1. Chapter 8 Federal Housing Policies: Part One © OnCourse Learning

2. 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 © OnCourse Learning 2

3. Housing Affordability  Federal programs make housing more affordable  Three categories  Economic support of financial institutions  Mortgage insurance, grants, and subsidies  Income tax provisions © OnCourse Learning 3

4. 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 © OnCourse Learning 4

5. 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 5 © OnCourse Learning

6. 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 6 © OnCourse Learning

7. Sources of Institutional Risk  Interest volatility risk  Credit risk  Liquidity risk  Internal fraud risk  Miscellaneous risk 7 © OnCourse Learning

8. 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 8 © OnCourse Learning

9. 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 government- provided 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 9 © OnCourse Learning

10. 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 © OnCourse Learning 10

11. 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) 11 © OnCourse Learning

12. 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 low- income housing  HOPE Program issues grants to rehab public housing © OnCourse Learning 12

13. 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 13 © OnCourse Learning

14. 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 14 © OnCourse Learning

15. 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 15 © OnCourse Learning

16. 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. © OnCourse Learning 16

17. 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 © OnCourse Learning 17

18. 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 © OnCourse Learning 18

19. 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 © OnCourse Learning 19

20. 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 20 © OnCourse Learning

21. 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 © OnCourse Learning 21

22. 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 22 © OnCourse Learning

23. 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 23 © OnCourse Learning

24. 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. © OnCourse Learning 24

25. 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. © OnCourse Learning 25

26. 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% © OnCourse Learning 26