The Unequal Costs of Black Homeownership (Compounded By Bank Regulations And QM Rules)

Ed Golding, formerly of Freddie Mac and now of MIT’s Golub Center for Finance and Policy, has an interest paper on “The Unequal Costs of Black Homeownership.”

“As Keynes noted, a small difference in interest rates can compound to a large number. A new study by the GCFP’s Executive Director, Ed Golding, and two co-authors, Michelle Aronowitz and Jung Choi, demonstrate that Black homeowners on average will pay $67,320 more for their houses because each month Black homeowners pay slightly higher mortgage rates, mortgage insurance premiums, and property taxes. If we eliminate these extra costs paid by African Americans, the $130,000 black-white gap in liquid savings at retirement would drop by half. This report will soon appear in the National Association of Real Estate Brokers 2020 Report on State of Housing in Black America.”

Then, on the other hand, black homeownership rates are at an all-time high as is black median weekly real earnings growth.

But Golding et al refer in their paper to “Black homeowners pay higher mortgage rates at origination.”

Why? How about the 16% mortgage denial rate for blacks compared to 9% for whites and Asians?

Let’s start with Laurie Goodman’s mortgage denial research at the Urban Institute. Their analysis revealed that % of loans to low credit households has decreased from 53% in 2006 (peak of the housing bubble) to 24% in 2017.

How about Fannie Mae’s and Freddie Mac’s average credit score of loans acquired? They rose over 25 basis points.

  • Thanks to my GMU FNAN 421 students for using Python to download and analysis Fannie and Freddie on-lined data.

While it is easy to blame Fannie Mae and Freddie Mac for increasing credit standards versus 2006, there are other mitigating factors … like the CFPB’s Qualified Mortgage (QM) ruling.

All qualified mortgages should generally meet the following mandatory requirements:

1.The loan cannot have negative amortization, interest-only payments, or balloon payments.

2.Total points and fees cannot exceed 3 percent of the loan amount.

3.The mortgage term must be 30 years or less.

Qualified mortgages must also satisfy at least one of the following three criteria:

1.The borrower’s total monthly debt-to-income (DTI) ratio must be 43 percent or less.

2.The loan must be eligible for purchase by Fannie Mae or Freddie Mac (the government-sponsored enterprises,or GSEs) or insured by the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA),or the US Department of Agriculture Rural Development (USDA), regardless of DTI ratio.

3.The loan must be originated by insured depositories with total assets less than $10 billion but only if the mortgage is held in portfolio.

DTI of 43% or less?

Lenders have increased lending standards and that has been problematic for black households. In that respect, Senator Warren’s Consumer Financial Protection Bureau (CFPB) and The Federal Reserve have differentially-impacted black households given that black households have lower average incomes and lower credit scores than white households.

Lenders deny mortgages for Black applicants at a rate 80% higher than that of white applicants. And values of homes owned by Blacks are still 17.6% below the typical U.S. home.

So, making the financial market “safer” negatively impacts black households. We need to rethink QM and bank capital rules.

The Return Of CDOs And The Decline In CMBX In Face Of Covid (Goldman Sach’s Abacus CDO Revisited)

Does this sound familiar? (The Big Short)

(Bloomberg) — Cerberus Capital Management is selling debt that packages commercial mortgage-backed securities rated at the cusp of speculative-grade into top-rated securities, a practice employed by collateralized debt obligations (CDOs) that contributed to the global financial crisis.

The offering bundles so-called interest-only slices of CMBS rated the lowest tier of investment grade into $300 million of bonds with preliminary ratings of AAA by DBRS Morningstar, the senior portion of a $390 million transaction. Some market observers are concerned that these strips might eventually be subject to losses.

“This is a CDO,” said Jen Ripper, an investment specialist at Penn Mutual Asset Management in Horsham, Pennsylvania. “There could be a real risk of some principal loss at the BBB- level, which most of these interest-only tranches are ‘stripped’ off of.”

The deal comes at a time when the CMBS market is in crisis, a victim of shutdowns stemming from the coronavirus pandemic that have battered revenues for malls, hotels and other commercial properties that back the debt. But the challenges also mean that hedge funds are looking for opportunities to profit amid the fallout.

The transaction is being referred to as a “resecuritization” in deal documents seen by Bloomberg. Those marketing materials say it is structured so that cash flows are “protected from both prepayments and losses.”

The deal is backed by about 9,300 mortgages, 27.6% of which are office, 25% retail and 15.5% hotel, while the rest is a mix of other commercial real estate sectors, initial marketing materials show. The short duration of the product — the AAA slice matures in just 2.2 years — and the top shelf rating could attract yield-hungry investors.

“I’m sure the ratings are what’s driving the demand,” said Jason Callan, head of structured assets at Columbia Threadneedle Investments.

CMBS interest-only strips are linked to the performance of corresponding bonds with the same ratings that pay both principal and interest. They represent securities backed by the excess interest generated from a pool of commercial mortgages.

A representative from DBRS Morningstar said that the ratings are still pending and that no presale report was available yet. A representative for Cerberus didn’t immediately provide a comment.

The deal is being arranged by Deutsche Bank AG, JPMorgan Chase & Co., and Wells Fargo & Co. Representatives for JPMorgan and Deutsche Bank declined to comment while a press officer for Wells Fargo didn’t immediately provide a comment.

Here is an example of Goldman Sach’s ABACUS CDO to refresh your memory. And read the following instead of listening to Selena Gomez and Richard Thaler explain synthetic CDOs.

Abacus 2007-AC1 is paid off. Here is the A1 tranche.

But if we fast forward to today in the commercial real estate space, office space is the worst performing property type in the mid-Atlantic region.

The CMBX 12 synthetic price fell to 58 in late March, but since rebounded to 79.86.

You can see the impact of Covid on CMBX prices in the following chart.

Here we are again, back in the CDO-era of the 2000s.

US Core Inflation Clocks In At … 1.7% YoY And Real Avg Weekly Earnings At 4.1% YoY, Rent Inflation Falls To 2.5% YoY (Taylor Rule Suggests Fed Funds Target Rate Of -0.51%)

Well, the Consumer Price Index less food and energy remain near the same level, 1.7133% YoY and is leading the Core PCE growth of 1.5934% YoY.

US Real Average Weekly Earnings YoY checked it at 4.1% YoY.

US CPI Urban Consumers Owners Equivalent Rent of Residences YoY fell to 2.5% YoY despite massive Fed intervention.

The Rudebusch variation of the Taylor Rule suggests that the Fed Funds Target rate should be at -0.51%.

On a side note, the US Dollar rose and gold got clubbed downwards.

Where Has All The Credit Gone? Credit Cards And Mortgage Availability Have Crashed

Where has all the credit gone?

Credit cards and other revolving debt has crashed during the Covid-shutdown recession, despite another expansion of The Fed’s balance sheet.

Yes, banks are tightening standards on consumer loans and credit cards.

Mortgage credit availability has crashed as well despite The Fed’s balance sheet expansion.

Over 50% of lenders are tightening credit standards for mortgage lending, even for GSE-eligilble mortgages.

Apparently The Fed’s spoonful of asset purchases hasn’t done anything to prevent the decline in credit availability to households.

Hispanic Homeownership In USA Highest EVER As Hispanic Wage Growth Soars (Also Highest Ever)

There is a lot to celebrate in the housing market, particularly for Hispanic households.

Hispanic (Latino) homeowership has soared to its highest level in history, surpassing even the peak of the housing bubble in 2005-2007. The primary driver of the record Hispanic homeownership rates is soaring Hispanic wage growth YoY.

Black homeownership rates have also soared in 2020.

It is indeed a better world when minorities can share in the American Dream of homeownership and rising earnings.

Where Will Mortgage Rates Be In Three Years? Hint: Right Where They Are Now Because The Fed Isn’t Going Anywhere Until 2023

One question that is often asked if “Where Will Mortgage Rates Be In Three Years?”

Take a look at Freddie Mac’s 30Y mortgage survey rate (white line) and M2 Money Velocity (green line). And then overlay The Federal Reserve Balance Sheet, pushing down the benchmark 10Y Treasury Note yield. It is clear that mortgage rates aren’t going up anytime soon.

Look at home price growth and The Fed’s balance sheet. As the Fed began shrinking its balance sheet in 2018 and then the Case-Shiller home price index growth rate started falling … then recovered as The Fed threw more gas on the fire.

Gold? There is also a positive relation to The Fed’s balance sheet.

The Fed isn’t going until at least 2023. So, The Fed is here to stay, distorting markets and prices.

Rock and roll, hoochie koo.