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.

Copyright© 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. Using this article without permission is a violation of copyright laws.

Housing market 2017

housing market 2017
Housing Market 2017(infographic from RE/MAX National Housing Report remax.com)

There’s no doubt that 2016 was an outstanding year for real estate and the housing market.  In fact, National Association of Realtors chief economist Lawrence Yun was reported to say in a January NAR press release (www.nar.realtor) that the 2016 housing market was the best since the Great Recession.  There were 5.45 million total existing home sales in 2016, which exceeded 5.25 million during 2015.  What is necessary for a great housing market 2017, and how will it finish the year?

January’s sales were strong and Dr Yun stated in the press release that there is “resilience” in a “rising interest rate environment:”

“Much of the country saw robust sales activity last month as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home…

Market challenges remain, but the housing market is off to a prosperous start as home buyers staved off inventory levels that are far from adequate and deteriorating affordability conditions.”

Home prices also surged during 2016.  A February 28th S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index press release (spindices.com) indicated a 30-month index high, increasing 5.8 percent during December.  The Seattle, Portland and Denver regions were at the top during this period, posting gains of 10.8 percent, 10.0 percent and 8.9 percent respectively (the Washington DC region gained a respectable 4.2 percent).  David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices stated:

“Home prices continue to advance, with the national average rising faster than at any time in the last two-and-a-half years…One factor behind rising home prices is low inventory. While sales of existing single family homes passed five million units at annual rates in January, the highest since 2007, the inventory of homes for sales remains quite low with a 3.6 month supply. New home sales at 555,000 in 2016 are up from recent years but remain below the average pace of 700,000 per year since 1990. Another factor supporting rising home prices is mortgage rates. A 30-year fixed rate mortgage today is 4.2% compared to the 6.4% average since 1990. Another indicator that home price levels are normal can be seen in the charts of Seattle and Portland OR. In the boom-bust of 2005-2009, prices of low, medium, and high-tier homes moved together, while in other periods, including now, the tiers experienced different patterns.”

Of course, the record year was nowhere near the peak market pace of 6.48 million existing home sales during 2006.  However, the economics of the market during that time was different; being influenced by outside forces such as uber-easy money policies and overzealous speculation in the housing market.

The peak market sales records may be a benchmark of a sort.  But in retrospect, those numbers are a reflection of a distorted market where speculators bought and sold homes in record numbers taking advantage of the easy money and a seemingly guaranteed big money payoff (which was a factor in the steep home appreciation spike at that time).  It was a crazy time for housing, when homes were flipped in a matter of days.  Many investors were even making money on homes they never owned by selling their interest in their purchase contracts.  The result was that home buyers found themselves either priced out of the market, or borrowing more than they could realistically afford because of the fierce buyer competition.

After posting impressive housing stats for 2016, the expectations for housing market 2017 are high.  And not surprisingly home sales started the year on the same pace, as the NAR reported January’s existing home sales (homes that settled during January) increased 3.3 percent.  However, the pending home sale index (homes under contract and described by NAR as a forward looking number) showed a different picture with 2.8 percent decrease during January.  Of course in the absence of bad weather, some economists explain that the decrease in pending home sales are due to low inventory and rising interest rates.

Housing Market 2017

Some are concerned about the decreased prospects of future home sales, suggesting that there won’t be a repeat performance of record home sales during 2017.  The recent pending home sale index release is reminiscent of the index reported for January 2014, where the NAR reported that the pending home sale index dropped 9 percent following post-recession record year of home sales during 2013.  At the end of 2014, it was revealed that existing home sales dropped 3 percent from the previous year.  Reasons given for the decrease were low inventory and tight lending.

Many, like myself, remain optimistic for housing market 2017 because interest rates remain historically low, even with recent rate hikes; and mortgage lending has been the easiest since the financial crisis.  The sentiment for housing market 2017 is also shared by consumers; who conveyed increased optimism about the housing market in Fannie Mae’s 2017 Home Purchase Sentiment Index (HPSI).  The February 17th News release (fanniemae.com) indicated that the January’s HPSI increased 2 percent, which is 1.2 percent higher than the same time last year. Doug Duncan, senior vice president and chief economist at Fannie Mae, stated:

“Three months after the presidential election, measures of consumer optimism regarding personal financial prospects and the economy are at or near the highest levels we’ve seen in the nearly seven-year history of the National Housing Survey…However, any significant acceleration in housing activity will depend on whether consumers’ favorable expectations are realized in the form of income gains sufficient to offset constrained housing affordability. If consumers’ anticipation of further increases in home prices and mortgage rates materialize over the next 12 months, then we may see housing affordability tighten even more.”

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Home prices surprise

home prices
National home prices exceed peak prices. Home equity increases! (infographic from keepingcurrentmatters.com)

Back in January, I told you that the housing market of 2016 would be about home prices.

2016 housing market hinges on home prices.

A home selling season has not been anticipated so much by home sellers since 2013. It’s not that 2015 was a bad year for housing, because it wasn’t. It’s that many home owners who have been wanting to sell since 2010 (some because of being underwater) may be in position to make the long awaited move.

And indeed, national home sale prices have appreciated considerably through the year.  But who would have thought that home prices would once again approach the level reached during the peak market of 2006?

The S&P CoreLogic Case-Shiller National Home Price Index (spindices.com) reported in July that the index was within 3 percent of peak, with another month of 5 percent appreciation.  And surprise!  This week’s release of home price data indicated that the September’s S&P CoreLogic Case-Shiller National Home Price Index exceeded the index that was recorded during the peak market that occurred July 2006!  September’s year-over-year gains were due to a 5.5 percent gain to the National Index, while the 20-City composite remained unchanged at a 5.1 percent.

Of course, regional and local differences explain why actual home prices in many areas don’t seem as high as they were during the peak. Consider that Seattle, Portland, and Denver reported the highest annual home price gains with 11 percent, 10.9 percent, and 8.7 percent respectively.  The Washington DC region realized a 2.7 percent increase; which is well below the top gainers, as well as below the national average.  Although the housing markets in Miami, Tampa, Phoenix and Las Vegas experienced the most home price gains during the peak; current home prices in those cities “remain well below their all-time highs.”

Analysis provided in the November 29th press release states:

“The new peak set by the S&P Case-Shiller CoreLogic National Index will be seen as marking a shift from the housing recovery to the hoped-for start of a new advance” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “While seven of the 20 cities previously reached new post-recession peaks, those that experienced the biggest booms — Miami, Tampa, Phoenix and Las Vegas — remain well below their all-time highs. Other housing indicators are also giving positive signals: sales of existing and new homes are rising and housing starts at an annual rate of 1.3 million units are at a post-recession peak.

The Federal Housing Finance Agency (fhfa.gov) also reported continued home price gains last week.  The FHFA Home Price Index (HPI) increased 6.1 percent year-over-year. The November 23rd press release reported that home prices increased in 49 states during the third quarter of 2016 compared to the same period last year.  However, “Delaware and the District of Columbia were the only areas not to see price increases.”

Indications of a strengthening housing market have been reported for many months.  Last year, the National Association of Realtors® (realtor.org) reported that the national median home sale price recorded for June 2015 ($236,400) surpassed the peak national median home sale price established during July 2006 ($230,400).

And if that weren’t enough, existing home sales have also been expanding.  The NAR reported last week that existing home sales increased during October.  The two-month consecutive increase doesn’t only outpace June’s peak, but is now the “highest annualized pace in nearly a decade.”

Existing-home sales ascended in October for the second straight month and eclipsed June’s cyclical sales peak to become the highest annualized pace in nearly a decade, according to the National Association of Realtors®. All major regions saw monthly and annual sales increases in October.

Termed an “autumn revival,” Lawrence Yun NAR chief economist, stated that “October’s strong sales gain was widespread throughout the country and can be attributed to the release of the unrealized pent-up demand that held back many would-be buyers over the summer because of tight supply…Buyers are having more success lately despite low inventory and prices that continue to swiftly rise above incomes.”

As much as we would like home prices to significantly appreciate indefinitely, market forces and economic factors will intervene.  Increasing interest rates is not only consistent with a growing economy, it will likely moderate home prices.

Fed Chair Janet Yellen stated in her November 17th Congressional testimony  regarding monetary policy:

At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives. This judgment recognized that progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year. And inflation, while still below the Committee’s 2 percent objective, has increased somewhat since earlier this year. Furthermore, the Committee judged that near-term risks to the outlook were roughly balanced.

Yellen stated that “an increase could well become appropriate relatively soon.”  Yellen referred to economic strengths as rationale, however analysis of new data should comport with the Open Market Committee’s objectives.  Yellen stated that housing market strengths are favorable for an interest rate increase.  Although new home construction has been “subdued,” the fundamentals of the housing market are complimentary to such a move.

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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.

It’s Mr. Trump’s housing market now

Trump's housing market
Dodd-Frank regulation (from uschamber.com)

Change is not always easy.  Sometimes we choose to change and other times we are forced to change.  The Great Recession forced massive change to many aspects of our lives – mostly financial.  Many found themselves out of work because of the recession, and many home owners lost their homes to foreclosure; while the rest of us searched for ways to cope.  It’s Mr. Trump’s housing market now.

As a result, the Dodd–Frank Wall Street Reform and Consumer Protection Act was quickly pieced together and signed into law in 2010.  “Dodd-Frank”, contained over two-thousand pages of regulations and rules, many of which were to be created at a later time by many agencies and unelected bureaucrats.  Dodd-Frank also created the Consumer Financial Protection Bureau, which took over RESPA, lending and consumer finance markets enforcement responsibilities.  The CFPB created the “Qualified Residential Mortgage” and “Know Before You Owe” rules that significantly impacted the mortgage and housing industries.

The purpose of Dodd-Frank and the CFPB was well intentioned as Congress sought a solution to prohibit future crises.  In the uncertain financial atmosphere that ensued, consumers wanted accountability from Wall Street and mortgage lenders.  While some continue to generally blame Wall Street and the mortgage industry for the financial crisis, the reality is that the dynamics that created the financial crises were complex.  And one can surmise from the many hearings, books, dissertations, and working papers that the crux of the financial crisis was widespread fraud that took advantage of a hot real estate market and easy money.

Six years after Dodd-Frank, the rules and regulations keep coming.  Writing for the US Chamber of Commerce’s “Above the Fold,” J.D. Harrison pointed out that Dodd-Frank has created over 27,000 new federal regulations by thirty-two federal agencies impacting many industries (Dodd-Frank’s Regulatory Nightmare in One Rather Mesmerizing Illustration; uschamber.com).  Compared to the previous Wall Street reform in 2002, which had two agencies issuing regulations to only five industries.  Harrison stated that the Sarbanes-Oxley Act “basically sought more corporate transparency and accountability.”

Many have associated Dodd-Frank with the ongoing slow economic recovery, citing increased consumer costs and restricted lending – which effects the housing market, home buyers and sellers.

An example of increasing consumer costs is the CFPB’s TILA-RESPA Integrated Disclosure.  The Mortgage Bankers Association (mba.org) recently reported that compliance with TRID costs on average $210 per mortgage, some of which is recouped from the consumer.  The rule is also responsible for “slower application to closing times.”

A recent appellate case highlighted some of these Dodd-Frank outcomes.  The CFPB sought fines against a mortgage lender for their years of compliance with HUD’s interpretation of a rule; the fines were imposed retroactively for not complying with a new CFPB reinterpretation of the same rule. Additionally, the court focused on the CFPB’s unilateral ability to impose rules and fines without oversight.

It’s Mr. Trump’s housing market now.

Repeal and Replace is a talking point that is not exclusively for the Affordable Care Act.  Shortly after Donald Trump’s election as the forty-fifth President of the United States, many industry insiders and pundits are already anticipating the future of Dodd-Frank and the CFPB.  Mr. Trump’s plan for financial services is posted to the President-Elect’s site (greatagain.gov) stating: “The Dodd-Frank economy does not work for working people.  Bureaucratic red tape and Washington mandates are not the answer.  The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.

Copyright © Dan Krell

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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.

Copyright © 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. Using this article without permission is a violation of copyright laws.