California Congressman on REO-to-rental warpath


Takano pushing four federal bodies to investigate





Longtime critic of REO-to-rental U.S. Rep. Mark Takano, D-Calif., is on the warpath Thursday, firing off letters to four federal entities asking for a detailed investigation into the growth of REO operations and REO-to-rental as an investment — and what they are doing to effectively regulate the emerging asset class.

Takano sent letters Thursday morning to the Consumer Financial Protection Bureau, the U.S. Department of Housing and Urban Development, the U.S. Securities and Exchange Commission, and Treasury Office of Financial Research.

Takano is concerned that rental prices are going up, and a surplus of investors in rentals — along with new rental-backed securities deals — could have the effect of artificially raising rental prices, making housing even more costly in parts of California and elsewhere.

Takano cites a Federal Reserve report, which claims if unchecked, investor activity in local housing markets may lower the quality of neighborhoods, while pushing up prices.

Investor purchasers have been an outsized figure in recent years in housing. Normally, about 85% of home sales are individuals purchasing with a mortgage, about 10% are all-cash sales, and about 3-5% are distressed sales. In 2013, something like 40% of home sales were individuals using a mortgage, 40% were all-cash, more than about 15% were distressed sales and 5% were flips.

Takano’s office wants a number of detailed questions investigated by the federal entities, including clarification on how single-family rental bonds are structured, what their metrics are, how their performance criteria could affect operations, and what is the risk that when bonds mature, the borrower would be unable to refinance the bonds and be forced to sell properties to repay bondholders.

From the SEC, Takano wants to know details about the investors who are purchasing the bonds, how the riskier tranches are sold and whether they are being re-packaged into collateralized debt obligations and resold with higher ratings.

He wants the CFPB to provide a list of local housing markets with high concentrations of rental properties linked to rental-backed securities, and analysis of common trends within these communities, so that they can examine the impact of REO-to-rentals and rental-backed securities on mortgage credit availability, rental prices, and housing prices in highly impacted communities.

Further, he wants the CFPB to perform a comparison between the rehabilitation, ongoing maintenance, and management costs that large investors spend on REO-to-rental properties with other actors, and how that impacts local neighborhoods.

From HUD and the Federal Housing Administration, Takano is asking for detailed information about the impact of large investor purchasers on first-time homebuyers’ ability to enter the market, and an evaluation of trends in FHA-approved mortgages in impacted communities.

To date only two REO-to-rental deals have been securitized.

Blackstone Group (BX) spent the past two years building an expansive portfolio of single-family rental homes via subsidiary Invitation Homes, spending $7.5 billion to acquire 40,000 houses. Blackstone then packaged rental income from single-family homes into a pass-through security, which is functionally not unlike a mortgaged-backed security.

Goldman Sachs (GS) started coverage on American Homes 4 Rent at a neutral rating and a price target of $18, reports say. American Homes 4 Rent has spent some $3.5 billion to acquire more than 21,000 rental homes.

“If vacancy rates rise or renters are unable to pay their rent, Blackstone and others may be forced to sell off vast amounts of property to make their investors whole,” Takano explained. “Selling a large amount of properties quickly would not only deprive renters of their home, but destabilize the market for homebuyers and send housing prices into a freefall.”

Jed Kolko, chief economist with Trulia, told HousingWire that the outsized and growing number of single-family rentals’ affect on rental rates in general is negligible.

Using American Community Survey data from 2005 and 2012, Kolko looked at the change in metro housing units that were single-family rentals.

Most metros had a large increase in the share of their housing stock that was single-family rentals. Among the 100 largest metros, Kolko looked at the top 10 with the biggest increases in institutional investments (from one to ten) – Las Vegas, Nev.; Phoenix, Ariz.; Cape Coral-Fort Myers, Fla.; Memphis, Tenn.; Riverside-San Bernadino, Calif.; Tuscon, Ariz.; El Paso, Texas; Lakeland-Winter Haven, Fla.; Fresno, Calif., and Sarasota, Fla.


A Closer Look at Qualified Mortgages – Starting 1/10/2014

By Jeff Bounds  |  December 10, 2013

Big changes are coming for residential mortgage lenders starting next year.  That’s when new rules from the federal Consumer Financial Protection Bureau (CFPB) go into effect concerning the origination of home mortgages.

Fannie Mae has made some changes to its eligibility standards as a result, but before looking at those, it’s helpful to understand the new Ability-to-Repay and qualified mortgage (QM) rules.

Underlying the QM concept is the Ability-to-Repay rule that the CFPB issued on January 10, 2013. This rule, which takes effect on January 10, 2014, requires mortgage lenders to consider consumers’ ability to repay their home loans before extending credit to them.

Ability-to-Repay Rule

Broadly speaking, the Ability-to-Repay rule requires a lender to only make a loan that the lender reasonably believes the borrower has the ability to repay at the time the loan is made. Borrowers must provide financial documentation to support this, and lenders must verify all the documents that the borrower provides.

Under the Ability-to-Repay rule, lenders have to consider and document at least eight underwriting criteria in deciding whether to lend money for a home purchase or refinance, said John Burley, associate general counsel for Fannie Mae. The criteria are:

  1. The borrower’s current or expected income or assets.
  2. The borrower’s income and employment status if the borrower is claiming to have employment income.
  3. Monthly payments on the loan, including any possible changes if the interest rate is adjustable.
  4. Monthly payments on other loans being made at the same time secured by the property that the lender is aware of.
  5. Monthly costs of other mortgage-related obligations the borrower has, such as homeowners’ association dues or property taxes.
  6. Other loans and debts the consumer has, such as alimony, child support, or credit card debt.
  7. The borrower’s debt-to-income ratio.
  8. Credit history.

What Makes a Mortgage Qualified?

Think of a QM in three ways. At one level, it’s a loan that meets various standards that the CFPB has established. In a more simple sense, it’s a loan for which the lender presumes the borrower has the ability to repay. And for the lawyers in the crowd, the granting of QM status provides a defense for lenders against legal actions that borrowers can now bring over loans they’ve taken out and later claim they can’t afford under the ability to repay standards.

Under CFPB rules, a QM must have the following characteristics:

  • Loans may not have terms that extend beyond 30 years, and all principal must be paid in substantially equal installments over the life of the loan.
  • Points and fees, which are costs that the lender charges to the borrower during the process of applying for the loan, are capped at 3 percent of the total amount the borrower takes out for loans of $100,000 or more.

A Degree of Legal Protection

A major reason why lenders are interested in QM is that they can receive a degree of legal protection from borrower lawsuits if the borrower claims the lender failed to consider the borrower’s ability to repay the loan. Broadly speaking, there are two classes of QMs. The amount and type of legal protection the lender gets will depend on criteria of the QM loan they’ve made:

  • Safe harbor loans have annual percentage rates (APR) that are not more than 1.5 percentage points (or 150 basis points) of the “average prime offer rate” (APOR). (The APOR is determined weekly and relates to Freddie Mac’s survey.) A safe harbor loan is harder for the borrower to challenge in court because the lender is conclusively considered as having fulfilled the Ability-to-Repay rule.
  • Rebuttable presumption loans have APRs more than 1.5 percent above the APOR. The lender in this case gets less legal protection than with safe harbor loans. Borrowers with such loans can potentially win a lawsuit based on the Ability-to-Repay rule if they can prove that the lender didn’t give adequate consideration to living expenses after the mortgage and other debts they were aware of.

Fannie Mae’s New Eligibility Rules

Starting next year, Fannie Mae will impose new limits on the types of loans it can buy from lenders. This is because of instructions that it received on May 2, 2013, from the Federal Housing Finance Agency, which serves as its regulator and conservator.

For loans with applications on and after January 10, 2014, if a loan is subject to the CFPB’s Ability-to-Repay  rule, then Fannie Mae can buy it only if:

  • It is “fully amortizing,” meaning that the borrower can pay the entire principal by making all monthly payments on time. This means Fannie Mae cannot accept negative amortization, balloon or interest only loans for purchase.
  • The term of the loan is a maximum of 30 years.
  • Points and fees are less than 3 percent of the total amount of the loan (higher limits apply to loans under $100,000).

The first two items are relatively straightforward. The third is not. Burley notes that a plethora of rules govern what lenders must include, or may exclude, in points and fees.

“It’s very technical,” he said. “That’s where most of the concerns will be.”

If a loan is exempt from the Ability-to-Repay rule, points and fees must be less than 5 percent of the total loan amount for Fannie Mae to buy the loan.

It’s not Fannie Mae’s role to establish whether a given loan is a QM, nor whether it is of the safe harbor or rebuttable presumption variety. The burden for complying with those regulations rests with the lender.

Nevertheless, Fannie Mae recognizes that lenders face challenges in complying with all of the new regulations. Therefore, during a transitional period of as-yet undetermined length after January 10, 2014, Fannie Mae will not require a lender to buy back a loan on the basis of a Fannie Mae determination that the loan doesn’t comply with the QM points-and-fees requirement, as long as the loan in question is otherwise eligible for Fannie Mae to purchase.

However, lenders will be required to buy back those loans from Fannie Mae if a court, regulator, or other authoritative body determines that points and fees violated CFPB standards.

For More Information

Since the CFPB made the rules governing matters such as QM, Ability-to-Repay, safe harbor, and rebuttable presumption, that agency is the first place lenders should go to get questions answered.

Lenders may want to start with the CFPB’s website, which has a lot of resources to help lenders comply with the new rules. MBAA is also another good source of guidance.

In addition to going to the CFPB, lenders may also consult with the various law firms and advisory shops that are offering advice on complying with CFPB regulations. Fannie Mae can’t endorse any outside firm’s advice for legal compliance.

Fannie Mae has also published guidance around the eligibility requirements, including SEL 2013-06, LL 2013-05, LL 2013-06, and LL 2013-07.