Posts tagged ‘FHA’

Time to Clamp Down on Mortgage Lending Standards?

The Federal Housing Authority (FHA) certainly thinks so. On March 14th it issued an updated guidance in response to increasing “risk trends” in its single family mortgage portfolio. Under the new approach announced by the FHA, it is flagging more loans for manual underwriting and imposing tougher minimum loan criteria. According to the WSJ, roughly 40,000-50,000 loans a year will be impacted by the new standards.

While the announcement is likely to be criticized by some housing advocates, concerns have been raised for years about the solvency of the FHA. In the letter announcing the move, FHA Commissioner Montgomery argued that the FHA “must seek the right balance between managing risk and fulfilling its mission of supporting sustainable homeownership.” In contrast, according to the FHA in January, 28% of its mortgages had a debt to income ratio greater than 50%.

Are You Ready For The Day After Tomorrow?

I really do have to come up with a different movie reference when I’m writing about natural disasters but I really can’t get that dumb movie, The Day After Tomorrow, out of my head.

In any event, in response to flooding in the mid-west, regulators, including the NCUA, issued the obligatory statement imploring financial institutions to be flexible when dealing with consumers in the affected areas. The statement includes a link to a 2017 guidance to examiners which I would suggest including in your materials preparing for your credit union’s own natural disaster. I’m no meteorologist but I would work on the assumption that the question is no longer if but when Mother Nature will wallop your operations.

Anyway, the guidance is an interesting read. For example, it stipulates that when evaluating an institution’s natural disaster preparedness, examiners should access a financial institutions “effectiveness in responding to changes in the institution’s, markets as a result of the disaster. And of course, they should expect management to conduct annual risk assessments and update their disaster preparation plans where appropriate.

Enjoy the spring weather. See you tomorrow.

March 26, 2019 at 8:42 am Leave a comment

Killing a Flea with an Elephant Gun

This morning brings yet another example of how the government seems to work against itself. The FHA announced that it is cutting premiums charged to homeowners who take out FHA loans. At the same time, the FHFA is proposing regulations that will, at the very least, add one more layer of complexity for credit unions offering mortgage loans. Time is running out to comment on this regulation that would impose new ongoing requirements on FHLB members. Considering how many credit unions are FHLB members – 64 in New York alone – you may want to dash off a quick note to the FHFA explaining that the proposal uses a butcher’s knife where a scalpel is in order.

First, some background. The Federal Home Loan Bank was formed in 1932 as one of the phalanx of quasi-governmental corporations intended to prop up Depression-era mortgage lending. The FHLB is comprised of 12 regional banks. Membership is extended to banks, credit unions, Community Development Financial Institutions, and insurance companies. (This last one surprised me, too, but it makes sense when you consider that insurance companies purchase mortgages and mortgage-backed securities). The purpose of the system is to provide liquidity to the housing market by providing loans to member institutions. The enabling statute requires that institutions applying for membership “make such home mortgage loans as, in the judgment of the Director [of FHFA], are long-term loans.” In the erstwhile tradition of congressional abdication, regulators are left to determine what that means. Congress also requires depository institutions that were not members of the Bank as of January 1, 1989, to have at least 10 percent of its total assets in “residential mortgage loans.” The statute generally exempts FDIC-insured depository institutions with $1 billion or less in total assets from this requirement. However, since credit unions aren’t FDIC-insured they don’t qualify for this important exemption. Again, the statute does not define what constitutes a residential mortgage loan.

Now for the regulation, with which I am vexed. The FHFA, which oversees the FHLB system, is concerned that the existing regulation has such loose membership requirements that institutions can enjoy its benefits without being committed to the housing market. According to the regulator, several real estate investment trusts (REITs), which are not eligible to become members, have established captive insurance subsidiaries that then became Bank members. A number of those captives then obtained advances in dollar amounts so large that they appear to have no relationship to the operations of the captive and appear to flow to the REITs.

The FHLB’s proposed solution is to mandate that FHLB members comply with the 10% ratio on an ongoing basis, as opposed to just when they are applying for membership and to impose an additional requirement that members maintain at least one percent of their assets In home mortgage loans on an ongoing basis.

There is no evidence that credit unions are gaming the FHLB. When a credit union goes through the hassle of joining the Bank it’s because it wants help making mortgages. Why doesn’t the FHFA simply strengthen existing membership requirements by clamping down on captive membership while allowing financial institutions to continue to make mortgage loans without having to worry about arbitrary targets? Why are we making it harder and harder for the smaller credit union and community bank to provide mortgages to their members?

The FHFA should keep in mind that credit unions under $1 billion are already at a disadvantage to their banking counter parts. The trades have pushed Congress to extend an exemption to credit unions, but so far it appears Congress is too busy catering to investment banks to do something that directly helps the main street homeowner.

January 8, 2015 at 9:06 am 1 comment

FHA Insurance Creating “Subprime” Loans

Greetings from the Turning Stone where I will shortly be going downstairs to attend the second day of the Association’s Annual Legal and Compliance Conference.  To no one’s surprise, the biggest issue in the room is how to comply with the Dodd-Frank mandated, CFPB proposed mortgage regulations.

Even before these changes, however, the regulatory environment continues to result in unintended consequences.  For example, on August 30th New York State’s Department of Financial Services extended a temporary order excluding FHA mortgage premium increases that took effect earlier this year from subprime loan calculations under New York State law.

As I have written in previous blogs, the FHA has been running short on cash, raising concerns that it would have to get a bailout from the U.S. Treasury.  One of the things it has done to put itself on firmer footing is to increase the premiums FHA borrowers pay.  These increased premiums are included in the APR calculations used under New York State law to determine if a loan is subprime.  As a result, if these new calculations are included in the terms, there are many New York lenders making subprime loans without any change in underwriting policy, violating section 6-m of the Banking Law.

Fortunately, the Department of Financial Services has issued an order excluding these new premiums from the subprime loan calculation.  But clearly, this is a problem in search of a long term solution.  My hope is that when the CFPB comes out with its combined posting disclosures, which are expected to include new fees in the calculation of the APR, that both federal and state regulators will raise the threshold for what constitutes so-called “high-cost” or “subprime” loans.  In the meantime, keep your eyes open.  There are an awful lot of moving parts and things probably won’t settle down for the next several months.

September 11, 2013 at 8:29 am 1 comment

Congressman to CUNA: My Bad

So, it ends up that yesterday’s biggest story isn’t about a bill to effectively end the credit union industry by doing away with its tax exempt status.  Instead, the Wall Street Journal reported that the Federal Housing Administration is once again on the verge of needing a bailout from the American taxpayer.  If this is true, and looking through some previous blogs I would note that the Wall Street Journal has made similar assertions in the past, it would mean not only that taxpayer funding would have to prop up the agency for the first time in its 78 year history, but that housing policy would finally be on the legislative agenda.  Depending on your perspective, the FHA is either a villain of scandalous proportions or a shining light in America’s housing industry. Here is why.

The FHA insures mortgages of individuals who may not otherwise qualify for a conventional mortgage.  The homeowners put down as little as 3.5% at closing and they pay back the insurance premium as part of the mortgage payments.  When Fannie and Freddie effectively went bankrupt at the start of the mortgage crisis and were taken over by the United States Government the FHA essentially filled the void left by its sister entities.  Today, it is responsible for one third of all mortgages in the country and together with Fannie and Freddie these government created entities are responsible for 90% of the mortgages in this country.

Those inclined to think of its behavior as scandalous would ask what other entity would increase lending during a mortgage crisis?  While artificially propping up the housing market, it has just put the American taxpayer on the hook and put off the day of reckoning for the government to actually decide what type of housing support to have in this country and how to pay for it.

For those inclined to see it as a beacon of sanity, it is safe to say that as bad as the housing market has been for more than five years now it would have been much, much worse without the FHA.  In addition, according to the Wall Street Journal, a disproportionate number of FHA’s delinquencies are on mortgages dating to early in the crisis.  Presumably this means that the worst may be over if only we can get through this rough spot.  I’ll let you decide whether you think the FHA should be considered a friend or foe of the American consumer, not to mention the credit union member who wants to get a house.  But I do know that if the Treasury has to extend a lifeline to this institution it will be seized on as an example of government overreaching and hopefully start a discussion about what the future of housing policy should look like in this country.

Congressman to CUNA:  My Bad

I didn’t think anything could take my attention away from the Peyton Place drama unfolding in Tampa Bay involving the top echelon of our military and intelligence establishment, but I was jarred back into reality when I saw the news bulletin from CU Times announcing that Florida Republican Congressman Dennis Ross had put forward a bill that would end the credit union tax exemption for both state- and federally-chartered institutions.  In fairness to the Congressman, he actually put forward the recommendations of the Boles-Simpson Commission on deficit reduction, which, as I pointed out in a recent blog, included ending the tax exemption for credit unions.

We can all breathe easy.  According to CUNA, conversations with staff revealed that the proposal eliminated the tax exemption as a result of a drafting error and that if the bill ever did start moving it would be amended.  Even assuming that the Congressman mistakenly proposed effectively doing away with our industry, the incident demonstrates just how fluid the next several weeks of congressional action is going to be.  If there is going to be a deal on deficit reduction, it is going to be a lot of last-second horse trading and a lot of it will take place behind closed doors.

New York Senate Republicans move closer to majority coalition

Speaking of late night horse trading behind closed doors, the New York State Senate Republicans are now within one seat of putting together a majority in the Senate with absentee ballots in one crucial upstate seat still being counted.  Senator-elect Simcha Felder, a conservative Democrat from Brooklyn will caucus with the Republicans.  If the Republicans don’t obtain a majority, the balance of power will hinge on the four Senate Democrats who created an Independent Democratic Caucus.  Stay tuned, I’m sure there is more fun to come.

 

November 15, 2012 at 8:08 am 1 comment

Gekko to Wall Street: I Was Just Joking

There is more important stuff I could talk about today, but none I find quite so amusing or disturbing.  Michael Douglas, who made his suspender-wearing, slicked back hair sporting corporate raider character Gordon Gekko an icon of 80’s greed, has actually produced a one-minute public service commercial pointing out that insider trading is against the law.  According to the Wall Street Journal, Douglas became increasingly disturbed by the number of Wall Street types who approached him over the years saying that his character was their inspiration.  I don’t want to give away the ending, so stop reading here if you want to watch the movie, but Gekko ends up in federal prison after a young Charlie Sheen, who could actually act before he became recklessly unstable, cooperates with investigators to capture his misdeeds on tape.  Perhaps it is only fitting that the announcement of Douglas’s PSA was made as part of a FBI press briefing announcing that the scope of its insider trading investigations was much larger than previously thought.  I have a confession to make, it was the Gekko character that inspired me to want to become a high-flying credit union executive, but I couldn’t quite pull off the slicked back hair.  Incidently, my prediction is that the PSA will rank right up there with the Marlboro man telling people that smoking is bad for your health.

FHA Fees to Rise

The Federal Housing Administration announced Monday that it would be raising fees charged to borrowers who qualify for the government insured mortgages.  According to the Wall Street Journal, starting April 1, the fees will rise by 0.75 percentage points, meaning that the borrower who takes out a FHA insured mortgage will pay a 1.75% up front premium.  So, a borrower who takes out a $300,000 loan through the FHA would have to pay $5,200 in fees as opposed to $3,000.  Not to worry, they can, of course, roll these up front costs into the mortgage.  These fees combined with an estimated $1 billion it expects to receive as part of the mortgage settlement with the attorneys general will give the FHA a much needed cash infusion at a time when its coffers were running low and it faced the possibility of a government bailout for the first time in its history.

 

February 28, 2012 at 7:06 am Leave a comment

On FHA Bailout and Ganja

In news that should come as a shock to no one, it appears that the Federal Housing Administration is going through money quicker than Mitt Romney can change positions.  As a result, it may need a nearly $700 million infusion from the Treasury Department as early as next year.

The Federal Housing Administration guarantees mortgage loans to borrowers who put as little as 3.5% down on their mortgage.  In its 78 year history, the FHA has never lost money and generates income as borrowers repay the mortgage insurance to the government.  Over the last three years, FHA has greatly expanded its lending.  That’s right, the FHA has filled the void left by Fannie and Freddie, who have tightened their lending standards after they effectively went bankrupt, except that they’re being kept alive with government money.

News outlets report that the estimate is contained in the Office of Management and Budget’s projections for the upcoming fiscal year, but Obama administration officials insist that the projections are outdated since they don’t take into account money that FHA is expected to receive from the recently announced $25 billion settlement with mortgage servicers.  Still there could be some sleepless night ahead for FHA officials.  If they do need a bailout, they will have to get one in the middle of the presidential campaign and Republicans are in no mood to be seen as okaying another government bailout.  And don’t underestimate the importance of FHA as a primer to the housing market. Some day we might have a debate about housing policy in this country but then again maybe I’m just a hopeless romantic.

Cheech and Chong CU?

While I love to highlight the use of the cooperative structure to finance small but growing industries, the Colorado State Legislature might be taking this idea a bit too far.  The land of TIVO is also the state that has gone the farthest to legalize the use of Marijuana.  The problem is, it is difficult for that industry to get financing.  Go figure.  So, Yahoo reports that their Legislature is actually debating a bill that would allow credit-union like cooperatives to form for the purpose of providing financing to pot entrepreneurs.  This is one idea that will probably go up in smoke.

February 14, 2012 at 7:05 am 1 comment

Too big to fail is too big

I’ve been accused of being a glass half empty kind of guy, so let me say that I see some light at the end of the tunnel this morning.   First, at its board meeting yesterday, NCUA projected nettlesome but manageable assessments on credit unions next year in relation to the cost of the corporate bankruptcies and the replenishment of the Share Insurance Fund.  While the costs are not minimal, if current trends continue it appears that the effects of the failure may finally be moving into the rear view mirror of the industry.

Secondly, Congress passed a bill that will expand the size of mortgages that can be guaranteed with FHA insurance.  As I discussed in a previous post, there are serious financial hurdles confronting the FHA, but at least Congress realizes there is still a housing crisis in this Country and that occasionally something actually has to be done about it. 

But the news that intrigued me most yesterday was a nomination hearing for Thomas Hoening as Vice Chairman of the FDIC.  Why is this good news for credit unions, which of course are not subject to FDIC jurisdiction?  Because with Hoening’s nomination we may have someone in a high-profile position able and willing to criticize the financial industry and to advocate for reforms that are really needed to shield credit union members and the wider American public from banker malfeasance in the future. 

In my glass half-empty mode, it is clear to me that Congress has done nothing to address the fundamental causes of the financial crisis of 2008 and the ensuing Great Recession.  The American public has watched their tax-payer dollars go to bail out the largest banks in America, which continue to justify their exorbitant bonuses as a reflection of their alleged capitalist prowess.  The simple truth is that if we’ve learned anything, it is that if institutions are too big to fail, they’re too big.  This sentiment brings us to Mr. Hoening.  As a former President of the Federal Reserve Bank of Kansas, Mr. Hoening gave a speech in February, 2011 in which he argued that banks had in fact become too big to fail.  His solution was to pare back the activities in which investment banks may engage.  He sounded like a blogger when he concluded his speech by noting that the United States is still stuck with much of the same financial system which led to the initial crisis but with higher stakes.  His only hope was that fundamental changes could be brought to the system without first having to endure another such crisis.  I hope he’s right.

November 18, 2011 at 8:01 am Leave a comment

The good, the bad and the ugly

This morning’s news demonstrates how yet again that even though credit unions have made some progress in cleaning up what they can of the financial mess, much more needs to be done, and almost all of it is outside of the industry’s control. 

First, the good news.  NCUA’s decision to aggressively go after investment banks that underwrote the failed mortgage securities purchased by the corporates is beginning to pay dividends.  The $165 million in settlements announced late yesterday ($20 million from Citibank, $145 million from Deutsche Bank) won’t make much of an impact on the bottom line of credit unions since the remaining money borrowed by credit unions to repay the failed securities ranges somewhere from $1.8 to $6 billion, but every little bit helps.  And who knows, with the holidays coming maybe the remaining holdouts will be in a giving mood.

The bad. . .one of the reasons why NCUA’s estimate of the range of remaining costs to repay the securities is so wide is because the housing crisis has yet to be resolved in any meaningful way.  A recent report produced by the American Enterprise Institute argues that it is more likely than not that FHA will eventually need government funds to continue operations.  The analysis is given increased legitimacy by a report to be published today by an independent auditor predicting that there is a 50% chance that  FHA will need government funds in the next year.  FHA is in the business of insuring the mortgages of  homebuyers otherwise unable to qualify for lower cost mortgages, often with down payments as low as 3% and the cost of the premium rolled into the mortgage payments.  It backed one-third of mortgages used to finance home purchases last year, as opposed to just 5% in 2006.  Imagine the confusion of the American taxpayer when they find out that three years after the bail out of Fannie Mae and Freddie Mac, a quasi-governmental finance agency needs a bailout because of its aggressive underwriting of the housing industry during the mortgage meltdown.  Not to mention the fact that America’s mortgage system is more, not less, dependent on government financing than ever before.  We desperately need a debate about housing policy in this Country.

Now the ugly. . .the November 23rd due date for the Super committee to unveil its proposal for an additional $1.2 trillion in deficit reductions over the next decade is fast approaching.  Although there appears to be some movement, we still seem to be days away from a deal and there is little talk of using the opportunity to agree to much larger deficit reduction measures in the neighborhood of $4 trillion.  The stock markets have watched with horror as the economic dominos have fallen in Ireland, Greece, and now maybe even Italy.  Now is no longer the time to muddle through.  If we have learned anything from these events it is that decisive action is needed from a political system that increasingly has neither the will nor the ability to act.

November 15, 2011 at 7:56 am Leave a comment


Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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