All items from Credit Slips

There are three major new regulations shaping the housing finance market:  QM (qualified mortgage), QRM (qualified residential mortgage) and Reg X.  QM is a safe harbor from the statutory ability-to-repay requirement that applies to all mortgages.  QRM is a safe harbor from the statutory risk retention requirement that applies to mortgage securitization.  And Reg X are the new mortgage servicing regulations.  It's important to understand how these three regulations interact and how they're going to affect the housing finance market.  (There's also new TILA/RESPA disclosure stuff, but I don't think that's particularly impactful, in part because I don't think disclosure regulation is especially effective in most real world circumstances.) 



Posted 1 day 11 hours ago

The long awaited credit risk retention rules for securitization are out. The big question--whether the qualified residential mortgage or QRM exemption would be narrower than the CFPB's qualified mortgage or QM safe harbor to the Ability to Repay requirement for mortgages is no. QRM=QM. The short version is that the rule doesn't require meaningful credit risk retention where it counts, and imposes significant market-shaping safe-harbor requirements where skin in the game isn't so important.

The basic rule is that 5% credit risk must be retained, unhedged, by the securitization sponsor, either as a pro rata vertical slice of the deal or as a horizontal slice equal to 5% of the fair market value of the deal as of the closing date. But there are lots of exceptions: CMBS B-pieces suffice, Ginnie Maes, Fannie/Freddie (as long as they have "capital support form the United States" (they can still qualify with the QRM exception and other exceptions for multi-family even without US capital support), etc. Commercial loans, commercial mortgages, and auto loans all have their own QRM-type safe harbors.

In fact, as far as I can tell from a quick perusal of the rule, there is only a meaningful credit risk retention requirement without exemptions for (1) credit card securitization, (2) non-pass-through CDOs, and (3) auto and equipment leases and less common sorts of securitizations. Everything else has either a blanket safe harbor or a safe harbor provided that the underlying assets meet certain requirements.



Posted 3 days 1 hour ago

Yves Smith has had some great coverage of the AIG bailout trail over on Naked Capitalism.  While the litigation, as Yves has characterized it, is a bit like a brawl between the ugly stepsisters, it's telling us all kinds of stuff we didn't know (or at least couldn't document) about the 2008-09 bailouts.   
Today's coverage is a must-read piece by Matt Stoller about the civil service regulatory capture at the Fed, as personified by its general counsel.  The AIG trial has highlighted some of the worldview problems at the Fed. It has also included some jaw-dropping exchanges like the following:
Q: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities?
A: I don’t know.
You can't make this stuff up.  I'll let readers draw their own conclusions. 



Posted 3 days 6 hours ago

I was pleased to see today’s New York Times editorial entitled “A Rate Cap for All Consumer Loans.”  It created a very public description of an industry indiscretion involving loaning money to the military at over 36%. Those loans are illegal because a federal law makes it so, a law that passed with broad and deep bipartisan support because trapping military personnel in high-cost loans interferes with military readiness and thus threatens national security. This editorial, not in some fringe publication, but rather the New York Times, argues that we all deserve the same protections from high cost loans.  I agree (in this recent article), and think the time is right to start listening to people and not industry on this topic.



Posted 6 days 5 hours ago

When I first heard about the NY Fed's Doomsday book, my initial thought was, "Wow, they've got a comprehensive survey of land titles, so MERS really isn't an issue!" Then I realized it was a Doomsday book, not a Domesday book. Apparently the Doomsday book is some sort of "in case of emergency" do-it-yourself bailouts manual that outlines the steps the NY Fed believes it can legally take to stave off economic Armageddon. 
I'm rather puzzled by the NY Fed's claim that it should be kept under seal.  I guess we'll find out more of the Fed's reasoning soon enough, but it hardly seems to be particularly sensitive of secret information.  This isn't the Coca-Cola recipe or some sort of trade secret. It's hard to believe that we didn't see the full panoply of the Fed's bailout powers on display in 2008, and perhaps then some. (A colleague has suggested that they might be developing some sort of secret, stress-tested, boilerplate clad bailout machine in the basement of the NY Fed. Of course such a bailoutbot would exercise its own free-living-will. Its only vulnerability would be following a haircut.)
The fact that the Doomsday book apparently contains legal advice is not a seal issue--that's a privilege issue. Once that privilege is waived (I'm guessing it has been), I can't see why the fact that the document includes legal advice presents cause for remaining under seal. 



Posted 1 week 4 days ago

Filings by Judicial District.Sept 2014Bankruptcy filings have dipped to their lowest rate since 1990, as previously blogged (ignoring anomalous statistical gyrations around the 2005 changes to the bankruptcy law). Over the past twelve months the bankruptcy filing rate per 1,000 persons has been 2.95, which is the first time it has been below 3.0 in almost 25 years. But, the filing rate is not that low everywhere.



Posted 2 weeks 1 day ago

"What is the optimal consumer bankruptcy law?" Now that's an abstract first line that grabs my attention! I've thought about this question for most of my academic career, and I've struggled to find solid bases for an answer. Now, Indiana Univeristy economist Gray Gordon offers an intriguing if difficult to understand possibility. In his paper, Optimal Bankruptcy Code: A Fresh Start for Some, Gordon actually quantifies the sweet spot: (1) an optimal system offers a discharge of debt (a constant refrain in policy papers, e.g., here and here), (2) it does so for households whose debt is 2.6 times their endowment, and (3) this optimal system results in a welfare gain of 12.2%. The conclusion is nowhere near as confusing for a non-economist (like me) as the proof, expressed in inscrutable Greek-symbol-filled equations which occupy the bulk of the paper.



Posted 2 weeks 2 days ago

Not much new to say from the last time, except that this contempt order was signed by the judge. Argentina must "reverse entirely" the steps it has taken to remove BNY-Mellon and install a new trustee and otherwise start "complying completely" with the injunction. Or else....? The order doesn't say.
So, Argentina has been ordered to stop violating orders. If it doesn't, it will be in violation of another order. Which means basically nothing. Perhaps there was some doubt as to whether the judge meant the injunction as sort of a suggestion? Or perhaps this signals that the judge plans to skip the whole unenforceable-monetary-fine thing and get right to more innovative contempt sanctions if (when) Argentina fails to comply. Or maybe the order is an attempt to defer the confrontation as long as possible. Yawn. Wake me when something interesting happens.
 



Posted 2 weeks 4 days ago

The IMF released its long-awaited paper on sovereign debt contract reform, advocating single-tier aggregated collective action (majority amendment) clauses and a clarification of the pari passu clause to preclude its future use to block payments on restrutured bonds, a la NML v. Argentina. An accessible summary of key points per IMF GC Sean Hagan is here. The recommendations were coordinated with ICMA (whose reform proposal is discussed here and here), as well as wealthy and emerging market governments.



Posted 2 weeks 5 days ago