Make housing great again

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

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 (  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, subprimelending is simultaneously viewed as having greatpromise 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 (, 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.

By Dan Krell
Copyright © 2017

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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.

Will new mortgage rules set stage for subprime resurgance

Subprime Mortgage

After much speculation, new mortgage and appraisal rules have recently been revealed and will go into effect in January.  Combined with the recent news of FHA’s reduction of loan limits (authorized increased limits sunset the end of 2013), there’s been a lot of buzz about how the housing market and home buyers could be affected.

On December 18th, the Consumer Financial Protection Bureau (CFPB) launched a campaign to educate consumers about new mortgage rules that go into effect January 10th; specific information and fact sheets can be found at  Among the new rules, several include: the creation of the Qualified Mortgage (QM); new mortgage servicing rules; and additional protections financially challenged borrowers.

The QM is classified by the CFPB as a loan which qualified borrowers are presumed to be able to repay; and is described as a “safer” loan compared to some of loans originated prior to the mortgage crisis.  One of the main features of a QM, as of January 10th, is that mortgage lenders will have to assess the borrower’s ability to repay.  Additionally, the borrower cannot exceed a total monthly debt-to-income ratio (all monthly obligations including mortgage payments) of 43%.  Although lenders must make an effort to determine a consumer’s ability to repay based on typical factors including: income, assets, and debts; the new rules do not eliminate all subprime mortgages.

Two additional features of a QM include safer terms and limiting points and fees.  A QM cannot have loan terms that have been attributed to “risky” loans, such as negative amortization or interest only payments.  Furthermore, if you are directly paying a mortgage broker to originate your loan, they can no longer receive additional payment by another party for the same transaction; a QM is limited to 3% of the loan amount for points and fees.

To assist borrowers, the CFPB has set new mortgage servicing rules that include: providing clear mortgage statements that show how payments are credited; addressing mistakes promptly; crediting payments when received; and providing early notice for adjustable interest rate increase.

To assist borrowers facing financial challenges, the CFPB institutes rules that include: foreclosure cannot be initiated prior to 120 days delinquent; a foreclosure cannot be initiated if a complete application for mortgage assistance has been submitted; servicer call centers must be able to answer borrower questions relating to critical documents; as well as providing accurate and timely foreclosure status to borrowers who ask.

Financially challenged borrowers seeking assistance through their mortgage servicer have additional protections.  Borrowers who make application for loss mitigation early on must have all their options evaluated with one application; an explanation must be provided to borrowers rejected for loss mitigation; and borrowers could appeal a loan modification rejection based on the servicer’s mistakes.

New appraisal rules instituted by the CFPB become effective January 18th.  Although these rules do not apply to all mortgages, typically a borrower should expect: a licensed appraiser; an interior of the property, and a copy of the appraisal prior to closing.  Additionally, a second appraisal is required for a home that is considered a “flip;” a home sale that has sold in the previous six months is classified as a flip.

Although some have speculated the new rules, along with reduced FHA loan limits, will limit the availability of mortgages for some home buyers; others see the resurgence of the subprime mortgage to fill the gap.

New mortgage rules, lowered FHA loan limits, and other new changes are increasing investor backing of non-conforming mortgages.

by Dan Krell
© 2013

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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.

Subprime Mortgage Woes – Again

by Dan Krell

The adage that we are doomed to repeat history unless we learn from it is once again demonstrated. The recent news that the subprime mortgage industry is in trouble should not be a big surprise. The fact that subprime lenders are in trouble is the consequence for an industry whose foundation is high risk.

If you are unaware of the subprime mortgage industry, here is a rudimentary primer. Subprime lenders provide mortgages to borrowers who would not otherwise qualify for a standard Fannie Mae/ Freddie Mac loan. Most often, these borrowers have credit challenges; however, some have good credit but do not meet the Fannie/Freddie income, asset, and/or employment guidelines.

The subprime lenders’ underwriting guidelines dictated by investors who ultimately buy the mortgages on a secondary market (usually Wall Street). The attraction to investors is that they receive a high yield based on the risk. Generally, subprime underwriting guidelines become lenient when the market is favorable for these loans.

Up until about a year ago, the subprime mortgage industry exploded because the risk was countered by a safety net that was the record sellers’ market. Many subprime borrowers who fell behind in mortgage payments found themselves able to sell their home before foreclosure, pay off their mortgage, and make a little money in the deal.

Since the market has slowed, many subprime borrowers cannot sell to avoid foreclosure. This has impacted subprime lenders by the loss of revenue. Subprime investors have forced lenders to tighten their subprime underwriting guidelines to meet new requirements and lessen their risk.

The subprime mortgage industry has a cyclic history of loosening and tightening of underwriting guidelines. The last time the subprime industry was in a crisis was in the latter part of the 1990’s when mortgage fraud and illegal flipping schemes were widespread and took advantage of the loose subprime underwriting guidelines of the time.

At that time, subprime lenders lost millions on blatant fraud and real estate schemes. Some loan officers and mortgage companies found it easy to perpetrate fraud on loan files so as to have the loans approved. Additionally, schemes using tactics such as straw buyers or fraudulent appraisals were devised either to defraud lenders or take advantage of home buyers, or both.

In response, “due diligence” became the hot buzz word. Subprime lenders were forced to tighten their underwriting guidelines and institute a number of quality assurance checks, both prior to loan approval and post settlement.

Although we may not feel compassion for the lenders and investors of subprime mortgages, the unfortunate casualty is the consumer. The last few years found an explosion of minority home ownership that is unprecedented. Unfortunately, as reported in a front page article in the Washington Post (March 26, 2007), many of those affected by the perfect storm of a declining real estate market and high risk lending are recent immigrants and minorities.

In a year or two the cycle of subprime lending will return to liberal underwriting guidelines. Make no mistake, subprime lending is needed and is beneficial. Hopefully we in the real estate industry have learned the lesson to practice our profession responsibly by ensuring that borrowers understand the risks and realties of subprime mortgages. If we don’t, we are doomed to repeat history.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 26, 2007. Copyright © 2007 Dan Krell.

Risky mortgages

Reading Friday’s Washington Post Article about Alan Greenspan’s comments on the housing market does not surprise me. Mr. Greenspan was concerned about the increase in the use of what was termed “exotic mortgages,” specifically interest only mortgages. In other words, “risky mortgages.”

A lot of media focus has been given to this type of loan lately because the national housing market. Locally, there has been media attention as well. Like me, the Washington Post has recently written about the potential hazards of interest only mortgages. In addition to interest only mortgages, there are many other non-traditional mortgages that are popular as well, which include 100% financing, no-doc loans, balloon notes, option arms, “sub prime” mortgages, and their many variations of each. I will only describe interest only mortgages and 100% financing. You can contact your local mortgage lender for more information regarding all non-traditional mortgage programs.

What some describe as “risky mortgages” are non-traditional mortgages that were designed to increase homeownership and to help those that can qualify for traditional mortgages. However, many more home buyers are looking toward these non-traditional mortgages to help them purchase more expensive homes which they might not otherwise qualify.

What are risky mortgages?

An interest only mortgage is just that, it is a mortgage where the borrower’s monthly payments only go to pay off the interest of the loan. The principal is never paid back until the home is sold or the mortgage is refinanced. There are several varieties of this type of loan but the underlying goal is the same, which is to allow a borrower to have lower mortgage payments. The intent for this program is to lower the mortgage’s impact on the borrower’s cash flow. In reality, however, the borrowers’ cash flow has been increased because of the added debt from the higher priced homes they purchase. Doing so only puts the borrower at a higher risk because the borrower’s cash flow has not been reduced and the mortgage principal never decreases during the life of the loan.

Another popular mortgage program is the no down payment mortgage, or 100% financing. This program helps borrowers who have little cash for down payment and closing costs. The program provides the borrower with a loan that is one hundred percent of the purchase price. Typically, the borrower relies on a long term approach for building equity. However, recently, borrowers have relied on the strong real estate market to grant them short term equity gains.

These are two wonderful mortgage programs, when employed properly help home buyers. The risk in these two programs is paradoxical. What was devised to help home buyers with limited funds and/or cash flow becomes a tremendous burden when the borrower has a financial set back. Because the principal on the loan is either not reduced at all or is reduced marginally within the several years of the loan, the borrower could easily become “upside down” if they fall behind on their mortgage. Added interest and penalties on unpaid amounts quickly add additional thousands of dollars to the overall mortgage. Being upside down is a term used to describe when you owe more than the home is worth.

Again, these mortgage programs are great devices that have helped to increase home ownership across the country. All mortgages are risks, some are riskier than others. Home buyers should understand the risks involved before choosing any mortgage program.

by Dan Krell © 2005