The credit and real estate meltdowns, coupled with the subsequent foreclosure crisis, caused many politicians, all with differing motives, to shift into high legislative gear. Without commenting on motivation, which is an admittedly fertile area for discussion, let’s take a look at the national legislative scene to see what has occurred, and whether things are better today than in 2008.
MERS. I am addressing this issue at the beginning, primarily to get it out of the way. I for one am suffering from “MERS Fatigue,” which is a malady afflicting many of us who watch and wait for something new to occur on this front.
It’s important to understand that MERS, which is the catchy acronym for the “Mortgage Electronic Registration System”, was never a creature of statute. It was born and bred by the lending and title industries in the late 1990s, for reasons that most people already know. But because of its national scope – affecting approximately 60% of all home mortgages – MERS bears mentioning here.
Despite all the national attention, the MERS controversy is really one that can only be resolved on the local level, since real estate recording and foreclosure statutes occur on a state – not national – level. In Oregon, although there have been several federal court rulings, MERS’ legality is still up in the air. This is because the local federal judges, who are supposed to follow Oregon law, have no binding Oregon appellate court precedent to follow when it comes to MERS. The result is that there have been divergent federal court rulings. And, the topic is so contentious at the Oregon legislature that there is little political appetite to tackle the problem, since few can agree on a solution.
So, the news is that there is no news. It will take months for the one state court case currently on appeal to find its way to the Oregon Court of Appeals or Supreme Court. And, although there is a slight chance of a breakthrough in the upcoming session, 2012 does not appear to be a year in which we will see a legislative answer.
Fannie and Freddie. Since the fall of Lehman Brothers in 2008, these two Government Sponsored Enterprises or “GSEs” have come under government ownership and control. For a summary of the issues from the Congressional Budget Office, go to the link here. Since the private secondary mortgage market effectively disappeared between 2007-2008, this means that today, there is no viable buyer of residential loans except the federal government. To some observers, depending on their political bent, this is a good thing; but to others, it’s bad.
One thing is certain; as long as the federal government, through Fannie and Freddie, dictate borrower qualifications, LTVs, and conforming loan limits, the conventional mortgage market will continue to be tight. This does not bode well for higher end homes, especially. Unfortunately, we don’t have to go back very far in time to remember what happened in the “private label” secondary mortgage market (i.e. non-GSE market) where home loans were handed out like party favors, and those who should never have qualified did.
While there is much talk about doing away with Fannie and Freddie, it is unlikely any time soon. However, what is occurring, albeit slowly and somewhat quietly, is a move to shift some of the GSEs’ loans to the private sector, where the risk would not be backed by the federal government. If this works, perhaps more will follow. While there may be some investors for such loans, it is likely that without a governmental safety net, the nascent private secondary market will demand a higher rate of return to offset the higher risk.
In the meantime, the loans of choice appear to be through the FHA. While the paperwork may be daunting, the LTVs are good and the bar to borrower qualification is much lower and more flexible than conventional loans.
The Consumer Finance Protection Bureau. In recognition of Wall Street’s role in the credit and mortgage meltdowns, Congress established the Consumer Financial Protection Bureau (CFPB) through the Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21 of this year, it was opened for business. This is no ordinary federal agency. It is a super agency, responsible for regulating many, many areas of consumer finance and mortgage loans.
Elizabeth Warren, a Harvard law professor and Presidential Advisor, was the driving force behind the Agency’s creation. She was a zealous advocate for the consumer. Unfortunately, the political reality was that she may have been too zealous. Instead of being appointed director, Richard Cordray, former Ohio Attorney General, was appointed to head the agency. However, his nomination is currently tied up in Congress, and he may not be confirmed. Many Republicans oppose the idea of so much power being wielded by a single person rather than a board of Senate-confirmed appointees. So as it stands, the CFPB – this mega agency that was created to oversee so many aspects of consumer law – has a website, is hard at work making manuals and processing paperwork, yet has no director to oversee enforcement of anything.
Risk Retention, Skin in the Game, and the QRM. Mindful of the risks created when banks used their own safety net capital to trade in high risk loans, known as “proprietary trading,” the 2010 Dodd-Frank Act enacted Section 619, which placed severe restrictions on the ability of banks to use their funds to place risky bets (known as the “Volker Rule”). Billions of dollars of these bets failed in 2008, leading up to the massive government bailouts that taxpayers funded. What is the status of the Volker Rule today? It’s still out for public comment, with banks arguing that the Rule will reduce their revenues and thereby force them to increase the cost of loans to borrowers. Given that big banks are still suffering the reputational fallout from the bailouts, the Volker Rule -with most of its teeth – may actually become law. When? Who knows.
Also mindful of the risks created through sloppy underwriting of securitized loans, Dodd-Frank sought to require that banks retain a 5 percent interest in the risk of loss on those loans. This risk retention rule has been referred to as “skin in the game,” and was intended to require banks to share a portion of the risks they securitized to others. Instead of investors taking on the entire risk of a slice of securitized loans, banks would have to hold back 5% on their own balance sheet.
However, the law made a major exception; it provided that through rule making, a standard be set for certain loan types with statistically lower default rates for which risk retention would be unnecessary. This exception became known as the “Qualified Residential Mortgage” or “QRM.” The QRM rules were intended to impose high standards for documentation of income, borrower performance, low debt-to-income ratios and other quality underwriting requirements. Although they were to be the exception, not the rule, today, most lenders want these standards to be flexible rather than inflexible, so that there is more wiggle room for their loans to qualify as QRMs and thereby remain exempt from risk retention. The argument in favor of looser loan standards is the fear that an inflexible QRM exemption will impair access to home loans by low and moderate income borrowers. This debate continues today, and there is some reason to believe that these rules will be substantially diluted before becoming law.
PCQ Editorial Comment: It was not so long ago that certain banks criticized borrowers of 100% home financing as creating “moral hazard” – i.e. they took risks because they had no financial risk of default since they had no down payment to lose. Today, the concept of “moral hazard” seems to have been forgotten by those same banks opposing risk retention rules. They now expect their borrowers to have “skin in the game” – hence the higher down payment rules – but deny the need to do so themselves. “Pot meet Kettle.”
Conclusion. So, notwithstanding the fact that this country teetered on the brink of disaster in 2008, the politicians’ rush to legislate has continued to move at a snail’s pace. Query: Is the American consumer really better off today than in 2008?
 This article will not cover Mortgage Assistance Relief Services (“MARS”), since the much ballyhooed national law was never intended to apply to Realtors®, even though that realization did not come soon enough to avoid all sorts of unnecessary industry handwringing and forms creation. All of the Oregon-specific legislation has been discussed in my prior articles.
 On September 30, 2011, Fannie’s high loan limits for certain high housing cost parts of the country expired. In portions of California, this may result in otherwise qualified buyers having to wait a year or two to save for the additional down payments.
 Here is a listing of its responsibilities: Board of Governors of the Federal Reserve: Regulation B (Equal Credit Opportunity Act); Regulation C (Home Mortgage Disclosure); Electronic Fund Transfers (Regulation E); Regulation H, Subpart I (Registration of Residential Mortgage Loan Originators); Regulation M (Consumer Leasing); Regulation P (Privacy); Regulation V (Fair Credit Reporting); Regulation Z (Truth in Lending); Regulation DD (Truth in Savings); FDIC: Privacy of Consumer Financial Information; Fair Credit Reporting Registration of Residential Mortgage Loan Originators; Office of the Comptroller of the Currency: Adjustable Rate Mortgages Registration of Residential Mortgage Loan Originators; Privacy of Consumer Financial Information; Fair Credit Reporting; Office of Thrift Supervision: Adjustments to home loans; Alternative Mortgage transactions; Registration of Mortgage Loan Originators; Fair Credit Reporting; Privacy of Consumer Financial Information; National Credit Union Administration: Loans to members and lines of credit to members; Truth in Savings; Privacy of Consumer Financial Information; Fair Credit Reporting Requirements for Insurance; Registration of Mortgage Loan Originators; Federal Trade Commission: Telemarketing Sales Rule; Privacy of Consumer Financial Information; Disclosure Requirements for Depository Institutions Lacking Federal Depository Insurance; Mortgage Assistance Relief Services; Use of Pre-notification Negative Option Plans; Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations; Preservation of Consumers’ Claims and Defenses; Credit Practices; Mail or Telephone Order Merchandise Disclosure Requirements and Prohibitions Concerning Franchising Disclosure Requirements and Prohibitions Concerning Business Opportunities Fair Credit Reporting Act Procedures for State Application for Exemption from the Provisions of the Fair Debt Collection Practices Act; Department of Housing and Urban Development: Hearing Procedures Pursuant to the Administrative Procedure Act; Civil Monetary Penalties; Land Registration Purchasers’ Revocation Rights; Sales Practices, and Standards Formal Procedures and; Rules of Practice Real Estate Settlement Procedures Act; Investigations in Consumer Regulatory Programs. For source, link here.
 It is rumored that Morgan Stanley and Goldman Sachs, both of whom changed their charters from securities firms to become “banks”, in order to be eligible for taxpayer funded bailout money, are now considering exiting that status, precisely so they will not have to comply with the Volker Rule – if it passes.