The Shame of the Mortgage-Interest Deduction

It’s not just a failure of housing policy. It's a symbol of everything that’s wrong with the American tax code.

 

The Atlantic | May 14, 2017        It might be one of the most important policies in the U.S. economy, but the mortgage-interest deduction sounds esoteric to most people. Perhaps that’s because, for most people, it’s completely irrelevant.

Although about two-thirds of American households own a home, only one-quarter of them claim the deduction, which sometimes gets abbreviated to MID. As Matthew Desmond, a sociologist at Harvard University, explains in a magisterial essay on the MID in the New York Times Magazine, this little fact has played an outsized role in the United States’ yawning wealth inequality.

Federal housing policy transfers lots of money to rich homeowners, a bit less to middle-class homeowners, and practically nothing to poor renters. Half of all poor American families who rent spend more than 50 percent of their income on housing costs. In May, rental income as a share of GDP hit an all-time high. Meanwhile, in 2015, the federal government spent $71 billion on the MID, and households earning more than $100,000 receive almost 90 percent of the benefits. Since the value of the deduction rises as the cost of one’s mortgage increases, the policy essentially pays upper-middle-class and rich households to buy larger and more expensive homes. At the same time, because national housing policy’s benefits don’t accumulate as much to renters, it makes it harder for poor renters to join the class of homeowners.  Read more here.

Supreme Court Says Cities Can Sue Banks Over Predatory Loans

USA Today | May 1, 2017       The Supreme Court ruled Monday that cities can sue banks for discriminatory mortgage lending practices, but they must prove that predatory loans led to damages such as lost tax revenue and higher spending on municipal services.

The decision was a partial victory both for Miami, which sought standing to sue banks under the Fair Housing Act, and for Bank of America and Wells Fargo, which argued that the city's damages were too many steps removed from the original loans. The dispute now returns to lower courts for further action.

The 5-3 ruling was written by Justice Stephen Breyer and backed by the court's liberal justices and Chief Justice John Roberts. Three justices — Clarence Thomas, Anthony Kennedy and Samuel Alito — argued that the city had no right to sue under the landmark 1968 civil rights law in the first place. Newly confirmed Justice Neil Gorsuch did not take part in the decision.  Read more here.

Regulators Are Suing Subprime Mortgage Servicer Ocwen for Years of ‘Deceptive Practices’

Fortune | April 21, 2017        For the second time since 2013, the U.S. Consumer Financial Protection Bureau on Thursday sued Ocwen Financial over accusations of widespread misconduct in how it serviced borrowers' loans, from foreclosure abuses to a basic failure to send accurate monthly statements.

News of the CFPB accusations plus related legal actions against Ocwen filed by at least 20 states sent shares of Ocwen crashing by nearly 60% in just over an hour, starting after a cease and desist order filed by North Carolina.

CFPB officials said that mortgage servicer Ocwen and its subsidiaries have failed to clean up their act, even after the CFPB ordered Ocwen in December 2013 to fork over $2 billion in relief to harmed borrowers because of similar violations.

"The consumer bureau has uncovered substantial evidence that Ocwen engaged in unfair and deceptive practices," CFPB Director Richard Cordray said, adding that thousands of customers were harmed.  Read more here.

New Firms Catching Up to Banks in Foreclosure Rankings

The New York Times | March 30, 2017           The number of home foreclosures is down sharply from the depths of the financial crisis, even as many of the mortgage firms involved remain the same, including Fannie Mae, Wells Fargo, Bank of America and JPMorgan Chase.

But the latest foreclosure rankings also include a number of firms that barely registered or did not exist when the crisis began a decade ago.

These new entrants include firms affiliated with the private equity giant Lone Star Funds, the mortgage lender PennyMac Loan Services, the investment bank Goldman Sachs and the mortgage firm Carrington Mortgage Services.

This changing of the guard in the foreclosure rankings, based on data compiled by RealtyTrac, reflects the new reality that most foreclosures today are not coming from mortgages written during the post-crisis period, but from soured loans written before the crisis that are in the final stages of liquidation.

Quicken Loans, for instance, one of the top originators of mortgages issued during the last few years, ranks relatively low in terms of recent completed foreclosures, according to the RealtyTrac data.

Most of these newer firms that are moving up in the foreclosure rankings are ones that have bought soured mortgages and are looking to profit by restructuring those loans and getting delinquent borrowers to start making payments again. And when those efforts fail, the firms are foreclosing on borrowers, taking back the homes and reselling them.

Firms affiliated with Lone Star, PennyMac, Goldman and Carrington all have been staple buyers of distressed mortgages, either from big banks directly or from government agencies. Lone Star, a $70 billion private equity firm based in Dallas, has been one of the largest buyers and works in tandem with its wholly owned mortgage firm, Caliber Home Loans.  Read more here.

Morning Agenda: The Wells Fargo Clawback

The New York Times | April 11, 2017         How could this have happened? You might have wondered after the scandal over fraudulent accounts at Wells Fargo.

Most of the blame has been pinned on two people: John G. Stumpf, the former chief executive, and Carrie L. Tolstedt, the former head of community banking.

To meet sales goals set by Ms. Tolstedt, bankers across Wells Fargo committed fraud, opened unwanted or unneeded accounts, and occasionally moved money in and out of the sham accounts.

The board of the bank will claw back $75 million from the two former executives, the largest forced return of pay and stock grants in banking history.  Read more here.

Goldman's Buying of Default Mortgages Not Without Risk

The Hill|  March 20, 2017        Goldman Sachs has launched an ambitious program to buy severely delinquent or nonperforming home mortgages as one element of a $5.1-billion settlement it has entered into with the federal government for its role in creating and selling mortgage-backed securities (MBS) in the years leading up to the financial crisis.

According to a Wall Street Journal article, Goldman has spent $4.5 billion to acquire 26,000 delinquent mortgages from Fannie Mae. Goldman did not originate any of these mortgages. It also has purchased similar troubled mortgages from Freddie Mac and private sellers.

Goldman intends to restructure the mortgages it has purchased with the expectation that the homeowners will then become current in making payments on them.  In accordance with its settlement agreement, Goldman will provide $1.8 billion of relief to homeowners, presumably by a combination of writing down principal balances, lowering interest rates on the mortgages and extending the repayment period.  Read more here.

The Mortgage Market is Now Dominated by Non-Bank Lenders

The Washington Post | February 23, 2017         Most borrowers, whether they are purchasing property or refinancing their home, focus on their mortgage rate and loan terms rather than the type of lender they choose. 

Quicken Loans has seized a larger share of the mortgage market but rising interest rates and anticipated deregulation under President Trump could change things. (Uli Deck/picture-alliance/dpa/AP )

Quicken Loans has seized a larger share of the mortgage market but rising interest rates and anticipated deregulation under President Trump could change things. (Uli Deck/picture-alliance/dpa/AP )

Yet the landscape of the lending market has shifted dramatically over the past few years from domination by big banks to a market where more loans are made by non-banks — financial institutions that only make loans and do not offer deposit accounts such as a savings account or checking account. 

“For consumers, it doesn’t really matter whether you get your loan through a bank or a non-bank, although in some ways non-banks are a little more nimble and can offer more loan products,” says Paul Noring, a managing director of the financial-risk-management practice of Navigant Consulting in Washington. “The impact is bigger on the housing market overall, because without the non-banks we would be even further behind where we should be in terms of the number of transactions.”  Read full story here.

Mortgage Delinquencies Among Some Homeowners Just Spiked, Spelling Trouble

CNBC | February 15, 2017         A troublesome signal just appeared in the housing market and could put taxpayers at risk.

Federal Housing Administration mortgage delinquencies jumped in the fourth quarter for the first time since 2006, the Mortgage Bankers Association reported Wednesday. The FHA insures low down-payment loans and is a favorite among first-time homebuyers.

The seasonally adjusted FHA delinquency rate increased to 9.02 percent in the fourth quarter from 8.3 percent in the third quarter, MBA data show. The jump, which followed the lowest delinquency rate since 1997, was driven by loans made since 2014 and early-stage delinquencies, those just 30 days past due.

It's too soon to know if it is a blip or a trend, but the jolt is clearly a warning.   Read more here.

Foreclosure Prevention Returns to the Unknown

The New York Times | January 25, 2017        After an eight-year run, a troubled government effort to prevent foreclosures and keep struggling borrowers in their homes came to an end last month.

What happens next will be a Trump-era laboratory experiment in how financial services companies conduct themselves when the regulatory fetters are loosened.

The expired Obama-era program — known as HAMP, the Home Affordable Modification Program — was widely criticized for its poor execution. Participation was voluntary for banks, and many that opted in did so unenthusiastically. (At one bank, “the floor of the room in which the bank dumped the voluminous unopened HAMP applications actually buckled under the packages’ sheer weight,” according to a scathing oversight report.)

Consumer advocates were also not thrilled; many felt that the program did not go far enough to help troubled homeowners or hold accountable the banks that contributed to their predicaments.

But Republican-led Washington has no intention of replacing it. So now it will be entirely up to the private sector to address a lingering social ill that was brought on by the financial crisis.

Banks and mortgage lenders say they are ready to step in with their own foreclosure-prevention programs, modeled on what they learned from the Obama administration’s effort. Armed with years of new data, financial companies say they now know how to make loan-modification programs successful, for both borrowers — who want to protect their homes — and lenders, who want to limit their losses on delinquent loans headed for default.

“There’s tremendous public good in having an industrywide approach,” said Justin Wiseman, the director of loan administration policy at the Mortgage Bankers Association, a trade group. “No one wants things to revert to what we had before.”

Still, housing advocates are skeptical, and for good reason: The mortgage industry was largely responsible for HAMP’s shortcomings (as well as for creating the need for the program in the first place). The business has long been littered with errors, confusion and outright abuses.

“We’re going back into uncharted territory,” said Jacob Inwald, the director of foreclosure prevention at Legal Services NYC, which helps low-income residents fight foreclosures and evictions.

Before the government stepped in “it was like the Wild West, with every servicer having their own program,” he said.  Read more here.

Deutsche Bank Fined $630m Over Russia Money Laundering Claims

The Guardian |  January 31, 2017        Deutsche Bank has been fined more than $630m (£506m) for failing to prevent $10bn of Russian money laundering and exposing the UK financial system to the risk of financial crime.

The UK’s Financial Conduct Authority imposed its largest ever fine – £163m – for potential money laundering offences on Germany’s biggest bank, which it said had missed several opportunities to clamp down on the activities of its Russian operations as a result of weak systems to detect financial crime between 2012 and 2015.

A US regulator, the New York Department of Financial Services (DFS), also fined the bank $425m as it listed problems at Deutsche including one senior compliance officer stating he had to “beg, borrow, and steal” to get the resources to combat money laundering. As part of the settlement, the DFS has imposed a monitor, who will police the behaviour inside the bank for two years.

The latest run-in with regulators comes as Deutsche’s chief executive, John Cryan, tries to clean up the bank. Last month it paid $7.2bn to settle a decade-old toxic bond mis-selling scandal with the US Department of Justice.  Read more here.