CFPB Releases Borrower Guidelines

The Mortgage Corner

The Consumer Protection Financial Bureau, set up as part of the Dodd-Frank Wall Street and Consumer Protection Act, has just published guidelines for mortgage borrowers to help them get the best possible terms.

Knowing mortgage guidelines and regulations may seem a no-brainer for borrowers, but most don’t research their mortgage options with various direct lenders or brokers, according to the CFPB.

Based on new data in the National Survey of Mortgage Borrowers, a voluntary survey jointly conducted by the CFPB and the Federal Housing Finance Agency, almost half of consumers who take out a mortgage don’t shop prior to filling out an application for a mortgage. Three out of four consumers only apply with one lender or broker. CPFB contends most consumers only get their information from lenders or brokers, who have a stake in the outcome. But many such leads come from referrals by satisfied borrowers. That’s why it’s important to get other opinions.

Graph: The Housing Wire

“Most consumers put substantial effort into considering their differing housing needs,” CFPB Director Richard Cordray said in a speech at The Brookings Institute. “But they do not seem to be as careful or as confident in weighing the economic aspects of the mortgage decision, such as what down payment they can afford or what mortgage terms fit their unique financial needs.”

There are many reasons for this, including convenience. It is now much easier to shop online for mortgage rates and terms than in the past, as sources such as bankrate.com offer comparisons.

There are also the complexities in applying for a mortgage. So-called conforming mortgages that ‘conform’ to Fannie Mae and Freddie Mac qualification guidelines have the best rates and terms, but the most rigorous qualification standards. That is why their default and foreclosure rates are now close to long term historical trends.

Fannie Mae reported that the Single-Family Serious Delinquency rate declined slightly in November to 1.91 percent. The serious delinquency rate is down from 2.44 percent in November 2013, and this is the lowest level since October 2008, says Calculated Risk. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59 percent.

Freddie Mac, the other conforming mortgage guarantor, also reported that the Single-Family serious delinquency rate was unchanged in November at 1.91 percent. Freddie's rate is down from 2.43 percent in November 2013, and is at the lowest level since December 2008. Freddie's serious delinquency rate peaked in February 2010 at 4.20 percent.

Graph: Calculated Risk

The Fannie Mae serious delinquency rate has fallen 0.53 percentage points over the last year, and at that pace the serious delinquency rate will be under 1 percent in late 2016, the long term trend, as we said—although the rate of decline has slowed recently.

So how do we know where, or how to shop for the best possible terms? Alas, some homework is involved. Because interest rates have declined so low, most prospective borrowers will opt for the 30-year fixed rate, which makes it easy to compare rates and terms. And 30-year conforming fixed rates have dropped to 3.50 percent with 0 points in origination fees in California, for the best credit scores.

Credit scores are extremely important to lenders in today’s post-housing bubble m environment. It has to be at or above a so-called mid-score of 740 (that is, the middle score from the 3 major credit agencies—Equifax, TransUnion, and Experian.)

And stable income is a major requirement, which can be difficult to verify for self-employed borrowers, since it requires 2 years’ federal tax returns, which will be cross-checked with the IRS for accuracy.

But this is the best time to buy or borrow. Home prices are still recovering from the housing bubble, and optimism from major surveys, such as Case-Shiller, is rising. Surveys are now showing that consumers believe they will see housing values continue to rise in 2015.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Restricted Credit Will Impede Housing Recovery

Financial FAQs

As if we need more evidence that the Consumer Protection Finance Bureau and government regulators have listened to the wrong people when drafting their Qualified Mortgage requirements (that lowers the maximum debt-to-income ratio to 43 percent for non-agency mortgages, disallows interest only options and 40-yr amortization for starters), while Fannie Mae and Freddie Mac add huge fees and stricter underwriting criteria to anyone below a 700 credit score (which is almost perfect in today’s trying markets), the latest new-home sales should convince us.

Graph: Calculated Risk

The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 406 thousand, while May sales were revised down from 504 thousand to 442 thousand, and April sales were revised down from 425 thousand to 408 thousand. Inventories rose to a 5.8-month level from 5.2 months in May.

The National Association of Home Builders tried to put a good face on the numbers. "With continued job creation and economic growth, we are cautiously optimistic about the home building industry in the second half of 2014," said NAHB Chief Economist David Crowe. "The increase in existing home sales also bodes well for builders, as it is a signal that trade-up buyers can move up to new construction." Regionally, new-home sales were down across the board. Sales fell 20 percent in the Northeast, 9.5 percent in the South, 8.2 percent in the Midwest and 1.9 percent in the West.

But this is not good news for housing advocates so late in the recovery. For one thing, government regulators and the Obama administration are way behind the housing curve in choosing to tighten credit standards long after the problem of too easy credit was solved. The Federal Reserve and regulators have outright banned low teaser rate, negatively amortized,‘liar’ loans, and loans that don’t require income and asset verification. Mortgages delinquencies are down, existing-home sales are back to a 5 million annual sales rate, and record low interest rates should make it easier to qualify.

So why are regulators still chasing phantoms, and continue to punish lenders five years after the housing bubble burst? Instead, it’s time to encourage them to lend some of their record $1 trillion in excess reserves held by the Federal Reserves in MZM accounts (i.e, at zero interest). Without a housing recovery, there will be no substantial economic recovery, say many major economists.

For instance, former Fed Chair Bernanke has said too-tight credit conditions have squeezed both prospective homebuyers and builders. "Why has the recovery in housing been so slow? One important factor is restraints on mortgage credit," Bernanke said in 2012, adding that total outstanding mortgage credit has shrunk by about 13 percent since its peak in 2007.

Just how weak are home sales? Five years after the end of the recession, sales of new single-family homes still remain far below an annual average of more than 770,000 over the 20 years leading up to a 2005 peak, government data show.

Fannie Mae is growing more optimistic this month about U.S. sales of new single-family homes, and now sees 2014 hitting the highest level in seven years. Fannie’s  FNMA July housing-market forecast estimates that sales of new single-family homes will reach 486,000 this year — the most since 2007 — a bit higher than June’s estimate of 478,000, which would have been the greatest since 2008.

However, despite the uptick in the July forecast, over the past year Fannie has slashed its outlook for new-home sales, showing just how disappointing the market’s been in 2014. Back in July 2013, federally controlled Fannie had expected 2014 sales of new single-family homes to hit 588,000.

Rising mortgage rates, a low supply of new homes and unusually poor winter weather each took a bite out of residential sales this year. It’s also been tough for many borrowers to meet lenders’ strict credit standards, as we said. But it is home sales, and new-home sales in particular that has to improve to boost inventory and keep housing prices in the affordable range.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

New-Home Sales Soaring

The Mortgage Corner

There aren’t enough new homes being built, apparently, as new U.S. homes sold at an annual rate of 444,000 in October, up 25.4 percent from 354,000 in September, the U.S. Census Bureau said Wednesday. And the inventory of new homes for sale plunged to a post-recession low of 4.9 months, which puts for-sale inventories back into 1960 levels.

Graph: Econoday

Lower interest rates are also holding, as more Federal Reserve Governors are saying that QE3 tapering of securities’ purchases shouldn’t begin until the unemployment rate actually drops below 6.5 percent, from its current 7.1 percent. And economists don’t see that happening for at least another year.

The collection of sales data for both months was delayed by the federal shutdown, prompting the government to release the information on the same day. Demand in October was strong across the country, with double-digit percent gains in all four major regions. Part of what drove sales was a decline in prices and more demand for lower-prices homes, a trend that typically emerges in the colder months.

The median price of new homes fell 5.3 percent to $245,800 in October. That's the lowest level since November 2012. The supply of new homes on the U.S. market, meanwhile, sank to 4.9 months in October at the current sales pace from 6.4 months in September. This is while new home sales are 21.6 percent higher compared to one year ago.

We mustn’t forget that the Federal Housing Finance Authority (FHFA) is also delaying any drop in conforming loan limits below $417,000 through 2014, which has to be heartening home buyers. As such a lower restriction on loan amounts would affect entry-level, lower-priced homes in particular.

Inventory levels are in fact back to levels last seen in 1997 to 2005 in this Calculated Risk graph that dates back to 1963. This is spurred the housing construction boom that boosted the housing bubble. But with all the restriction on mortgage lenders initiated by both the Federal Reserve and Dodd-Frank, Consumer Protection Finance Bureau, we don’t see the likelihood of another housing bubble. The homeownership rate has dropped to 64 percent from its high of 68 percent during the bubble. And with household incomes and debt loads that haven’t recovered from the Great Recession, there is little chance a bubble would re-occur anytime soon, if ever.

Graph: Calculated Risk

In spite of this news, existing-home prices were building steam through September based on S&P Case Shiller, indicating overall demand is still strong. The 20-city index rose an adjusted 1.0 percent in September vs monthly gains of 0.9 percent and 0.6 percent in the prior two months. Very respectable gains swept all 20 cities for the second month in a row, led this time by Atlanta at plus 1.9 percent followed by a string of cities out West where S&P says there's talk now of a housing bubble.

But we know S&P tends to be overly conservative in their projections. Most of the price gains were either in Las Vegas, or the California coastal cities of San Francisco, Los Angeles and San Diego, beneficiaries of the fast-growing Silicon Valley economy. So most of the growth in sale prices can be attributed to real economic growth, rather than the financial speculation that occurred on Wall Street leading to the Great Recession.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

We Need a Real Consumer Protection Agency

Financial FAQs

Why is there such an ongoing debate on whether to nominate Harvard Professor Elizabeth Warren as head of the new Consumer Financial Protection Agency that is mandated under the Dodd-Frank banking act? To put it bluntly, there are no regulations with teeth at present that protect consumers from many of the practices of the major financial institutions who control most consumers’ deposits and investments.

The Federal Reserve is attempting to force banks to clean up their foreclosure practices with a recent consent decree signed by 10 of the largest banking institutions. But that doesn’t protect consumers from the abusive practices that spawned all those liar loans and almost caused another Great Depression.

Professor Warren has been making headway with community banks on the necessity to oversee the largest financial institutions. In fact, she told a group of community bankers in San Antonio, Texas that they weren't the bureau's main target. Instead, the biggest part of its budget will be used to police 80,000 nonbank firms that are involved in payday loans, student lending, debt collecting and the mortgage business, but that now largely escape regulation. She also said the agency would be more focused on supervision and enforcement than on writing new rules.

The community banks "are worried, and I don't blame them for being worried," Ms. Warren says, in a recent interview. "So I try to talk to them about the regulatory philosophy of the agency, whether we're an agency that's going to come in and try to say rule, rule, rule or an agency that says let's focus on what we're trying to accomplish by using more of a principles-based approach. We're trying to make these markets transparent, which makes it easier for community banks to compete both with large financial institutions and with their nonbank competitors."

Her message is simple: the consumer “market” for financial products does not operate like a proper market because leading firms (bigger banks and also nonbanks, like some payday lenders) have figured out how to make a great deal of money by confusing their customers.

Of course, there are many honest players – mostly in credit unions and smaller banks.  But when the playing field has been unfairly tilted towards cheating, honest bank executives struggle to stay in business (or to keep their jobs).

“If someone attempted to sell boxed cereal in the same fashion that many financial products are now sold, that person would be drummed out of the cereal business.  The norms of that sector (and many other nonfinancial sectors in the United States) would not stand for this degree of deception and malpractice”, said one critic of the Republican campaign against her nomination.

Transparency is an issue with all financial markets, not just mortgages, of course. The multi-trillion dollar derivatives’ business is controlled by a self-appointed consortium of the major banks. And they are resisting providing a record of their transactions to a central clearing house, a provision of the Dodd-Frank bill that is still being developed.

Why? For the same reason that mortgage lenders could hide the true costs of mortgages until the latest reforms enacted by the Federal Reserve that regulate the disclosure of loan fees and costs.

And, as two Nobelists, economists George Akerlof and Joseph Stiglitz have researched, markets driven by nontransparent or ‘asymmetrical’ information—where insiders have access to information about the investments that general market participants do not—destroys those markets. It in fact drives out the honest investors, causing a general loss of confidence on all financial markets.

So we can see Professor Warren is on a virtuous crusade. She wants to save the financial institutions from themselves—and their own propensities to promulgate the ‘buyer beware’ policies so prevalent on Wall Street that almost caused their own downfall.

Harlan Green © 2011