Transcript Clauretie Sirmans Chapter 8 - OnCourse Learning Publishing

Chapter 8
Federal Housing Policies:
Part One
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Chapter 8 Learning Objectives
 Understand how federal legislation has affected the
mortgage and housing markets in terms of affordability,
efficiency and competition
 Understand how legislation has been passed to increase
affordability of housing through subsidies to lenders and
borrowers
 Understand how the federal government has sought to
foster efficiency in the housing and mortgage market, and
the various laws that have been enacted to promote
competition
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Housing Affordability
 Federal programs make housing more affordable
 Three categories
 Economic support of financial institutions
 Mortgage insurance, grants, and subsidies
 Income tax provisions
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Economic Support of Financial
Institutions
 Loans to institutions at below-market rates from
Federal Home Loan Bank
 Subsidized deposit insurance
 Economic support leads to:
 Reduced cost of funds
 Allows institutions to deliver mortgage funds at lower cost
than they otherwise would
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Economic Support of Financial
Institutions
 Federal Home Loan Bank Act (1932)
 Established the Federal Home Loan Bank Board (terminated
in 1989) and 12 district banks
 The FHLBs provide liquidity to member associations in
periods when deposit growth slows or declines
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Economic Support of Financial
Institutions
 National Housing Act of 1934
 Created the Federal Housing Administration (FHA) and the
Federal Savings and Loan Insurance Corporation (FSLIC)
 FSLIC abolished in 1989 and merged with the FDIC; it’s
purpose was to insure consumer deposits against loss
 Deposit insurance allows lenders to take on greater risk than
they would otherwise
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Sources of Institutional Risk
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Interest volatility risk
Credit risk
Liquidity risk
Internal fraud risk
Miscellaneous risk
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Sources of Institutional Risk
 Interest volatility and credit risks have been critical for
thrifts
 Risk-averting institutions seek out investments that
reduce maturity mismatch and default exposure
 Risk-seeking institutions are likely to acquire LT or
speculative investments
 E.g. use of equity participation in CRE developments
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Deposit Insurance
 The value of deposit insurance varies directly with:
 Interest rate volatility
 The institution’s asset-liability maturity mismatch
 The institution's capital-to-asset ratio
 In a competitive market the value of governmentprovided insurance subsidy shifts forward to
borrowers and backward to depositors
 Low insurance premium explain why yield on money market
accounts can exceed that of ST Treasuries and popularity of
FRMs
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Mortgage Insurance and Grants
 Federal Housing Administration (FHA) provides default
insurance protecting lenders against loss in foreclosure at
a cost less that justified by the risk
 HUD administered direct grant programs
 Community Development Block Grants for acquisition or
rehab of property, construction of neighborhood centers
 Rental Rehabilitation Grants for rehab of rental properties
 Urban Homesteading Program – federally owned properties
are transferred to local governments with a homestead
program, who transfer the properties to low income families
for a nominal sum
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HUD Administered Grant Programs
 Emergency Shelter Grants Program – rehab and
convert buildings for shelter for homeless
 Self-Help Homeownership Opportunity Program
(SHOP)– for gaining ownership by low income
households
 Brownfields Economic Development Initiative (BEDI)
 Housing Opportunities for Persons with AIDS
(HOPWA)
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Subsidies
 HUD provides subsidy programs for low–income
households where a portion of housing costs are paid
 Lower Income Rental Assistance (Section 8) Program
 Section 8 Existing Housing Voucher Program
 Section 8 Moderate Rehabilitation Program
 HOME Program sets up an investment trust fund that
can be drawn from to increase the supply of lowincome housing
 HOPE Program issues grants to rehab public housing
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Social Programs of the GSEs
 Programs for affordable housing for underserved
segments of the population
 Fannie Mae and Freddie Mac can purchase loans with
a lower rate of interest
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Programs by FNMA
 Mortgage Consumer Rights Agenda
 National Minority Homeownership Agenda
 E-Homeownership Initiative
 Affordable Rental Housing Leadership Initiative
 HomeStay Program since 2007
 Keys to Recovery Program since 2008
 MyCommunityMortgage Program
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Federal Benefits of GSEs
 Have lower capital requirements
 Can issue callable long–term debt
 GSE debt securities are eligible for open market
transactions by the Federal Reserve System and for
investment by federally insured banks and thrifts
 GSE securities held by banks and thrifts require only 20%
risk weighting
 The US Treasury can purchase GSE debt securities
 Exempt from local and state taxes, filing with the SEC
 Have exclusive charters, limiting competition
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Income Tax Provisions
 Interest and property taxes on owner-occupied residence
are deductible on individual’s federal income tax return
 Owner-occupied residence receives favorable capital gains
tax treatment
 Annual cost for an owner-occupant of housing under the
current tax low:
C = [(1 – t)(i + p) + m + d – F]H
where C is a dollar cost; H – the value of the house; t – the owner’s
personal tax rate; i – the interest rate on the mortgage; p – the property tax
rate; m – maintenance and miscellaneous costs, d – rate of depreciation; f –
rate of annual inflation of housing values.
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Efficiency and Stability
 Fostered in two ways:
 creating liquid and efficient markets primarily through
securitization (Fannie Mae, Freddie Mac, Ginnie Mae)
 Deregulation such as the Depository Institutions
Deregulation and Monetary Control Act of 1980 that
eliminated ceilings on deposit rates and mortgage rates and
eliminated usury ceilings
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Making Real Estate Markets Competitive
 Interstate Land Sales Full Disclosure Act
 Requires disclosure of information in interstate land sales
 Consumer Credit Protection Act (Truth-In-Lending, or
Regulation Z, 1968)
 Applies to consumer loans and residential mortgages
 Requires lenders to provide full information about any loan the
grant to a customer
 Two most important features that must be revealed: total finance
charges and the annual percentage rate (APR) of interest
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Regulation Z and Alternative Mortgage
Instruments
 Any negative amortization on graduated payment
loans is a finance charge
 ARM terms must be disclosed, e.g. index, margin,
caps, etc.
 Disclosures on SAMs must be based on the original
interest rate
 APR on buydowns must account for the lower initial
rate
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Regulation Z and Dodd Frank Act
 Oversight of Regulation Z was transferred to the
Consumer Financial Protection Bureau (CFPB)
 Lenders will be required to confirm ability-to-pay
status of borrowers
 Lenders will be able to originate “qualified” mortgage
that provides special protection from liability
 Limit on the loan’s provision for prepayment penalties
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Home Equity Loans
 Are “open ended” in that the borrower can draw
amounts as needed
 Best described as open-ended, non-amortizing
adjustable-rate loans
 Payment terms and periodic rate must be disclosed
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Home Ownership and Equity Protection
Act (HOEPA, 1995)
 Is an amendment to the TILA intended to stop abusive and
predatory lending practices to borrowers that wish to
borrow against their equity
 Amendments to Reg. Z which administers the HOEPA
effective October 2009:
 Increases regulation of subprime mortgages
 Tightens requirements for verifying income and assets of the
borrowers;
 Limits prepayment penalties for high-priced mortgages
 Requires escrows for property taxes and hazard insurance
 Considers the ability of borrowers to meet payments
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State Antipredatory Lending Laws
 Since 2000 various states have passed antipredatory
laws
 The laws define abuse practices:
 Loan flipping
 Excessive fees
 Asset-based lending
 Outright abuse and fraud
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Real Estate Settlements Procedure Act
(RESPA)
 Passed in 1974 and requires reasonable estimates of
all settlement costs to be disclosed before closing
 Charges include appraisal fee, credit report fee,
inspection, mortgage insurance, title insurance,
document preparation, prepaid interest, recording fee,
attorney fees, etc.
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RESPA (cont.)
 Borrower must be given a copy of a booklet detailing
RESPA
 Good faith estimate prior to closing
 Uniform Settlement Statement lists all charges and
disbursements at closing
 Prohibits abusive practices such as kickbacks,
excessive escrow, etc.
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Homeowners Protection Act (HPA, 1998)
 Requires lenders to inform borrowers of right to
cancel mortgage insurance when the loan-to-value
ratio reaches 80%
 Automatic cancellation of mortgage insurance when
loan-to-value reaches 78%
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