Demand better consumer financial protection

consumer financial protection
Consumer Financial Protection and Dodd-Frank (infographic from CreditUnionTimes www,cutimes.com)

In an effort to reform the Consumer Financial Protection Bureau (consumerfinance.gov) to become a better steward of consumer protection, H.R.5983 – Financial CHOICE Act of 2016 was introduced during the last congress.  The effort to compel oversight on the now embattled agency, as well as provide for a panel of decision makers (in lieu of a single chairperson), is unfortunately highly politicized.  As financial consumers, we should demand a better and fair protection agency serving without political motive.

From the Executive Summary of the The Financial CHOICE Act
Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs:

SECTION THREE: Empower Americans to achieve financial independence by fundamentally reforming the CFPB and protecting investors.

  • Change the name of the CFPB to the “Consumer Financial Opportunity Commission(CFOC),” and task it with the dual mission of consumer protection and competitive markets, with a cost-benefit analysis of rules performed by an Office of Economic Analysis.
  • Replace the current single director with a bipartisan, five-member commission which is subject to congressional oversight and appropriations.
  • Establish an independent, Senate-confirmed Inspector General.
  • Require the Commission obtain permission before collecting personally identifiable information on consumers.
  • Repeal authority to ban bank products or services it deems “abusive” and its authority to prohibit arbitration.
  • Repeal indirect auto lending guidance.

Some have hailed the CFPB because it was created out of good intention. There is no question that the CFPB has done a great job in collecting and publicizing consumer complaints.  The announcements of consumer complaints seem to be a public airing of consumer grievances, which sometimes signaled forthcoming action from the agency in a specific financial sector.

However, critics contend that the CFPB rules have made lending more burdensome for both lenders and consumers by increasing bureaucratic red tape.  It has also increased the cost of lending to consumers by adding levels of compliance measures that are now embedded within the lending process.  Critics have also complained that the CFPB’s enforcement is not fair and unequal in focus.

Critics are becoming increasingly vocal, not only because of the sometimes invasive rule making, but more recently of how offenders are chosen and penalized.  Jacob Gaffney’s article for HousingWire (Former CFPB attorney pretty much just confirmed the worst fears of the mortgage industry: housingwire.com; January 3, 2017) earlier this year discussed two genuine concerns about the CFPB:

1) “The CFPB targets lenders for enforcement action based on opaque internal decisioning;” and

2) “Monetary penalties seemed determined by revenue, not equalitarian application of said enforcement action.”

Gaffney quoted Ronald Rubin, a former enforcement attorney at the Consumer Financial Protection Bureau, (from a December 21st 2016 piece “The Tragic Downfall of the Consumer Financial Protection Bureau” published online nationalreview.com) as confirming these concerns.  For example, the Wells Fargo fake consumer account scandal, one of the most egregious consumer scandals post financial crises, was not addressed by the CFPB (until it was too late) because Wells Fargo was allegedly “not a target of the agency at that time.”

Referring to the complaint database, Rubin stated:

The CFPB’s complaint database contained grievances against almost every financial business. Enforcement targeted the companies with the most revenue…rather than those with the most complaints.”  He further stated: “Targets (of the CFPB) were almost certain to write a check… Even the size of the checks didn’t depend on actual wrongdoing — during investigations, Enforcement demanded targets’ financial statements to calculate the maximum fines they could afford to pay.

The recent PHH Corp v Consumer Financial Protection Bureau case highlighted some of the alleged abuse of power by an agency with no oversight.  US Appellate Judge Kavanaugh wrote in his opinion:

That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case

…This is a case about executive power and individual liberty. The U.S. Government’s executive power to enforce federal law against private citizens – for example, to bring criminal prosecutions and civil enforcement actions – is essential to societal order and progress, but simultaneously a grave threat to individual liberty.”

We’ve followed the career of the CFPB since it was established in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  Shortly after the financial crisis, we eagerly anticipated the new agency to help those who were the target of abusive lending and foreclosure practices.  Since its inception, however, controversy has embraced the agency.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Make housing great again

make housing great again
“Dodd-Frank Has Imposed Regulatory Costs of $310 Per Household” (infographic from americanactionforum.org)

When President Trump was campaigning, one of his talking points was to “dismantle” Dodd-Frank.  And after a couple of weeks in office, it seems that it’s next on his “to do” list.  While many are already touting the move as controversial and partisan, the reality is that it’s a bipartisan issue.  Even Barney Frank was seen on CNBC this past Sunday admitting that his namesake legislation needs reform (video.cnbc.com/gallery/?video=3000590611).  Reforming Dodd-Frank will make housing great again.

Dodd-Frank is the nickname for Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The purpose, as described in its title, was to “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Dodd-Frank changed the housing industry dramatically.  Besides altering the process of financing and buying homes, critics have claimed that the legislation has also restricted lending.

Dodd-Frank created the Consumer Financial Protection Bureau; which creates and enforces rules and regulations for consumer financial markets.  Besides adding new home buyer and seller disclosures as well as timelines, the “Know Before You Owe” rule changed the home buying process by creating a new level of bureaucracy embedded within the mortgage lending process.

Many critics of the CFPB also claim that it has too much power with little oversight, and point to last year’s Appellate opinion on PHH Corp v. Consumer Financial Protection Bureau as confirmation for necessary reforms., where Judge Kavanaugh wrote:

“…the Director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy. The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law…That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case.”

One of the unintended consequences of Dodd-Frank was the restricted lending atmosphere in the mortgage industry.  Besides the overwhelming increase in rules and regulations as a result of Dodd-Frank, there has also been insufficient private portfolio and securitization of mortgages; which further limits access of funding to many home buyers.

Prior to the financial crisis, private mortgage securitization was prevalent; which provided a multitude of lending products, including “Alt-A” and subprime.  The wide access to private mortgage funding contributed to the homeownership rate to peak close to 70 percent (The most recent homeownership rate reported by the US Census was 63.7 percent, a forty year low).  Since the crisis, a majority (estimates were as high as 95 percent) of mortgages are insured or purchased by the government.

Before the financial crisis, Alt-A and subprime mortgages were widely available to give home buyers options to finance their homes, especially when they didn’t fit the underwriting guidelines for a conventional loan.  Many of these home buyers were self-employed or small business owners, whose financial picture was outside of the box of the requirements for a conventional mortgage.

Of course, FHA is an alternative to conventional mortgages.  FHA has lenient underwriting guidelines, like subprime mortgages; but is insured by the government.  However, the upfront and annual mortgage insurance premiums can be hefty.  Alt-A and subprime can seem more attractive when purchasing a home beyond the FHA loan limits, and/or when documentation becomes onerous.

Back in 2001, Federal Reserve Board Economist Liz Laderman wrote about the growth of subprime through the 1990’s (Subprime Mortgage Lending and the Capital Markets; FRBSF Economic Letter; December 28, 2001).

“An increase in access to the capital markets through loan securitization also contributed to growth in subprime lending in the 1990s. Securitization is the repackaging, pooling, and reselling of loans to investors as securities. It increases liquidity and funding to an industry both by reducing risk—through pooling—and by more efficiently allocating risk to the investors most willing to bear it. Investors had already become comfortable with securitized prime mortgage loans, and subprime mortgage loans were among various other types of credit, such as multifamily residential mortgage loans, automobile loans, and manufactured home loans, that began to be securitized in the 1990s. Through securitization, the subprime mortgage market strengthened its links with the broader capital markets, thereby increasing the flow of funds into the market and encouraging competition.”

Of course, Dr. Laderman also points out that the increased competition in the subprime market was a concern due to reported abusive lending practices.  However, she concluded:

“…subprime mortgage lending grew rapidly in the 1990s to become an important segment of both the home purchase and home equity mortgage markets. Evidence pertaining to securitization and pricing of subprime mortgages also suggests that the subprime market has become well linked with the broader capital markets, an important first step in the development of a fully competitive environment.”

A 2006 article by Souphala Chomsisengphet and Anthony Pennington-Cross (The Evolution of the Subprime Mortgage Market; Federal Reserve Bank of St. Louis Review; Vol. 88, No. 1) described the history of subprime mortgages.  The authors stated:

“..Because of its complicated nature, subprime
lending is simultaneously viewed as having great
promise and great peril…”

Through it’s history, subprime lending has had crises where this lending sector took pauses to reflect on missteps.  Chomsisengphet and Pennington-Cross described a “retrenchment” of subprime lending in the late 1990’s; but during that time, the facts point to huge losses in the subprime sector due to seemingly rampant illegal flipping and fraud.

Private mortgage funding isn’t entirely Alt-A or subprime mortgages, although there’s a place for responsible Alt-A and subprime lending.  Prior to the growth in securitizing these types of mortgages, banks and financial institutions privately held (portfolio) these loans which increased their institutional risk and provided incentive for originating performing loans.

How can Dodd-Frank be reformed?  One only has to look back to the S&L crisis of the 1980’s and listen to William K. Black.  Black was the Director of Litigation for the Federal Home Loan Bank Board in the aftermath of the S&L crisis.  His conclusions included a list of “Lessons not Learned.”  The focus of his list was fraud and ethics.  Black discussed curbing “control fraud” (fraud perpetrated by CEOs as well as those who are in power) and other types of fraud.  He wrote The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry  first published in 2005, but was recently updated.

Not surprisingly, Mr. Black reemerged after the financial crisis to provide testimony to Congress, including testimony in 2010 to the Committee on Financial Services United States House of Representatives regarding “Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner.”  In a 2010 interview with Bill Moyers (pbs.org/moyers/journal/04232010/transcript1.html), Black discussed CDO’s (collateralized debt obligations), fraud, and their role in the recent crisis.  And although many, including the Financial Crisis Inquiry Commission, cited failures in the financial system as cause for the financial crisis; they all fall short in seeing William K. Black’s “control fraud” in action – Fraud was the vehicle that drove the unrelenting greed in the CDO and mortgage markets.

With regard to housing, there is much potential for reform within Dodd-Frank.  However, maybe begin with SEC. 941 “Regulation Of Credit Risk Retention” of Dodd-Frank.  SEC.941 requires a securitizer of residential mortgages to have skin in the game by retaining some of the risk of any asset or mortgage backed security that is sold, transferred, or conveyed.  Additionally, the securitizer is prohibited from hedging or transferring their credit risk.  Exceptions to this section include federal programs insuring or guaranteeing mortgages; which includes FHA and VA mortgages, as well as mortgages from institutions supervised by the Farm Credit Administration (including the Federal Agricultural Mortgage Corporation).  However, Fannie Mae and Freddie Mac are not exempt.

The President can make housing great again by incentivising private investment in the mortgage industry either through increasing portfolio and/or private securitization in the mortgage markets – along with reducing fraud (and control fraud) while ensuring responsible lending practices.  Private investment in mortgage funding will open the doors for many home buyers and increase homeownership rates.

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Home sale timing – sell for more

home sale timing
Timing the home sale (infographic from smartzip.com)

Everyone wants to know the future, especially when it comes to the home sale timing.  Home sellers and buyers want to predict home prices.  Home sellers want to know the best time to sell.  While Home buyers want to know if they’re getting a good price.  And apparently there may be a fairly reliable predictor to home prices, however it’s not what you think it is.

Several empirical studies have attempted to provide a methodology for predicting the housing market (home sale timing).  Of course there is the familiar of forecasting real estate through divorce and premarital agreements.  Back in 2013, the American Academy of Matrimonial Lawyer (AAML.org) issued a press release citing the increase of prenuptial agreements as sign of the improving economy.  The increase in prenuptial agreements meant that people felt there was value in their assets.  And this was meant to be a good sign in for housing market.

Of course there was also a spike in divorces that year, leading some to believe this to also be a good sign that people felt better about the economy because of their willingness to begin anew.  But as University of Maryland sociologist Philip N. Cohen pointed out in his November 2015 blog post (Divorce rate plunge continues; familyinequality.wordpress.com) the increased divorce activity of 2013 was a just a recession related “bump” and in actuality the divorce rate decreased in 2014.

Then there was predicting housing through internet search data, which sounds more like fortune-telling than research to be honest.  However, Beracha and Wintoki (Forecasting Residential Real Estate Price Changes from Online Search Activity; The Journal of Real Estate Research 35.3 (2013): 283-312.) concluded that, indeed, you can gauge regional housing trends through specific keyword search volume.  Given this method, I used Google Trends to look up the keyword “home for sale” for the Washington DC metro region – and it is bound to become a hot market in the next six months (maybe a Presidential election has something to do with that?).

But a better indicator of where home prices will go may be the availability of credit.  Most would argue that mortgage lending is a matter of housing demand.  However, a working paper by Manuel Adelino, Antoinette Schoar, and Felipe Severino (Credit Supply and House Prices: Evidence from Mortgage Market Segmentation; February 19, 2014) concluded that “easy credit supply leads to an increase in house prices.”  They contend that higher conforming loan limits and low interest rates benefit home sellers in the form of higher sale prices.

Adelino, Schoar, and Severino’s premise can be witnessed in hindsight as the pre-recession housing boom seemed to be fueled on easy credit.  As credit became increasingly available, home value appreciation took off.  Likewise, housing stabilized and home values appreciated post-recession as home lending requirements loosened.

Of course, many associate easy credit policies with recessions, and even the Great Depression.  However, it’s not necessarily the easy credit that precipitates the recession – but rather it’s the tightening of creditStephen Gandel (This is When You’ll Know it’s Time to Panic About a Recession; fortune.com; March 8,2016) said it succinctly, “Tightening credit doesn’t always lead to a recession. But every recession starts with that.

One may infer from Adelino, Schoar, and Severino’s research that a home seller can gauge their home sale price based on the lending environment.  Lower interest rates and loose credit points to a higher sale price.  However, tightening credit policies may point to flat or even lower home prices.

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Real estate year in review 2015

home prices
How will Home Prices do in 2016? (from WinningAgent101.com)

2015 could have been considered a “damn if you do and damn if you don’t” year for the Fed. The Fed is often criticized (sometimes harshly) for their action and inaction. And as the historic run of near zero interest rates ended this year, many criticized the Fed for waiting too long to raise interest rates, while others said it was still too soon. The full impact of the first Fed rate hike in nine years won’t be known well into the next year.

Another real estate milestone that occurred this year was the implementation of the TRID (TILA-RESPA Integrated Disclosure) rule. Although the Consumer Finance Protection Bureau decided to delay enactment once; the decision to put the rule in effect in October was not only significant, but a historic change to the real estate settlement process. Initially, there was mixed reception; some lenders indicated that they have transitioned smoothly, while others reported having difficulty. Even Congress attempted to provide a grace period for those still transitioning (Homebuyers Assistance Act, H.R. 3192). Like the Fed’s rate increase, the full effect of TRID on consumers and the industry won’t be realized until next year.

HomeEven though the 2015 housing market started slowly, because of record cold weather; the market demonstrated its resiliency with increased sales and continued home price growth throughout the year. Some markets were on fire this year; such as the Seattle WA region, where multiple offers and single digit days on market were the norm and home price indices exceeded the national average. However, most other regions (such as the Washington DC region) experienced average growth. The lack of inventory in some markets was said to add pressure on price growth. Home sale growth is expected to continue in 2016, as housing formation and employment outlooks are brighter. While home prices are still below the 2006 peak, home prices are expected to increase with a market expansion. And as housing affordability decreases, some housing critics are clamoring to predict another housing bubble.

San Francisco CA was one of 2015’s hottest markets. The market was so heated that many described it as “insane.” Madeline Stone reported that San Francisco teardowns sold for well above $1M while resales typically sold for 70% above list price (San Francisco real estate has gotten so crazy that this startup founder was offered stock options for his house; businessinsider.com; March 31, 2015).

And of course, there is the notable sale of a 765sf two-bedroom home that sold for $408,000 earlier this year (17% over list price). The significance of the 100-year-old San Francisco home is that it was described as a “shack” and needed much more than TLC (Daniel Goldstein; San Francisco earthquake shack sells for $408,000; marketwatch.com; October 22, 2015).

And what can be more proof that the real estate market has been recovering (at least for those who can afford it) than the world’s priciest home sale. Patrick Gower, Francois De Beaupuy , and Devon Pendleton reported on December 15th (This $301 Million Paris Chateau Is the World’s Priciest Home; bloomburg.com) about the sale of Chateau Louis XIV for €257Million (approximately $301Million); a private sale to a Middle Eastern buyer. Located in a 56-acre park, the recently built Paris estate is said to have taken three years to build. Amenities include an aquarium, cinema and a wine cellar, and a gold-leaf fountain.

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Real estate, climate change, and data-porn

winter home salesThe National Association of Realtors® (realtor.org) March 20th news release reported that February home sales remained subdued because of rising home prices and severe winter weather.  The decline in existing home sales was just 0.4% from January, but was 7.1% lower than last February’s figures.  NAR chief economist Lawrence Yun stated that home sales declines were due to “weather disruptions, limited inventory, increasingly restrictive mortgage underwriting, and decreasing housing affordability.”  And although it may sound bad, Yun actually has a rosy outlook saying, “…Some transactions are simply being delayed, so there should be some improvement in the months ahead. With an expected pickup in job creation, home sales should trend up modestly over the course of the year.”

So, if a snow filled and cold February is to blame for poor home sales, was Snowmagedden and Snowzilla the reason for increased home sales during February 2010?  Of course not.   And although home sales increased 5.1% year-over-year here in Montgomery County MD during February 2010, it was mostly due to increased home buyer demand that some speculate was due in part to the availability of first time home buyer tax credits.  Additionally, RealtorMag reported that Southern California December home sales dropped about 21% month-over-month, and were down about 9% in compared to the same period in 2012.

As home sales are trending lower, it’s reasonable to look for reasons why demand is soft; but can weather be the main reason to keep potential home buyers at home?  Probably not.  Consumer demand is a robust force that is multifaceted, and can even prevail over seemingly difficult circumstances.  Consumer demand can even trump weather, as was the case during the winter of 2010.

winter home salesConsumer demand can even be resilient in the face of the speculative effects of global warming.  A November 2013 RealtyToday article (The Looming Global Warming Catastrophe and its Effect on Real Estate; realtytoday.com) discusses how home buyer demand for coastal property has remained strong even as increased claims that climate change will make these areas uninhabitable.

Housing data cause and effect is only conjecture unless it is directly observed.  To make sense of the “data-porn” that is excessively presented in the media, often without proper or erroneous explanation; economic writer Ben Casselman offers three rules to figure out what the media is saying (Three Rules to Make Sure Economic Data Aren’t Bunk; fivethirtyeight.com): Question the data; Know what is measured; and Look outside the data.  Casselman states, “The first two rules have to do with questioning the numbers — what they’re measuring, how they’re measuring it, and how reliable those measurements are. But when a claim passes both those tests, it’s worth looking beyond the data for confirmation.”

Keeping these rules in mind, could the winter slowdown be the result of cold weather, or is it something else?  Sure, cold weather may have marginal effects on home buyer behavior and demand; however, weather does not typically affect extended periods of consumer behavior unless weather events are catastrophic.  The current data may be indicative of a housing market that is returning to the distinct seasonal activity that we have been used to for many years prior to the “go-go” market and subsequent recovery years.

However, other factors referenced by Dr. Yun, such as increased home prices and tougher mortgage standards, are more likely to be the reasons for subdued home sales.  And as the year progresses, these factors may emerge to be significant issues for home buyers.

by Dan Krell ©
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. This article was originally published the week of March 24, 2014 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © Dan Krell.