialty servicers, which used high-touch collection practices rather than the low-touch model prime servicers used. Workout options for delinquent borrowers mainly included repayment plans or extensions. And though servicers completed some modifications, short sales, and deeds in lieu of foreclosure, these were exceptions to the normal course of business.

Today, residential mortgage servicing involves complex regulation, increased mandatory workout options, and multiple layers of internal control functions. Over the past 10 years servicers have had to not only modify their processes, but also hire more employees and enhance their technology infrastructure and internal controls to support those new processes. As a result, servicing mortgage loans has become less profitable, which has caused loan servicers to consolidate and has created a barrier to entry for new servicers. While the industry expects reduced regulatory requirements under the Trump administration and delinquency rates to continue to fall, we do not foresee servicers reverting to pre-crisis operational processes. Instead, we expect states to maintain, and in some cases enhance, their regulatory requirements to fill the gap for any lifted or reduced at the federal level. Additionally, most mortgage loan servicers have already invested in new processes and technology, and despite the cost to support these and adapt to any additional requirements, we do not expect them to strip back the controls that have become their new normal. (2/10, citation omitted)

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As The Economy Improves, Delinquency Rates Have Become More Stable

Total delinquency rates have only just begun returning to around pre-crisis levels as the economy–and borrowers’ abilities to make their mortgage payments–has improved (see charts 1 and 2). Lower delinquency rates can also be attributed to delinquent accounts moving through the default management process, either becoming reperforming loans after modifications or through liquidation. New regulatory requirements have also extended workout timelines for delinquent accounts. In 2010, one year after 90-plus delinquency rates hit a high point, the percentage of prime and subprime loans in foreclosure actually surpassed the percentage that were more than 90 days delinquent–a trend that continued until 2013 for prime loans and 2014 for subprime loans. But since the end of 2014, all delinquency buckets have remained fairly stable, with overall delinquency rates for prime loans down to slightly over 4% for 2016 from a peak of just over 8% in 2009. Overall delinquency rates for subprime loans have fluctuated more since the peak at 29% in 2009. (2/10)

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Modifications Now Make Up About Half Of Loan Workout Strategies

Government agencies and government-sponsored enterprises (Fannie Mae and Freddie Mac) developed new formal modification programs beginning in 2008 to address the rising delinquency and foreclosure rates. The largest of these programs was HAMP, launched in March 2009. While HAMP was required for banks accepting funds from the Troubled Asset Relief Program (TARP), all servicers were allowed to participate. These programs required that servicers exhaust all loss mitigation options before completing foreclosure. This requirement, and the fact that servicers started receiving incentives to complete modifications, spurred the increase in modifications. (4/10)

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Foreclosure Timelines Have Become Longer

As the number of loans in foreclosure rose during the financial crisis, the requirements associated with the foreclosure process grew. As a result, the time it took to complete the foreclosure process increased to almost 475 days in 2016 from more than 160 days in 2007–an increase of almost 200%. While this is not a weighted average and therefore not adjusted for states with smaller or larger foreclosure portfolios, which could skew the average, the data show longer timelines across all states. And even though the percentage of loans in foreclosure has decreased in recent years (to 1% and 9% by the end of 2016 for prime and subprime, respectively, from peaks of 3% in 2010 and 13% in 2011) the time it takes to complete a foreclosure has still not lessened (6/10)

Surveying Mortgage Originations, Going Forward

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REFinBlog has been nominated for the second year in a row for The Expert Institute’s Best Legal Blog Competition in the Education Category.  Please vote here if you like what you read.

As I had earlier noted, the Federal Housing Finance Agency has issued a request for comments on the National Survey of Mortgage Originations (NSMO).  The NSMO is “a recurring quarterly survey of individuals who have recently obtained a loan secured by a first mortgage on single-family residential property.” (81 F.R. 62889) I submitted my comment, written in the context of the newly-elected Trump Administration. It reads, in part,

I write to support this proposed collection, but also to raise some concerns about its efficacy.

The NSMO is very important to the health of the mortgage market.  We need only look at the Subprime Boom of the late 1990s and early 2000s to see why this is true:  subprime mortgages went from “making up a tiny portion of new mortgage originations in the early 1990s” to  “40 percent of newly originated securitized mortgages in 2006.” David Reiss, Regulation of Subprime and Predatory Lending, International Encyclopedia of Housing and Home (2010). During the Boom, subprime lenders like Countrywide changed mortgage characteristics so quickly that information about new originations became outdated within months.See generally Financial Crisis Inquiry Commission, Financial Crisis Inquiry Report 105 (2011) (“Countrywide was not unique: Ameriquest, New Century, Washington Mutual, and others all pursued loans as aggressively. They competed by originating types of mortgages created years before as niche products, but now transformed into riskier, mass-market versions”) Policymakers and academics did not have good access to the newest data and thus were operating, to a large extent, in the dark.  The information in the NSMO will therefore not only help regulators, but will also assist outside researchers to “more effectively monitor emerging trends in the mortgage origination process . . ..” (81 F.R. 62890)

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there is no question that this “collection of information is necessary for the proper performance of FHFA functions . . ..” (81 F.R. 62890) Given the likely changes to the federal role in the mortgage markets over the next four years, the NSMO can provide critical insight into whether homeowners feel that that market serves their needs.

Airbnb’s Tourist Tenements

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The New York State Independent Conference issued a report, Tourist Tenements in the Making. The report concludes,

New York City has long been at the forefront of ensuring that its housing stock is safe for residents. We have instituted laws such as the Multiple Dwelling Law, the Housing Maintenance Code, and the Fire Code to ensure that buildings are constructed to the right standards for their intended uses, and have passed laws to prohibit activities that endanger people’s lives. One such action is turning residential properties into illegal hotels hosting over a dozen guests.

Residential properties are not meant to host dozens of transient guests. The IDC’s investigation found over 100 ads featuring residential spaces for groups of more than a dozen people, some claiming to house over 30 people. This kind of behavior not only creates an inconvenience for neighbors, but creates real dangers to both residents of this city and those guests that may choose housing not knowing that it is an illegal posting, since they saw the ad on Airbnb. We should not wait for a tragedy to strike before taking actions to curb illegal rentals that create dangerous conditions.

It is important that the State government take steps to protect our residents and tourists visiting New York from this kind of irresponsible behavior. As such, the Executive should act and sign into law the recent bill passed by the Legislature that will impose fines on individuals advertising illegal short term rentals and the Legislature should examine additional steps necessary to make sure that illegal short term rentals are handled not only in multi-family buildings but in private homes as well and that hosting websites be made responsible for the content they profit from. (11)

While the sharing economy is here to stay, it is hard to imagine that it will not face some form of increased regulation after reports like these come out. One Airbnb rental highlighted in the report advertises space for 16 people in a two-family house and another claims that it can house 32 people. The pictures in the report tell a thousand words each — bunk beds, beds in the kitchen, air mattresses lined up one next to the other.

This report shows some extreme examples of what can happen when the free market for residential space goes unfettered in a high-cost city. But, as the report notes, the government has a legitimate interest in protecting the health and safety of its residents and visitors. New York first regulated tenements over a hundred years ago. No doubt, they will soon act on this 21st century version of them, hopefully before a Triangle Factory Fire-type event strikes.

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The State of Mortgage Lending

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AmericanBankersAssociation-1950

The American Bankers Association has issued its 23rd Annual ABA Residential Real Estate Survey Report for 2016. There is a lot to unpack in its findings. The key ones are

  • About 86 percent of loans originated by banks were QM [Qualified Mortgage] compliant compared to 90 percent in 2014, likely because more banks are adjusting underwriting criteria to target selected non-QM loan opportunities
  • Despite increased non-QM lending, approximately 72 percent of respondents expect the current ATR [Ability to Repay]/QM regulations will continue to reduce credit availability – down from nearly 80 percent in 2014
  • Relatedly, the percentage of banks restricting lending to QM segments dropped from 33 percent to 26 percent, and those providing targeted non-QM lending rose to 54 percent from 48 percent
  • High debt-to-income levels continue to be the most likely reason why a non-QM loan did not meet QM standards
  • The percentage of single family mortgage loans made to first time home buyers continues to climb to a new all-time high as it represented 15 percent of loans underwritten in 2015 – up from 13 percent in 2013 and 14 percent in 2014
  • Approximately half of the respondents state that regulations have a moderate negative impact on business, while nearly a quarter report the impact as extremely negative (4)

The most important finding is that banks are becoming more and more comfortable with non-QM loans. I had thought that this would happen more quickly than it has, but it now seems that the industry has become comfortable with the ATR/QM regs.

There are good non-QM loans — for good borrowers with quirky circumstances. And there are bad non-QM loans — for bad borrowers generally. As a result, the finding that “High debt-to-income levels continue to be the most likely reason why a non-QM loan did not meet QM standards” could cut both ways. There are some non-QM borrowers with high debt-to-income [DTI] ratios who are good credit risks.  Think of the doctor about to finish a residency and enter private practice. And there are some non-QM borrowers with high DTI who are bad credit risks. Think of the borrower with lots of student loan, credit card and auto debt. Unfortunately this survey does not provide any insight into what types of non-QM loans are being originated. That is a big limitation of this survey.

The finding that about “half of the respondents state that regulations have a moderate negative impact on business, while nearly a quarter report the impact as extremely negative” is also ambiguous. Is a negative impact a reduction in the number of loan originations? But what if those loans were likely to be unsustainable because of the high DTI ratios of bad borrowers? Is it so bad for the ATR/QM regulations to have kept those loans from having been made in the first place? I don’t think so. It is hard to tell what is meant by this survey question as well. Perhaps the ABA could tighten up its questions for next year’s survey.

Wednesday’s Academic Roundup

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Wednesday’s Academic Roundup

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