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The risk lurking in the US mortgage market

By Patrick following x   2018 Mar 29, 11:42am 2,533 views   14 comments   watch   nsfw   quote     share    

Low interest rates. Easy credit. Poor regulation. Toxic mortgages.

These were just a few reasons regulators gave for the collapse of the US housing market a decade ago. Since then, regulators have improved the standards that lenders use when Americans apply for mortgages.

But today increasing danger lurks in the mortgage market, and economists say it could put the financial system at "even greater risk" when the next recession strikes or too many borrowers fall behind on their mortgage payments.

A growing segment of the mortgage market is being financed by so-called non-bank lenders — financial institutions that offer loans to consumers but don't provide saving or checking accounts.

Borrowers with poor credit have increasingly turned to these alternative lenders instead of traditional banks. The alternative lenders are subject to far less regulation and have fewer safeguards when borrower defaults start to pile up.

1   mell   ignore (1)   2018 Mar 29, 11:49am   ↑ like (0)   ↓ dislike (0)   quote   flag        

It is fascinating how bond rates have edged even lower despite the fed rate hike. Some has to do with the volatility in the market lately and the potential for a steeper correction but still, I did not expect rates to stay that low. Maybe there simply is so much cash slushing around on the sidelines that is not committed to stocks, but I see not let-up in easy lending and 0%, jumbo etc. loans and even the massive return of CDOs - now called slightly different maybe ;) to not spook investors - as long as rates do not rise significantly. So far the Fed strategy has worked somewhat (for them, not necessarily for those having to buy inflated assets), have to give it to them as much as I hate the countries exploding debt. No crisis in sight so far.
2   HeadSet   ignore (1)   2018 Mar 29, 3:09pm   ↑ like (2)   ↓ dislike (0)   quote   flag        

The alternative lenders are subject to far less regulation and have fewer safeguards when borrower defaults start to pile up.

No safeguards or regulations would be needed if the government gets out of the loan guarantee. No institution would make questionable loans if that institution was on the hook for all losses. House prices would fall to what people could afford with 10-15 year mortgages. Bankers and Wall St would be less rich, but the rest of us would benefit.
3   APOCALYPSEFUCKisShostikovitch   ignore (37)   2018 Mar 29, 3:10pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Time to disband Fannie and Freddie.

Never should have been created because markets are perfect.

If you can't pay for a house with cash, you deserve to be homeless, exactly as the Founding Fathers believed.
4   mell   ignore (1)   2018 Mar 29, 4:10pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

APOCALYPSEFUCKisShostikovitch says
Time to disband Fannie and Freddie.

Never should have been created because markets are perfect.

If you can't pay for a house with cash, you deserve to be homeless, exactly as the Founding Fathers believed.

Despite your sarcasm that's exactly what needs to happen. No the markets are far from perfect, but yes, people deserve to be homeless if they leverage up for a crap-shack when they could easily make ends meet by renting. Why should buying a a house (while bragging about your investment stating that prices ALWAYS GO UP because you're so smart) be protected by the taxpayer? The US housing market is a total socialist/crony capitalist scam and that's why houses have become so expensive, like bread in Venezuela. Socialism never works.
5   mell   ignore (1)   2018 Mar 29, 4:14pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

Why the fuck should Patrick pay for someone else's mortgage risk via higher taxes and socialized bailout debt? In fact the more over-leveraged crap-shack buyers losing their homes the better, only hard life lessons will change that parasitic behavior. Remove all mortgage interest deduction and eliminate free capital gains (currently up to 250K/500K) as well. Housing should be treated like every other investment / good, enough with the cronyism.
6   JH   ignore (0)   2018 Mar 30, 8:18am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Problem is that Patrick is NOT paying for someone else's mortgage risk. He is paying for the risk inherent in Scrooge Moneybag's investment in Jason's overleveraged shit shack. The bank will kick Jason to the curb and bail out Scrooge. The risk is not truly socialized as intended--with some exceptions, generally only the 2b2f are bailed out.

This lurking risk is great news for potential buyers.
7   mell   ignore (1)   2018 Mar 30, 10:51am   ↑ like (2)   ↓ dislike (0)   quote   flag        

JH says
Problem is that Patrick is NOT paying for someone else's mortgage risk. He is paying for the risk inherent in Scrooge Moneybag's investment in Jason's overleveraged shit shack. The bank will kick Jason to the curb and bail out Scrooge. The risk is not truly socialized as intended--with some exceptions, generally only the 2b2f are bailed out.

This lurking risk is great news for potential buyers.

Not entirely true. Scrooge gets bailed out but Jason too, and Patrick is paying for both. There are countless threads of people advising to buy a home fully leveraged as little - zero if possible - down as possible and make money flipping it or living in it for a while, and if things go south to immediately stop paying and squatting as long as you can, which is a very long time, and/or apply for bailout programs. People who don't pay for their houses should be out as soon as renters who don't pay their rent and their landlord is evicting them. Bailing out Scrooge is a problem in itself, but it takes two to Tango and the meme of the "surprised" poor home-owner is utter bs. They pulled this shit also with the so-called "poor" and black (race card!) victims by claiming predatory lending just to justify bailouts. If you can't walk into a bank and come out WITHOUT signing a contract that puts you in debt for the rest of your life, completely over-leveraging you (and worse making false statements on your application) then you should not be allowed to vote. Period.
8   APOCALYPSEFUCKisShostikovitch   ignore (37)   2018 Mar 30, 10:54am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Cities in flames!

Millions displaced!

Non-stop armed combat!

9   Kakistocracy   ignore (7)   2019 Feb 23, 2:41am   ↑ like (0)   ↓ dislike (0)   quote   flag        

M&A to pick up as down cycle begins - Not enough borrowers to compete for

Mergers and acquisitions are about to pick up as the housing market sees the beginning of its down cycle, according to Ted Krus, Flagstar Bank director of executive projects and 2017 HousingWire Rising Star. The Rising Stars represent the best young leaders in the mortgage industry – in lending, servicing, investing and real estate.

HousingWire sat down with our previous Rising Star winner to get some insight on the housing industry today.

HousingWire: What role do you think M&A will play in the housing finance market in 2019?

Krus: M&A activity in the industry will be even busier this year. We’re still at the start of the down cycle, and there are just not enough borrowers in the market to compete for. I think you’ll also continue to see service provider M&A as lenders’ demand for digital and technology services is rapidly growing.

HW: What should lenders/banks do in order to come out on top of the competition?

Krus: Lenders/banks should focus on the customer experience and operational efficiencies. These two go hand in hand. To compete, you have to differentiate the experience for borrowers whether that’s through digital or traditional channels. While digital capabilities are important to deliver the front-end customer experience, there has to be an integrated back-end operational component too. We are still a very inefficient industry and those lender/banks that improve the manufacturing of the loan and automating the process will come out on top.

HW: If a lender does decide to merge or acquire another, what's some advice you can give them as someone who has previously evaluated this process?

Krus: Obviously, the financials are important as well as the origination/channel mix and fit. But one of the most important aspects of evaluating acquisition opportunities is cultural fit. It’s often an overlooked component, but a very critical one. Take care of the due diligence up front on cultural alignment and make it a focus of the integration with consistent and clear communication across all parts of both organizations. In many cases this will help drive the financial performance of the deal more than expected.

10   Kakistocracy   ignore (7)   2019 Feb 23, 2:46am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Why 2019 could be the year of the big bank merger

One trend to pay attention to in 2019: consolidation in the banking industry. A lower corporate tax rate and a favorable regulatory environment are giving banks reason to think that next year might be the time to ink a big M&A deal.

Despite the fact that Democrats are set to take control of the House, the fruits of the Trump agenda on tax policy and deregulation are already in full force. Congress slashing corporate taxes from 35% to 21% has companies sitting on a generous stockpile of cash, and Trump-appointed officials at the bank regulators are hard at work on implementing a law rolling back portions of the Dodd-Frank financial regulatory framework. A notable change in the regulation: raising the threshold for extra scrutiny on banks, from $50 billion to $250 billion.

Prior to the regulatory change, banks near the $50 billion threshold were hesitant to make deals because growing in asset size would subject them to a slew of added regulatory requirements.

But with that line no longer there, the floodgates could open for larger banks to make big deals.

David Wright, managing director of Deloitte’s banking regulatory practice, told Yahoo Finance he has had conversations with banks between $50 billion and $200 billion on preparing for future mergers.

“We know that there are regional banks that are actively preparing to be able to execute if and when the numbers work for them,” Wright said.

Out of opportunity

RBC Capital Markets wrote December 12 that over the next 12 to 24 months, banks could be active in the M&A market with plenty of capital to spend. RBC said that in late 2019 or early 2020, it expects consolidation among the larger banks, a space eagerly hoping to reverse a post-crisis period of “anemic” M&A activity.

“We also believe banks today have excess capital and in some cases, management teams consider M&A an attractive alternative to share repurchases,” RBC wrote.

In addition to savings from the Tax Cuts and Jobs Act signed last year, banks could find excess capital from regulatory changes like tweaks to the Federal Reserve’s stress test process known as the Comprehensive Capital Analysis and Review. Unlike other industries, the U.S. banks are not allowed to issue dividends or share buybacks without clearing their capital distribution plans with the Federal Reserve first. But banks between $50 billion and $100 billion — covering the likes of Comerica (CMA) — will no longer be subject to CCAR at all, giving them more freedom to deploy capital in the M&A market.

One dampener on M&A activity is pricing. As RBC notes, the S&P 500 banks are currently trading at 1.61x book value, the latest measure in a 10-year trend of rising valuations. But banks’ return on average capital employed (ROACE) — a measure of efficiency as a proportion of profits to investments — has decreased over the last five years. Combined, this means that less attractive banks are getting more expensive even with the recent sell-off in broad markets.

Banks are getting less attractive and more expensive. S&P 500 banks are currently trading at 1.61x tangible book value. Credit: RBC Capital Markets

Out of need

But banks have business reasons to consider dipping into the M&A market next year.

With interest rates rising, banks are fighting to keep their depositors from moving their funds to competitors offering higher interest rates. The head of the Federal Deposit Insurance Corp., Jelena McWilliams, told Yahoo Finance smaller banks in particular are suffering from the “war on deposits.”

Banks need stable deposits in order to ensure they can issue loans. Wright says that the best way to keep funding is through the stability of old school deposits that can be acquired by simply buying another bank.

“[Those] give you a little bit more stickiness of the retail customer or even a digital customer,” Wright said.

There’s another big reason to pursue M&A deals now: technology. Consumers are increasingly turning to mobile banking and away from visits to brick-and-mortar bank branches.

Studies from the Federal Reserve and the FDIC estimate that Americans have rapidly taken up mobile banking over the past seven years and are at or near a 50% adoption rate of mobile banking.

Dan Ryan, partner of banking and capital markets at PricewaterhouseCoopers, told Yahoo Finance that the mega-banks are making it hard for smaller banks to compete with their digital banking platforms.

“It’s been the biggest banks because they can afford to spend really more on the technology,” Ryan said. He added that the large regional banks’ only way to fend off the mega-banks is by teaming up “to create another mega-bank that can go head to head” with the likes of JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC).

The time to make that deal might be in 2019.

11   Kakistocracy   ignore (7)   2019 Feb 23, 2:47am   ↑ like (0)   ↓ dislike (0)   quote   flag        

The Benefits (And Dangers) Of Bank Mergers And Acquisitions

Nearly every middle-market bank in the industry is looking to either acquire another bank or be acquired, and it’s likely that yours is no exception. Many banks see an acquisition or merger as a chance to expand their reach or scale up operations quicker. Yet, a bank acquisition is not without its drawbacks as well – particularly for the unprepared banking executive.

Amidst the complex paperwork, deals and logistics that come with all mergers and acquisitions (M&A), it’s easy to forget the chief reasons your bank should cash in (or purchase). Furthermore, it’s just as easy to forget the dangers that bank mergers pose to all involved. Below, we explore both the benefits and the dangers of an M&A event for your bank so that you’re aware before your bank loses its way.



A bank merger helps your institution scale up quickly and gain a large number of new customers instantly. Not only does an acquisition give your bank more capital to work with when it comes to lending and investments, but it also provides a broader geographic footprint in which to operate. That way, you achieve your growth goals quicker.


Acquisitions also scale your bank more efficiently, not just in terms of your efficiency ratio, but also in terms of your banking operations. Every bank has an infrastructure in place for compliance, risk management, accounting, operations and IT – and now that two banks have become one, you’re able to more efficiently consolidate and administer those operational infrastructures. Financially, a larger bank has a lower aggregated risk profile since a larger number of similar-risk, complimentary loans decrease overall institutional risk.

Business Gaps Filled

Bank mergers and acquisitions empower your business to fill product or technology gaps. Acquiring a smaller bank that offers a unique revenue model or financial product is sometimes easier than building that business unit from scratch. And, from a technology perspective, being acquired by a larger bank might allow your institution to upgrade its technology platform significantly.

Talent And Team Upgrade

While not a factor on the balance sheet, every bank benefits from a merger or acquisition because of the increase in talent at leadership’s disposal. An acquisition presents the possibility of bolstering your sales team or strengthening your team of top managers, and this human element should not be ignored or downplayed.


Poor Culture Fit

Plenty of prospective bank mergers and acquisitions only look at the two banks on paper – without taking their people or culture into account. Failure to assess cultural fit (not just financial fit) is one reason why many bank mergers ultimately fail. Throughout the merger and acquisition process, be sure to thoroughly communicate and double-check that employees are adapting to the change.

Not Enough Commitment

Execution risk is another major danger in bank mergers. In some cases, banking executives don’t commit enough time and resources into bringing the two banking platforms together – and the resulting impact on their customers causes the newly merged bank to fail completely. Avoid this mistake by dedicating enough resources for a full integration of the two financial institutions.

Customer Impact And Perception

While undergoing an M&A event at your bank, it’s critical that you pay attention to the impact it has on your customers. Especially with smaller community banks, customers often respond very emotionally to a bank acquisition – so it’s essential that you manage customer perception with regular, careful communication. And once the merger or acquisition is fully underway, remember to consider the impact on your customers at every stage: Anything from changing technology platforms to financial products could impact your customers negatively if you don’t pay attention.

Compliance And Risk Consistency

A final danger to consider during your next merger or acquisition is the risk and compliance culture of each bank involved. Every financial institution handles banking compliance and federal banking regulations differently, but it’s important that the two merging banks agree on their approach moving forward. When two mismatched risk cultures clash during a bank merger, it negatively affects the profitability of the business down the road if they haven’t come to a working solution.

Bank mergers and acquisitions are complex procedures with the possibility of extraordinary payoff – or extraordinary peril – so it’s important that you handle your upcoming M&A event with care. Keep these benefits and dangers in mind as you combine the processes of each different bank, and you’ll be on your way to a successful merger or acquisition.

12   Kakistocracy   ignore (7)   2019 Feb 26, 12:25am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Why the housing and mortgage crisis is far from over

With major data providers reporting that mortgage delinquencies continue to decline, Wall Street and the pundits are more convinced than ever that the mortgage crisis is dead and buried.

The enormous delinquency problem in the New York City metro area shows why I’m convinced that the U.S. housing and mortgage crisis is far from over, and reveals an ugly truth about mortgage deadbeats. Moreover, New York City is not the only city in this weakened position.

Here’s what’s happening in New York that is likely occurring in other major U.S. real estate markets. In 2009, the New York State legislature passed a statute requiring all mortgage servicers to send a pre-foreclosure notice to all delinquent owner-occupants in the state. The notice warned them that they were in danger of foreclosure and explained how they could get help. Servicers were required to regularly send statistics back to the state's Department of Financial Services for all notices sent out. The department published two reports in 2010 with a compilation of these numbers. That was the last time these statistics were officially reported.

I have obtained the unpublished figures from a person involved with compiling the pre-foreclosure notice filings for the department. The latest update shows cumulative figures through the third quarter of 2018, covering New York City as well as Nassau and Suffolk counties on Long Island. Totals for the entire state are also included.

Here is a brief summary of what the data show. Since February 2010, mortgage servicers have sent out a total of 1,242,490 pre-foreclosure notices to delinquent owner-occupants in New York City and Long Island. This does not include delinquent investor-owners because that was not required under the 2009 law. About 85% of these notices were for delinquent first liens and the remainder were for second liens.

From the data and my contact, it’s likely that roughly 40% of these were second or third notices sent to the same property. Why? The servicers have been sending repeat notices to owners who have not taken action to cure their delinquency for more than a year, and have not yet been foreclosed. My contact recently informed me that close to 20% of the total are duplicates sent out mistakenly by the servicers.

That most of these delinquent owners have not paid for years is confirmed by related figures published monthly in theLong Island Real Estate Report. Since early 2016, almost half of the formal notices of default filed in Suffolk County have been repeat notices. Why? In New York State, a default notice (known as a lis pendens) is only active for three years after which it expires. Hence lenders have had to file a new default notice for borrowers whose default notice has been active for three years.

The Suffolk County statistics reveal how outrageous the serious delinquency situation has become in the New York metro area. Although 359,362 cumulative pre-foreclosure notices have been sent to deadbeat borrowers in Suffolk County alone, fewer than 1,000 formal default notices have been filed each month on these properties since mid-2008.

How is that possible? Mortgage servicers have been compelled by the 2009 statute to send out pre-foreclosure notices to all delinquent owner-occupants. Yet it is entirely up to the discretion of the mortgage servicer whether or not to file a formal default notice on the delinquent property before beginning foreclosure proceedings. For more than eight years, the servicers have chosen not to foreclose or even begin the process for the vast majority of delinquent owners.

Why deadbeats don't worry about losing their property

Some may contend that pre-foreclosure notice numbers don't reveal much because many of these delinquencies must have been either (1) foreclosed by the servicing bank or (2) brought current by the borrower.

Let's tackle these objections one at a time. Concerning foreclosures, I have reliable figures from Property Shark that an average of 1,548 properties were foreclosed annually in New York City between 2012 and 2016. Furthermore, their latest data show that just 1,312 foreclosed properties are now owned by the banks (REOs) and a mere 630 were scheduled for foreclosure auction as of November 2018.

The Furman Center for Real Estate at New York University publishes an annual State of New York City's Housing and Neighborhoods Report. Its 2015 report shows that an average of only 300 properties were foreclosed and re-possessed each year in New York City by the lender from 2011 to 2014. This in a city where 635,359 pre-foreclosure notices have been sent to deadbeats since early 2010. Its latest report for 2017 showed that the annual number of default notices filed in NYC has been declining every year since 2013 to just 10,000 in 2017.

The inescapable truth is that for eight years, mortgage servicers have foreclosed on exceptionally few long-term delinquent homeowners in New York City and Long Island.

What about the claim that many of these delinquent property owners have probably brought their loans current after receiving a pre-foreclosure notice? Remember that roughly 40% of these pre-foreclosure notices are second- or third notices sent to borrowers because they have not paid the arrears owed.

My article in February 2017 with figures from Fitch Ratings showing that 53% of all delinquent non-agency (i.e., not guaranteed by Fannie Mae or Freddie Mac) securitized loans in the state of New York had not made a payment for more than five years as of August 2016. The New York City metro alone had roughly 225,000 of these loans outstanding. In February 2016, 37% of them were seriously delinquent. That is the worst delinquency rate for any major metro in the nation. The notion that many owners in the New York City metro have cured their delinquency is ludicrous.

Does this have implications for the delinquency situation of other major metro areas? Clearly. Because of New York State's pre-foreclosure notice requirement, the New York City metro data provide the most comprehensive and reliable delinquency statistics in the nation. Unfortunately, to a great extent we are in the dark when it comes to the two dozen other major metros where the housing collapse of a decade ago was centered.

The trouble is that all data providers which claim to have delinquency figures are dependent on the numbers they obtain from the mortgage servicers — which are their clients. Seven years of digging for reliable data have taught me that numbers from the servicers are extremely inaccurate and often incomplete.

It is evident that in early 2016, 10 major metros that had deadbeat problems with their non-agency securitized loans all had serious delinquency rates of 23% or higher. I am confident that the delinquency rate for those major metros that suffered significant housing collapses is almost certainly much higher than widely believed.

13   Kakistocracy   ignore (7)   2019 Feb 28, 2:29am   ↑ like (0)   ↓ dislike (0)   quote   flag        

“Shadow Banks” Dominate Mortgage Lending by Piling on Risks. Federal Housing Administration (FHA) on the Hook

But deposit-taking banks have pulled back.

Lovingly known as “shadow banks,” nonbanks have come to dominate the mortgage market. And they originate the riskiest mortgages. The government — mostly the Federal Housing Administration (FHA) — is on the hook. Nonbanks do not take deposits and are not regulated by banking regulators (Federal Reserve, FDIC, and OCC). Their funding is derived mostly from selling the mortgages they originate, but also from bank loans and other sources. During the mortgage crisis, a slew of them got in trouble and, because they did not hold deposits, were allowed to collapse unceremoniously.

Today, there’s a new generation of shadow banks dominating mortgage lending. According to a February 2019 report by the Mortgage Bankers Association, the share of mortgage originations by nonbank lenders has surged from 24% in 2008 to 54% in 2017, while the share of large banks has plunged:

The largest nonbank mortgage lender, Quicken Loans, originated an estimated $86 billion in mortgages in 2017, according to the MBA’s February 2019 report, giving it a market share of just under 5% of all mortgages written during the year.

These shadow banks are unlikely to get bailed out in a crisis, and investors will take the loss. From that perspective, taxpayers are off the hook. But their counterparties are also at risk of losses – with the government by far the most exposed. These counterparties fall into two groups:

Large banks extending “warehouse financing” (short-term credit lines secured by mortgages) to nonbanks to fund the mortgages temporarily until they’re sold into the secondary market.

The US government, through government agencies such as the FHA which specializes in riskier mortgages that it insures and guarantees but does not buy, or Ginnie Mae which buys and guarantees mortgages; and government sponsored enterprises Fannie Mae and Freddie Mac which buy and guarantee mortgages.

In its wide-ranging report and briefing materials (February 25, 184 page PDF) on the housing market and government involvement in it, the American Enterprise Institute (AEI) outlines how surging home prices push lenders to take ever greater risks. And as deposit-taking banks have pulled back from those risks, shadow banks have plowed ever deeper into them.

I will focus on a small aspect of the report: The increasing role of shadow banks in the mortgage business and the exploding role of the FHA in insuring and guaranteeing their mortgages that are becoming riskier and riskier.

FHA insures mortgages on single-family and multifamily homes to high-risk borrowers. It operates on the revenues it receives from the mortgage insurance premiums that borrowers pay upfront and monthly. To qualify for FHA insurance, mortgages must meet certain requirements. When homeowners default on their mortgages, the FHA covers 100% of the lender’s loss. It currently insures nearly 8 million single-family mortgages and about 14,500 apartment buildings.

The chart below by the AEI shows how nonbanks completely dominate FHA-guaranteed “purchase mortgages” (we’ll get to “refinance mortgages” in a moment). The chart excludes mortgages by State Housing Finance Agencies and Credit Unions, accounting for 4% of the FHA purchase-mortgage market. In November, the share of originations by nonbanks of FHA-insured mortgages surged to 85%:

In terms of FHA-insured refinance mortgages, the shift to nonbanks is even more striking. In 2012, nonbanks and banks originated about the same volume. By November 2018, nonbanks originated 94% of all FHA-insured refi mortgages:

“Migration to nonbanks has boosted overall risk levels, as nonbanks are willing to originate riskier FHA loans than large banks,” the AEI says. This is shown by two risk measures.

The first is the Mortgage Risk Index (MRI), a stress test that measures how the mortgages that were originated in a given month would perform if subjected to the same stress situation as mortgages originated in 2007, which experienced the highest default rates as a result of the Great Recession.

The AEI’s chart shows how risks of FHA-insured purchase mortgages, as measured by the MRI, have risen across the board, but much less at large banks than at nonbanks:

The second risk measure the AEI uses is the National Mortgage Risk Index (NMRI), a standardized quantitative index for mortgage default risk based on the performance of the 2007 vintage loans with similar characteristics. NMRI is expressed in a percentage, the “stressed default rate”:

•A higher rate means increasing leverage and looser lending standards and therefore higher risk of default;

•A lower rate means decreasing leverage and tighter lending and therefore lower risk of default.

The composite NMRI (black line in the chart below) has been trending up since mid-2013, with all agencies except the RHS drifting higher. While Fannie and Freddie guaranteed mortgages are at the bottom with stressed default rates of 8% and 6%, the stressed default rate for FHA-insured mortgages have surged, including a 7.6-percentage-point jump over the past 12 months, to 28.5% (click to enlarge):

Since nonbanks originated most of the FHA-insured mortgages over the past few years – in November, 94% of all FHA refi mortgages and 85% of all FHA purchase mortgages – the “stressed default rate” for the FHA reflects mostly the risks of mortgages originated by nonbanks.

The debt-to-income (DTI) ratio shows a similar scenario. It gauges the ability of a borrower to repay a mortgage by measuring the income consumed by servicing all outstanding debts of that borrower.

The upper limit of the DTI ratio for “qualified mortgages” (QM) under the Dodd-Frank Act is 43%. A mortgage that meets the QM requirements provides legal protection for lenders against a claim that the mortgage was made without due consideration of the borrower’s ability to repay. But Fannie Mae, Freddie Mac, FHA, VA, and RHS are exempt mostly from the QM requirements, and so here we go:

•In November, a record 60% of FHA-insured purchase mortgages exceeded the QM limit for DTI.

•50% of VA mortgages exceeded the QM limit.

•But Fannie and Freddie mortgages are well below the limit, at around 30% (click to enlarge):

So there are two dynamics that would be needed for future support of the housing market, according to the AEI:

•Accelerating household incomes

•“Further increases in leverage from an already high level.”

The first has been arriving too slowly and has been outpaced by home price inflation; and the second – increased leverage – would have to happen at the low end of the household-income scale where the FHA and shadow banks are most active, and where the risks are already the highest, and the borrowers the most vulnerable.

14   Kakistocracy   ignore (7)   2019 Mar 13, 4:10pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

America’s Most Hated Home Loan Is Staging a Comeback - Professors with industry ties praise the reverse mortgage.

Professor Chris Mayer has a lesson for ­homeowners: Reverse mortgages, which let older Americans tap their home equity without selling or moving, aren’t as risky as some say. In an online video, he brushes aside “common misconceptions,” including fears about losing your home.

Mayer, a real estate professor at Columbia Business School, isn’t an impartial observer. He’s chief executive officer of a company that sells reverse mortgages. He’s trying to rehabilitate one of the U.S.’s most-­reviled financial products—part of a broader push that relies in part on academics with interests in the mortgage industry.

The host of Mayer’s talk was the American College of Financial Services, a school that trains financial planners and insurance agents. Until recently, it had a task force funded by reverse mortgage companies, which each contribute $40,000 a year. They include Mayer’s firm, Longbridge Financial, and Quicken Loans’ One Reverse Mortgage.

To show the need for reverse mortgages, industry websites cite a Boston College retirement research center run by Alicia Munnell, a professor and former assistant secretary of the Treasury Department in the Clinton administration. She once invested $150,000 in Mayer’s company, though she’s since sold her stake.

The six-year-old task force cites key successes. Mainstream publications have run articles quoting positive research on the loans, and financial planners are growing more comfortable recommending them. The Financial Industry Regulatory Authority, the securities industry’s self-regulatory agency, in 2014 withdrew its warning that reverse mortgages should generally be used as “a last resort.”

Mayer and Munnell said they’ve fully disclosed, in research, appearances, and interviews, their financial interest in the lender. Columbia and Boston College both said they approved the arrangements.

The professors and industry officials say these government-backed mortgages deserve a second look, partly because of a series of federal reforms in recent years designed to protect taxpayers and consumers.

“We are looking to help people responsibly incorporate home equity in their retirement planning,” Mayer said of Longbridge.

Reverse mortgages let homeowners draw down their equity in monthly installments, lines of credit or lump sums. The balance grows over time and comes due on the borrower’s death, at which point their heirs may pay off the loan when they sell the house. Borrowers must keep paying taxes, insurance, maintenance and utilities—and could face foreclosure if they don’t.

While even critics say the mortgages can make sense for some customers, they say the loans are still too expensive and can tempt seniors to spend their home equity early, before they might need it for health expenses.

Fees on a $100,000 loan, based on a $200,000 home, can total $10,000. Because the fees are typically wrapped into the mortgage, they compound at interest rates that can rise over time. Homeowners who need cash could be better off selling and moving to less expensive quarters.

“The profits are significant, the oversight is minimal, and greed could work to the disadvantage of seniors who should be protected by government programs and not targeted as prey,” said Dave Stevens, CEO of the Mortgage Bankers Association until last year and a commissioner for the Federal Housing Administration in the Obama administration.

Academics represent a new face for an industry that’s long relied on aging celebrity pitchmen. The late Fred Thompson, a U.S. senator and Law & Order actor, represented American Advisors Group, the industry’s biggest player. These days, the same company leans on actor Tom Selleck.

“Just like you, I thought reverse mortgages had to have some catch,” Selleck says in an online video. “Then I did some homework and found out it’s not any of that. It’s not another way for a bank to get your house.”

Michael Douglas, in his Golden Globe-winning performance on the Netflix series The Kominsky Method, satirizes such pitches. His financially desperate character, an acting teacher, quits filming a reverse mortgage commercial because he can’t stomach the script.

In 2016 administrative proceedings, the U.S. Consumer Financial Protection Bureau accused American Advisors, as well as two other companies, of running deceptive ads. Without admitting or denying the allegations, American Advisors agreed to add more caveats to its advertising and pay a $400,000 fine.

Company spokesman Ryan Whittington said the company has since made “significant investments” in compliance. Reverse mortgages are “highly regulated, viable financial tools,” and all customers must undergo third-party counseling before buying one, he said.

The FHA has backed more than 1 million such reverse mortgages. Homeowners pay into an insurance fund an upfront fee equal to 2 percent of a home’s value, as well as an additional half a percentage point every year.

After the last housing crash, taxpayers had to make up a $1.7 billion shortfall because of reverse mortgage losses. Over the past five years, the government has been tightening rules, such as requiring homeowners to show they can afford tax and insurance payments.

In response to public concerns, Shelley Giordino, then an executive at reverse mortgage company Security 1 Lending, co-founded the Funding Longevity Task Force in 2012. It later became affiliated with the Bryn Mawr, Pennsylvania-based American College of Financial Services.

Giordino, who now works for Mutual of Omaha’s reverse mortgage division, described her role as “head cheerleader” for positive reverse mortgages research. Gregg Smith, CEO of One Reverse Mortgage, said the group is promoting “true academic research,” including work by professors with no industry ties.

In January, the American College cut its ties with the task force because the school, as a nonprofit institution, wasn’t comfortable being affiliated with an organization endorsing products, according to Vice President James N. Katsaounis. “A proper retirement portfolio is one that is well-balanced and diversified, which may or may not include reverse mortgages,” he said.

Mayer, the Columbia professor and reverse mortgage company CEO, said many older consumers could benefit from the loans because they can never owe more than their house is worth even if real estate prices plunge.

A former economist at the Federal Reserve of Boston with a Ph.D. from the Massachusetts Institute of Technology, Mayer joined the Columbia faculty in 2004 and currently co-­directs Columbia’s Paul Milstein Center for Real Estate. He wrote his first paper on reverse mortgages in 1994, when the FHA product was five years old.

In 2012, Mayer co-founded Longbridge, based in Mahwah, New Jersey, and in 2013 became CEO. He’s on the board of the National Reverse Mortgage Lenders Association. He said his company, which services 10,000 loans, hasn’t had a single completed foreclosure because of failure to pay property taxes or insurance.

While many colleges let professors engage in outside business activities, Gerald Epstein, a University of Massachusetts economics professor who’s studied academic conflicts of interest, said Columbia may need to scrutinize Mayer’s arrangement closely.

“They really should be careful when people have this kind of dual loyalty,” he said.

Columbia said it monitors Mayer’s employment as CEO of the mortgage company to ensure compliance with its policies. “Professor Mayer has demonstrated a commitment to openness and transparency by disclosing outside affiliations,” said Chris Cashman, a spokesman for the business school. Mayer has a “special appointment,” which reduces his salary and teaching load and also caps his hours at Longbridge, Cashman said.

Likewise, Boston College said it reviewed Professor Munnell’s investment in Mayer’s company, on whose board she served from 2012 through 2014. Munnell said another round of investors in 2016 bought out her $150,000 stake in Longbridge for an additional $4,000 in interest.

She said she now prefers another approach: States allowing seniors to defer property tax payments. The advantages include “no fee, no paperwork and no salespeople,” she said. In one way, she’s glad she exited her reverse mortgage investments.

“Anytime I had a conversation like this, I had to say at the beginning that I have $150,000 in Longbridge,” she said. “I had to do it all the time. I’m just as happy to be out, for my academic life.”


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