Wednesday, November 29, 2017
(This just in from Troy Rule @ASU:) The Program on Law and Sustainability at ASU Law launched the annual Sustainability Conference of American Legal Educators in May 2015. This innovative conference is a national event hosted each spring for legal academics researching in environmental sustainability-related areas. Roughly 50 professors from law schools throughout North America convene to present their most current research. At the conference, the program also awards the newest winner of the Morrison Prize Contest—an annual contest that awards a $10,000 cash prize to the author(s) of the most influential sustainability-related law review article published in the previous year.
This year's ambitious conference is the program’s signature contribution to the worldwide sustainability movement—a movement whose influence continues to expand throughout legal academia. The conference offers a unique forum for subject matter areas pertaining to environmental sustainability, including but not limited to:
- Climate Change
- Energy Law
- Water Law and Policy
- Environmental Law and Sustainability
- Sustainability Policy and Natural Resources
- Land Use and Zoning Law
- Sustainable Development
- Disaster Law
Now accepting proposals for the 2018 Call for Conference Speakers and entries for the 2018 Morrison Prize Contest – Click here for more information
Sunday, November 19, 2017
Now that Richard Cordray is on his way out as director of the Consumer Financial Protection Bureau (CFPB), banking and financial services lobbyists are gearing up to attempt to unwind some of the bureau’s regulatory work and to put a halt to some of its more aggressive enforcement actions.
And it looks like they’ll likely get their way since President Trump appears to be ready to appoint (at least on an interim basis) the current director of the White House Office of Management and Budget, Mick Mulvaney.
For property professors (particularly the housing and real estate folks), there are some important things we should be on the look out for as things unfold. This is because the CFPB has played a major role in reshaping the way Americans have access to property—or more specifically, how they have access to mortgage credit that leads to homeownership.
One of the most important aspects of the Dodd-Frank Act when it comes to mortgage lending was the creation of a rule that requires firms that originate mortgage loans to make a good faith determination that the borrower has the ability to pay the loan. This may seem obvious, but in the lead-up to the 2008 crisis it was far from a universal practice. In fact, it was not at all uncommon for a mortgage lender to extend credit to a borrower using only the individual’s “stated income” on the loan application, without the lender ever conducting any independent verification or requiring documentation. This was often called “low-doc” or “no-doc” lending because hardly any documentation about the borrower was needed to advance credit. In certain instances the borrower could put down any number they wanted and the lender would nevertheless make the loan, relying solely on the ever-rising value of the real estate subject to the mortgage.
Mortgage lenders would also manufacture pay stubs, employment data, and income information in order to form the basis of mortgage underwriting. And some mortgage lenders—far from being concerned with a borrower’s credit worthiness—would actually encourage their employees to disregard a borrower’s actual ability to repay. One company called Long Beach Mortgage required little documentation, often accepting letters of credit from landlords, fake tax returns, or suspicious-looking pay stubs in lieu of verified statements of income. One former employee said that higher-ups at the company would frequently offer gifts to the loan reviewers in exchange for looking the other way on questionable loan applications. Antoinette Hendryx, a former loan reviewer for Long Beach Mortgage, said “’They’d offer kickbacks of money’” or said things like “’I’ll buy you a bottle of Dom Perignon.’ It was just crazy.”
So Dodd-Frank aimed to force mortgage lenders to study a borrower’s actual ability to repay a loan before extending credit. Dodd-Frank also empowered the CFPB to create a rule that would set forth a safe harbor for how lenders could meet the ability to repay requirement. This safe harbor rule (called the “Qualified Mortgage”) essentially states that if a lender makes a loan that is very “vanilla” (i.e., no predatory or out of the ordinary features, regular payment structure, fully amortized, etc.) then that lender will be deemed to have met the standard. As I’ve written here, lenders have fully embraced the Qualified Mortgage. Indeed, mortgage origination data indicate that something like 99 percent of all new mortgage loans are “Qualified Mortgages.”
But many lenders and industry advocates have argued that the Qualified Mortgage is hurting mortgage lending. And the Trump administration (via a report by the U.S. Treasury Department this past summer) indicated that it desired to loosen the ability to repay rule and change the qualified mortgage. Those goals might very well be met under a Director Mulvaney.
I wrote back in October of last year (here) on this blog that lending for low- to moderate-income borrowers and borrowers of color is indeed down. And total loan originations between 2014 and 2015 definitely took a dip (table with origination numbers for comparison here). But is the Qualified Mortgage and the Ability to Repay the reason for this?
A few months ago in September 2017, Federal Reserve researchers, using Home Mortgage Disclosure Act data, studied the decline in lending to low-income borrowers by major, traditional financial institutions. I thought their findings were interesting and useful in thinking about the causes of credit tightening. Quoting from their paper:
The Decline in FHA Lending
A second trend in the mortgage originations of the largest banks that might help explain their declining [low- and moderate-income (LMI)] share is a coincident decline in their origination of loans insured by the Federal Housing Administration (FHA). FHA insurance protects lenders against losses in the event of borrower default, and so allows borrowers with relatively small down payments or relatively low credit scores to access mortgage credit they might otherwise be denied. FHA loans are disproportionately used by LMI borrowers for these reasons.5
As shown in figure 3, the FHA share of loans originated by the three largest banks fell from 43 percent in 2010 to just 5 percent in 2016. Because FHA loans are much more likely to be originated to LMI borrowers, this decline is likely related to these banks' decrease in LMI lending. The share of FHA lending also declined for other banks and for nonbank lenders, though not as sharply as for the largest three banks.
The disproportionately large decline in both LMI and FHA lending by the largest three banks raises two questions. First, why did these largest three bank lenders reduce their FHA originations by more than other lenders during this period? Second, how much of the "excess" decline in lending to LMI borrowers by the three largest banks can be accounted for by the larger decline in FHA mortgages?
Reasons for the Decline in FHA Lending
One possible reason for the disproportionate decline in FHA lending by the largest banks could be related to recent litigation brought against them by the Department of Justice under the False Claims Act. The Department of Justice has argued that lenders who improperly certify mortgages as eligible for FHA insurance may be held liable for making false claims to the United States government, subjecting them to treble damages. Since 2011, the Department of Justice has sued a number of large mortgage lenders for violations of the False Claims Act, including each of the largest three bank lenders. The costs of these lawsuits have been large: for example, Wells Fargo reached a $1.2 billion settlement with the Department of Justice in 2016. While other lenders have also been targeted in these lawsuits, large banks have been particularly explicit about the effect of these lawsuits on their FHA lending. For example, in an April 2015 letter to shareholders, JP Morgan Chase CEO Jamie Dimon explained that the company had reduced its FHA lending in part because of the risk "from the penalties that the government charges if you make a mistake."
Several other factors have also contributed to the overall decrease in FHA lending since 2010. First, rising FHA insurance premiums over this period likely shifted demand away from the FHA. Second, lenders have faced significant uncertainty around the FHA's "indemnification" policy, which defines circumstances under which FHA insurance is voided because the loans are judged to be improperly underwritten. Third, the cost of servicing a delinquent FHA mortgage rose significantly during this period. While each of these factors likely raises the expected costs associated with FHA-guaranteed mortgages for all lenders, they could have induced larger reactions from the large bank lenders, whose overall profits are less dependent on their mortgage lending business.
So I think we need more data and analysis in order to better assess the effect of the Qualified Mortgage and the Ability to Repay on mortgage lending and the availability of credit. In another Fed study that was done in 2014 (which was the year that the new CFPB rules went into affect—although many lenders already started to comply the year before just to get ahead of the game), the data indicated that the rules caused no material difference in mortgage lending. Will the new CFPB director go through a probing process before making substantial changes to these important underwriting rules? And if they change, what will mortgage underwriting look like in the future? We’ll have to wait and see.
(Photo Credit Above: Athens Area Habitat for Humanity)
Thursday, November 2, 2017
The Journal of Affordable Housing & Community Development Law (the Journal) is the nation’s only law journal dedicated to affordable housing and community development law. The Journal educates readers and provides a forum for discussion and resolution of problems in these fields by publishing articles from distinguished law professors, policy advocates and practitioners.
For its next issue the Journal invites articles and essays on the theme Managing the Tensions and Conflicts Among Affordable Housing, Community Development and Fair Housing Law
April 2018 will mark the 50th anniversary of the passage of Title VIII of the 1968 Civil Rights Act, the federal Fair Housing Act. Doubtless, there will be numerous publications celebrating it and evaluating its effectiveness. This issue of the Journal will focus on another equally significant dimension worthy of reflection. Title VIII was enacted to address both governmental and private actions that discriminate or that promote segregation either intentionally or by neutral rules. Historians have documented a long history of governmental discrimination that promoted racial segregation by excluding people of color and others from communities of prosperity and opportunity as well as intentional practices of neglect and disinvestment that contained people of color and others protected by civil rights laws.
Given this legacy, there are numerous important and recurring tensions between fair housing law, the development of affordable housing, and community development that arise out of efforts to pursue Title VIII’s worthy objectives. Some examples of fair housing rules and policies that have caused complications include: (1) siting practices that are affected by the duty to affirmatively further fair housing and site and neighborhood standards; (2) the right of persons with disabilities to live in integrated, community-based settings where they can also receive long-term supportive services that address their individual needs; (3) the obligation to carry out affirmative fair housing marketing while also implementing admission and selection practices to create specialized housing for families with needs that often impair the ability to gain access to housing; (4) the responsibility to effectuate architectural access in a regulatory environment with complex building codes implemented by regulators and builders in inconsistent ways; and, (5) the importance of promoting equal access to housing by immigrants through language assistance policies in a political atmosphere where immigration itself is a contentious topic.
Often these tensions are expressed as an either-or proposition. Developers, sponsors, government officials and others are concerned about regulatory imperatives that are confusing or contradictory, interfere with their mission, cause inefficiencies, encourage unnecessary legal fees and litigation, create distortions in the developments and programs that lead to limits on the number of affordable units, or that undermine projects altogether. Fair housing advocates argue that some affordable development activities perpetuate or exacerbate conditions of segregation and containment affecting people of color and people with disabilities, and that in the absence of regulation and vigorous enforcement, bias, prejudice and exclusion will continue to plague the nation’s housing and finance systems. Some community advocates question fair housing goals that disfavor investment in low-income communities and communities of color, as well as when application of Title VIII appears to impede efforts to resist gentrification and community displacement. Advocates for special needs populations do not all agree whether integration into the larger community or formation of special communities are more advantageous.
The Journal seeks articles that will explain and analyze these types of issues and suggest strategies (including legal and policy recommendations) to deal with them. The focus is not on those trying to evade fair housing requirements but on the complexities of complying with legal rules by people of good will who support fair housing goals. Articles can either focus on a particular rule or policy (e.g. site and neighborhood standards) or address a broader theme (e.g. how the tensions affect the location of housing or how they exemplify issues of identity and difference).
The Journal welcomes essays (typically 2,500–6,200 words) or articles (typically 7,000-10,000 words) on the theme.
Interested authors should send an abstract describing their proposals to the Journal’s Editor-in-Chief, Tim Iglesias, at firstname.lastname@example.org by November 20, 2017. Submissions of final articles and essays are due by January 3, 2018. The Journal also accepts submissions on a rolling basis. Please do not hesitate to contact the Editor with any questions.