Congressman Pittenger Says Excessive Regulation Slows Economic Growth, Hurts Entrepreneurs

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Republican politicians have made a greater push in the last few months to ease the regulatory burden on smaller banks, and one of the central figures in favor of relief from regulation has been U.S. Congressman Robert Pittenger (R-North Carolina).

Pittenger, a member of the House Financial Services Committee, said in an interview co-authored the Bureau of Consumer Financial Protection Advisory Boards Act (H.R. 1195), which passed in the House last month largely along party lines (235 to 183) and is awaiting a vote in the Senate. Pittenger has been a vocal critic of the Consumer Financial Protection Bureau (CFPB); in February 2014, Pittenger called for more transparency and accountability from the CFPB as he denounced the “tsunami of regulations” coming from Washington, D.C.

Earlier this week, in an interview with the Charlotte Observer in his home district, Pittenger said that the pendulum has swung too far in the other direction and that the regulations intended to protect consumers are now having the opposite effect. It is the entrepreneur who gets hurt by the excessive regulations, he said, because the cost of compliance on the smaller banks who tend to make the loans to start-up businesses forces those banks to restrict their lending. Pittenger cited as evidence of this the failure of hundreds of banks since the financial crisis and the merger of several others.

Pittenger said he believes there are so many regulations in place that they could potentially cause another economic downturn, and he pointed to current slow economic growth (an annual 2.2 percent) as evidence that regulations are hurting the economy and preventing job growth.

“The CFPB continues to issue new regulations designed for massive, ‘systemic-risk’ financial institutions without considering how those same rules harm small businesses, community banks, and credit unions,” Pittenger said last month after H.R. 1195 passed in the House. “Small businesses create jobs. Community banks and credit unions support local businesses. Most bureaucrats just support new rules. This bipartisan legislation will give small businesses, credit unions, and community banks a voice in proposed regulations, allowing for adjustments that protect consumers while giving small businesses the freedom to grow and create good paying jobs.”

He has said he does not believe the CFPB should be eliminated altogether, just that it should be run by a five-member board instead of a single director and should be more accountable and transparent, and that it should enact fewer regulations.

The White House has threatened to veto H.R. 1195 if it passes in the Senate. The bill would create a small business advisory board to advise the CFPB during the rule-making process, and it would make permanent two advisory boards for community banks that are currently comprised of volunteers and could be eliminated at any time by the Director of the CFPB. A last-minute amendment to the bill proposed by House Financial Services Committee Jeb Hensarling (R-Texas) calls for a reduction in the amount of money the CFPB director can request for funding by less than 1 percent, Pittenger said. Nevertheless, the late amendment to the bill drove its co-author, Denny Heck (D-Washington), to vote against it and encourage others to do the same. Heck claimed that Hensarling “put the torch” to his bill.

Similar legislation is moving through the Senate; earlier this week, the Senate Banking Committee approved the Financial Regulatory Improvement Act of 2015 by a party line vote of 12 to 10. The bill is aimed at providing regulatory relief for community and regional banks and credit unions, and proposing “moderate” changes that would increase the transparency of the Federal Reserve.

Pittenger told the Observer that he plans to introduce legislation later this year that would eliminate duplicative or inconsistent financial regulations.

REO Share Still Way Above ‘Normal’ Levels in Many Metros

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The national percentage of residential single-family properties that were REO was 10 percent as of February 2015, which is five times its pre-crisis share (2 percent), meaning that in many metro areas the REO share is still way above pre-crisis levels, according to CoreLogicSenior Economist Molly Boesel.

In CoreLogic’s May 2015 MarketPulse released earlier this week, Boesel examined the question of whether or not REO share was headed back toward “a more normal level.” Its most recently measured rate of 10 percent is far below the share at the worst of the crisis, which was 28 percent. In some metros, the REO share got as high as 70 percent at the worst of the crisis.

One of the benefits of declining REO inventory is the elimination of the “saturation effect,” or the narrowing of the discount of REO prices to non-distressed resales, according to Boesel. During the crisis, the discount narrowed to about 30 percent, whereas it fell between 40 and 60 percent before the crisis.

“Falling REO shares would most likely help local prices, not only because fewer REOs are selling at a discount, but also because the saturation effect should go away,” Boesel said. “REO sales can also serve as a substitute for new home sales. Many areas were overbuilt in the run-up to the housing crisis, therefore a lower REO share my boost homebuilding in some areas of the country.”

In an examination of 386 metro areas which had at least 100 home sales in the last year, CoreLogic found that only 16 of them had REO shares below their pre-crisis means (calculated during a six-year period from 2000 to 2006) and the median distance between the REO share in the metro areas in February 2015 and pre-crisis was 6.2 percent. Only 3 percent of the metros measured (14 of them) had REO shares in February 2015 that were within 1 percent of their pre-crisis shares, according to CoreLogic. Six metros (2 percent) had February 2015 REO shares that were more than 20 percent higher than their pre-crisis means, led by Detroit, which was 48 percent in February 2015 compared to just 5 percent before the crisis.

Boesel cautioned that housing markets do not need to fall below their pre-crisis REO inventory levels in order to completely heal, but comparing current REO shares to those during a more “normal time period” does present an idea of “how far away the metros are from normalcy.”

Senate Banking Committee Approves Financial Regulatory Relief Bill

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The Senate Banking Committee narrowly approved a regulatory reform bill on Thursday by a party-line vote of 12 to 10, according to multiplemedia reports.

The Financial Regulatory Improvement Act of 2015, introduced last week by Senate Banking Committee Chairman Richard Shelby (R-Alabama) is aimed at providing regulatory relief for community and regional banks and credit unions, and proposes what Shelby calls “moderate” changes that would increase the transparency of theFederal Reserve.

The bill is meant to provide some regulatory relief and reduce the cost of compliance for small and regional financial institutions. Shelby contended in his opening statement that the law currently seeks to mitigate risk by implementing more regulation; the goal, he said, is less risk and therefore should require less government intervention.

One provision of the bill prohibits increases in guarantee fees charged by Fannie Mae and Freddie Mac to offset losses or reductions in revenue, or for any other purpose besides business functions for the GSEs or housing finance reform. The bill also prohibits the sale of Treasury-owned senior preferred shares in the GSEs without approval from Congress.

The contentious issue of what defines a financial institution as “systemically important” is addressed in the bill.

“Title 2 addresses the growing consensus that the mandatory $50 billion asset threshold contained in current law is not only arbitrary, it is a blunt instrument that acts as a substitute for more sophisticated and thoughtful supervision,” Shelby said. “The total assets held by a bank are an important factor, but not the only factor that should be considered when determining whether a bank poses a risk to the entire financial system. Contrary to a number of public statements, Title 2 does not ‘move’ the $50B threshold.  It actually preserves the $50 billion threshold and merely changes the process by which a bank is designated as systemically important. Our regulators know far more now than they knew five years ago about what makes an institution risky. Size is only one factor and it is not necessarily dispositive.  Therefore, it is appropriate to apply that knowledge to the law.”

The bill has been the subject of much debate in recent weeks between the Republicans and the Democrats on the Senate Banking Committee, with Democrats claiming the bill undermines the Dodd-Frank Act and may pave the way for future amendments to the controversial Wall Street reform and consumer protection act.

The Democrats on the Committee offered a substitute bill for the Financial Regulatory Improvement Act, but it was voted down by a partisan vote of 12-10. Both parties indicated that they would continue negotiations for the bill during the summer, according to reports.

“I am pleased the banking committee has taken the first step in reforming our financial system and reducing the overwhelming regulatory burden facing community banks today,” said Senator Bob Corker (R-Tennessee), a member of the Committee. “It is my hope that we will reach a bipartisan consensus before this legislation is considered by the full Senate that will give hardworking Americans access to credit while protecting taxpayers from another financial crisis, and I stand ready to work with colleagues on both sides of the aisle who are willing to make modifications that will produce a bill that can be signed into law.”

Click here to see Shelby’s opening statement about the bill. Click here to see the reactions of a number of stakeholders at the Senate Banking Committee’s vote to pass the bill. For a section-by-section summary of the bill, click here. For the full text of the bill, click here. To view an archived webcast of Thursday’s hearing about the bill, click here.

Single-Family Built-for-Rent Market Higher than Historical Average, but Still Below Peak

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The number of single-family homes built-for-rent experienced a 50 percent year-over-year decline in Q1 2015, from 4,000 starts in the same quarter a year earlier down to 2,000 starts, according to data released recently by the National Association of Home Builders (NAHB).

The Q1 market share for single-family build-for-rent homes stood at 3.5 percent of all single-family starts during the quarter, which is higher than the historical norm (2.8 percent) but lower than the peak of 5.8 percent in early 2013. The market share is measured on a one-year moving average using NAHB analysis and the Census Bureau’s Quarterly Starts and Completions by Purpose and Design. Since estimates for the market are small, there are rarely any significant statistical changes from one quarter to the next.

The market share for built-for-rent homes increased following the financial crisis of 2008, despite a share higher than the historical average in Q1, the total numbers overall are low. This particular measure includes only single-family homes that are built and rented out; it does not include homes that are sold to another party to rent.

“Despite the elevated market concentration, the total number of single-family starts built-for-rent remains fairly low – only 23,000 homes started during the last four quarters,” said Robert Dietz, economist for the NAHB, on the Eye on Housing blog. “It appears the market is returning to historical averages after recent peaks.”

Dietz said according to a 2011 American Consumer Survey, the single-family home share of rental housing stock was 29 percent, considerably larger than the built-for-rent share of single-family homes – because single-family homes often transitionto rental housing stock as they get older.

Housing Forecast Calls for Increase in Existing-Home Sales

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According to Auction.com’s, LLC Real Estate Nowcast for May, despite an unexpected drop in April, existing-home sales in May are expected to pick up and fall between seasonally adjusted annual rates of 5.03 and 5.34 million annual sales, with a goal of 5.18 million. This is a 2.9 percent increase from April and a 5.8 percent increase from a year ago. Auction.com expects May sales to come in at 5.18 million units (SAAR), and median sales prices at $220,799.

The Nowcast predicts market trends as they are happening before actual findings are released using industry data, proprietary company transactional data, and Google search activity, the company says.

“Heading into the summer buying season, we’re expecting to see healthy increases in home sales activity – though those increases will likely occur at a more modest pace,” said Rick Sharga, EVP at Auction.com. “While the jump we saw in March somewhat made up for lackluster performance in January and February, tight inventories, strict lending standards, and diminished participation by investors remain significant obstacles for the market.”

Yesterday, the National Association of Realtors (NAR) reported that existing-home sales were at 5.04 million units, a 3.3 percent decrease from March, though up 6.1 percent from a year ago. Both, Auction.com and Consensus estimates were off for April because they predicted a stronger performance based on data released in March.

However, Auction.com’s estimate of $201,052 and $222,215 for existing-home prices in April was correct, according to the company. The NAR reported an increase in existing-home prices in April to $221,230, revealing an 8.9 percent increase compared to a year ago and marking a new high for home prices, which are now 2.6 percent below their pre-bust level.

“It’s important to keep blips like the one we saw in March in context. We’re in an unusually volatile period in the housing market, with almost unprecedented swings in sales volumes from month to month, Sharga said. “The bottom line is that in a truly healthy housing market, we’d already be on pace for 6 million existing home sales, but at this rate, I expect that the market will stay in the 5 million range for at least the remainder of the year.”

For May, the Nowcast suggests that existing-home sales prices will increase 4.2 percent year-over-year for the month, and will fall between $209,759 and $231,839, with a targeted price of $220,799.

“In our estimation, this burgeoning home price strength should help to boost sales out of their range, as a key constraint to sales at this time is the low level of inventory for sale,” said Peter Muoio, Auction.com chief economist. “Higher prices should entice more sellers into the market.”

According to the company, stronger owner-occupier demand is also needed to offset current subdued investor purchasing activity.

“The good news on that household formations have been following a much better path recently, following the Census Bureau’s massive revisions released last summer,” Muoio said. “The improving economy should generate continued healthy household formations and therefore stronger demand for homes down the road.”

Numbers Don’t Lie: Complaints to the CFPB May Not Be What They Seem

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When entering the realm of statistics, numbers definitely have the potential to weave plenty of misleading and false narratives.

This is unfortunate since stories based on quantitative data tend to survive on their numerical authority alone, while sometimes hiding behind subtle deceptions based on the foundation of mathematical analysis.

Such is the case with the Consumer Financial Protection Bureau (CFPB) Consumer Complaint Database. The database is filled to the brim with complaints about servicers, lenders, and financial service providers.

Was a servicer late in dealing with a loan modification, unreceptive by phone, or flat out unhelpful or rude? The CFPB database of complaints is there to catch those grievances and report them to financial services industry and the world as informed data.

But probe deeper, as some analysts did recently, and the numbers from the CFPB do not look as daunting or as thorough as they do at first glance.

In fact, the industry discovered that simply analyzing data from the CFPB is not enough, especially since the database arrives with its own built-in bias—that bias being the very nature of the database itself. It collects complaints, not praises, and ignores the larger universe of loans serviced nationwide.

To fill the void of well-rounded data, Black Knight Financial Services and the Five Star Institute jumped into the missing space and used data from the CFPB database and its own analytics to inform its latest white paper on CFPB complaints.

The big takeaway from the report: servicers have improved tremendously.

The Numbers in Context

As servicers become preoccupied with fixing problems reported in the database, one significant development has slipped under the radar: the number of CFPB complaints plummeted by more than 50 percent for loan modifications, collections, and foreclosures during the two-year period stretching from 2013 through 2014, according to a recent white paper titled “Analysis and Study of CFPB Consumer Complaint Data Related to Mortgage Servicing Activities,” produced by Black Knight Financial Services in conjunction with the Five Star Institute.

The results paint a picture of an industry that has made incredible strides.

The number of non-current loans fell from more than 5 million in the first quarter of 2013 to under 4 million in the fourth quarter of 2014, reflecting a 27 percent drop.

Five Star President and CEO Ed Delgado, who initially proposed the idea for the report last year in response to mounting criticism of the industry by the CFPB, maintains the purpose of the report is not to “dismiss or diminish” the validity of the inquiries by consumers, but rather to “position and better understand the data.”

“The information contained in this report plays an important role in measuring the scope of volume related to CFPB inquiries made, in juxtaposition to the total number of mortgage holders in the U.S. market,” Delgado said. “Through the data lens, we can clearly examine operational efficiency and defect while measuring progress in providing quality service to homeowners.”

“A 53 percent reduction in complaints about loan modifications and foreclosures is great news,” Freddie Mac spokesman Brad German said. “I would attribute much of the improvement to the rising diligence and effectiveness of many servicers plus the impact of the Servicing Alignment Initiative, which requires early and frequent outreach to borrowers who need assistance.”

To produce these numbers, Black Knight and Five Star made the commitment last year to promote a greater understanding of CFPB data by creating a prototype report using data contributed by the CFPB and servicers. Conclusions from the first report published in April show servicers are performing at optimum levels in dealing with non-current loans.

“I think it does demonstrate that the industry has been focusing on the more difficult loan population: the non-performing loans, those that are in some stage of delinquency,” said Dori Daganhardt, VP of product marketing and market strategy at Black Knight Financial Services. “They are trying to ensure that the customer experience through that process has improved.”

Black Knight’s loan-level data report aims to provide the industry with a closer look at the CFPB’s data, so they have an accurate assessment of what is happening with both current loans and non-current loans facing servicing complaints.

Daganhardt said the data is intended to inform both regulators and financial firms as they track and respond to trends in the CFPB database. Her interpretation of this first report is that the “industry has been responding to the complaints and has tackled probably the most difficult cohort of the whole servicing book.”

She added, “What we see in the data, complaints are falling in the delinquent, default and foreclosure category, but the overall book is falling. The absolute overall number of complaints has decreased, and the overall book of loans has declined.” For Daganhardt, this “speaks positively of the efforts servicers have undertaken.”

The Industry Responds 

Bob Caruso, EVP of sales, strategy, and servicing at Black Knight firm, ServiceLink, supports the ongoing loan-level analysis and suggests the industry is hungry for data that will detect areas of risk, while celebrating improvements made.

“The report helps servicers understand how they are performing versus the average and whether we have the same pain points as our peers,” Caruso said.

“We’re all happy that complaint volume is low but also quite aware that we have more opportunity to improve. My hope is that consumers better understand that although the industry has been through a lot, we are better for it and will continue to improve. Complaints are much lower than we think customers may be aware.”

Ray Barbone, EVP of BankUnited, suggested the Black Knight white paper is a revelation of sorts—one that will hopefully show the industry is performing quite well when it comes to loan servicing.

“More specifically, notwithstanding the fact it has been widely publicized that mortgage servicing issues are one of the highest segments of complaints and that there have been thousands of such complaints received, it is equally worth noting that, according to the report, complaints related to general servicing of performing loans appear to be running at less than one 1/100th of a percent,” he explained. “It would be interesting to see a comparison of similar analyses for other financial services segments as well as non-financial service industries. Further, I think the report provides lenders with the benefit of some very high-level data by which to benchmark themselves.”

The white paper reflects a change in how the industry not only interacts with data, but also with the CFPB itself.
The industry has shown an interest in working with its newest regulator to fix the problems detected, but at the same time, servicers desire more informed data. One issue yet to be addressed is whether the regulator is able to add context to complaints that enter into the CFPB database.

“I would like to see the industry and CFPB continue to work together to provide even deeper context relative to complaints received, particularly regarding the percentage of complaints verified,” Barbone added.

The issue of whether complaints are analyzed and probed for accuracy and context is a sticking point for others in the industry as well.

“I think the whole report is interesting,” Caruso said. “I would like all the servicing company participants to contribute more data so we can get more granular. That may enable us to learn more yet. I’m curious on the amount of relief being given to customers and why, and I’d like to learn more details on whether many of the complaints are really complaints. Our data indicates that many of the complaints are really just inquiries and that other complaints are simply due to the customer not getting the answer they want.”

Caruso went on to explain that customers typically become upset when denied a loan modification, and the reason for the denials should not be extracted from complaints made to the CFPB.

The database, however, allows these complaints to creep into the system without specifying whether the consumer failed to qualify for a loan mod under HAMP or another government program—or whether there was truly an error on the servicer’s part.

A Desire for More Contextual Data

Going forward, the industry seems to accept the idea of a database, as long as analytics are informed and the database continues to improve in providing context to individual complaints.

Without context, it is merely an echo chamber for consumers. In the right context, it becomes a positive tool for both consumers and servicers.

“I don’t think this has changed anyone’s approach, but it is concerning that customers will have the ability to say whatever they want and the only public response we will have via the CFPB is a drop down box to explain what may have happened,” Caruso added, when discussing the limited remedies available to servicers to respond to reported complaints.

“I don’t see how this helps anyone. The more detailed data we have the more we can understand what customers issues they have and how to address them,” Caruso added. “We may not set the rules for topics like whether a customer qualifies for a modification with HAMP, Fannie, Freddie, FHA, but we can treat customers with respect and show empathy with the issues they do have.”
Daganhardt, who conveyed a desire to help both the CFPB and the industry with improved data, said there is a wish list so to speak of tools that could help all respective parties with data analysis. One of the areas of concern is the drop-down menu borrowers use when making a complaint. Often, a borrower will misclassify a home equity loan for a mortgage loan, which throws off the reporting. Daganhardt also would like to see standard codes for each “reason a loan goes into default.”

Currently, database users are able to comment in a free-flow text fashion, but this makes it difficult to structure and organize the data, Daganhardt said.

“That free text goes to the servicer as well, and they can act upon it. But, unfortunately, it gives the opportunity to misrepresent complaint trends and volumes before the back-end forensics is completed by the servicers,” Daganhardt explained. “If there is more of a survey type of process in the consumer portal, that facilitates more accurate responses by the borrower and maybe even offers some education along that way that would be better for everyone else involved.”

Daganhardt’s desired outcome would be a situation in which an improved question and answer  process is implemented to collect and organize the consumer data.

“The more intelligent questions that they would be asked would ultimately capture more accurate data from them,” Daganhardt explained. Right now, she said, “there are a limited number of drop-down menu options. Borrowers are left to their own devices.”

Tim Rood, chairman of the Washington, D.C.-based Collingwood Group, said, “I thought the report was insightful and should quiet critics of the industry’s customer service.”

Kim Yowell, SVP and servicing manager for Tulsa-based BOK Financial, echoed Rood’s comments. “The aggregated data confirms that the measures the mortgage banking industry has undertaken to address default related customer issues and complaints has had a positive impact on our customers.”

But in their second act since the CFPB launch, servicers desire something more than numbers. They want the same thing the CFPB desires: a complete 360-degree view of each borrower who makes a complaint and of the complaint itself.

Without more of this granular data, everyone is doing nothing more than chasing numbers in a box.

Credit Default Swaps are Linked to Mortgage Delinquencies, Study Says

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Credit default swaps (CDS) acting as insurance policies for investors are linked to mortgage defaults that precipitated the 2007 economic downturn, according to researchers from the University of Texas at Dallas.

In a report published in the latest issue of the Journal of Finance, finance and managerial economics professor Dr. Harold Zang and associate professor Dr. Feng Zhao said that credit default swaps – which protect investors of mortgage-backed securities in the event of default – drove the demand for mortgage-backed securities, which in turn led to loose lending on the part of originators and an increase in the number of subprime mortgages offered. Many of those subprime borrowers later defaulted on their loans, driving the default rate higher and bringing on the financial crisis.

“There are many media reports that to some extent link the financial crisis to the housing market crash, and subsequently, research has confirmed that,” Zhang said. “One of the issues that people have paid particular attention to is the role played by derivative securities, and in this case, credit default swaps.”

Zhang and Zhao discovered a direct correlation between CDS and higher mortgage default rates. The originators of the subprime loans packaged and sold them as mortgage-backed securities to investors. Neither the originators or investors had incentive to monitor the borrowers or the status of the loan – the originators had no incentive since the loans were now off of their books, and the investors had no incentive since the loans were backed by the CDS, their insurance policy. According to Zhang, CDS exacerbated the financial crisis by encouraging lenders to originate poor quality loans. The researchers discovered that mortgage loans with a CDS were much more likely to default than those without a CDS, because banks often allowed the riskiest subprime loans to be packaged into securities with CDS coverage.

With the right oversight, however, Zhang believes that CDS can be good.

“It protects investors,” Zhang said. “It helps reduce the cost of financing for financial institutions, and it increases the efficiency of funds. That’s always the advantage of securitization, but we should also be aware that there is this potential downside.”

The researchers said their study is relevant because it provides the first “empirical evidence in academic research” that some originators were engaging in a conflict of interest before the financial crisis by securitizing, packaging, and selling mortgage loans and then betting against them, a practice which first came to light during the testimony of U.S. Securities and Exchange Commissioner (SEC) Commissioner Luis Aguilar during a 2011 Congressional hearing.