Uncategorized

Home sellers taking their commissions fight nationwide are dragging Warren Buffet into the fray, accusing his real estate holdings of making billions of dollars in ill-gotten gains.Plaintiffs this week added Berkshire Hathaway Energy, which owns HomeServices of America, to another commissions lawsuit targeting six leading brokerages. The case, known in Missouri federal court as Gibson v. National Association of Realtors, expands the scope of home sellers' $1.78 billion dollar victory against real estate players last October."Berkshire Hathaway Energy has intentionally undercapitalized HomeServices," attorneys wrote in an amended complaint filed Monday. "Rather than ensure that HomeServices can return its ill-gotten home equity and/or pay the Burnett judgment, it accepts the profits of the conspiracy rather than leave the profits at the HomeServices level."The suit also accuses BHE of touting the "halo effect" in using the brand's association with Berkshire Hathaway CEO Warren Buffett to foster consumer trust. It also names Greg Abel,  Berkshire Energy chair and Buffet's planned successor, although he's not a defendant. Greg Abel, chairman of Berkshire Hathaway Energy Co., speaks during the virtual Berkshire Hathaway annual shareholders meeting on a tablet computer in Tiskilwa, Illinois, on May 1, 2021.Daniel Acker/Bloomberg Given HomeServices' $168 billion in sales volume last year, plaintiffs estimate an overpayment of $4.2 billion in commissions considering a 2.5% average buyer agent fee. BHE oversees almost 100,000 real estate agents under its dozens of brands and approximately 300 franchisees, according to the lawsuit.The Gibson case, which purports a class of consumers nationwide who've sold a home since October 2019, targets Compass, Douglas Elliman, EXP Realty, Redfin, Weichert and United Real Estate.Neither a representative for BHE nor attorneys for plaintiffs responded to requests for comment Thursday.Marty Green, a principal with Polunsky Beitel Green and a 25-year veteran of the mortgage space, suggested plaintiffs added BHE to skirt any roadblocks with arbitration provisions and for a larger possibility of securing a settlement with the deep-pocketed firm."My sense has been for some time that these cases would resolve themselves, particularly after we saw what the jury did in the first case that was tried over Kansas City," he said.Jurors in Kansas City last fall ruled that HomeServices, NAR and Keller Williams conspired in Missouri to inflate commissions under the structure in which sellers pay for the buyer broker. Keller Williams last month agreed to a $70 million settlement to skirt the massive damages, joining RE/MAX and Anywhere Real Estate which settled before the October trial. Plaintiffs in the Gibson case, in addition to unspecified damages that could be tripled upon judgment, are seeking a permanent injunction preventing brokerages from requiring sellers to pay buyer brokers.Numerous other lawsuits targeting Multiple Listing Services and brokerages over commissions are pending. The Department of Justice intervened in a Massachusetts case and suggested "decoupling" commissions, and feds also awaiting a U.S. Circuit Court of Appeals ruling on whether they can reopen a probe into NAR.Lenders are already seeing and asking legal counsel questions about changes in sales contracts, Green said. While NAR has made slight adjustments to its guidelines, RE/MAX and Anywhere expect to implement commissions rule changes as part of their settlements, scheduled to be finalized in a May hearing.Industry experts have offered varying opinions on how decoupling could impact originators. Green said lenders should pay attention to how underwriting may be affected, especially in the case of first-time homebuyers depending on sellers covering commissions."Some lenders might feel compelled to treat that as a seller concession as opposed to it just being a cost of the transaction where it's been done in the past," said Green. "So that could really impact affordability for first time homebuyers." 

About 15 months ago, observers of the private label securitization business were predicting that a bad 2022 would actually be a better year than the upcoming 12 month period. But a funny thing happened in the fourth quarter of 2022. The shift in the interest rate environment helped to drive activity because execution became an attractive option again.That has held so far in during the start of 2024. Year-to-date issuance is currently about $8 billion, a Kroll Bond Rating Agency report from Feb. 23 noted. "We have revised our expectations for [the first quarter] to close at over $20 billion," KBRA analysts Armine Karajyan, Jack Kahan and Eric Thompson said. "While we expect non-prime and government-sponsored enterprise [credit risk transfer] issuance to remain relatively steady versus last year, we see meaningful growth in both the prime sector and in second liens."KBRA expects second quarter issuance to also be about $20 billion. It expects full year PLS volume of $67 billion up from its previous projection of $57 billion.But the cloud on the horizon is that the 2023 vintage is putting out a higher rate of delinquencies than older deals, a Fitch Ratings report from earlier this year said.KBRA also noted a rise in late payments, as "RMBS 2.0 credit performance YTD 2024 has continued to show generally consistent outcomes for the prime sector; however, delinquencies have increased across the non-prime and CRT sectors. These increases are generally measured, mitigated by meaningful equity, modest monthly payments, and generally prudent underwriting practices." Recently, National Mortgage News spoke with Vadim Verkhoglyad, vice president and head of research at dv01 (which is now owned by Fitch Group) to discuss the outlook for nonagency securitizations in the upcoming year, including issuances and performance.The following question and answer session has been edited for length and clarity.

The Biden Administration has just unveiled a number of proposals to make homeownership more affordable.Aside from legislation to build and renovate more than two million homes, they are calling on Congress to approve a pair new “mortgage relief credits.”One targets prospective home buyers grappling with significantly higher mortgage rates, while the other addresses home sellers dealing with mortgage rate lock-in.Both are intended to increase the supply of homes for sale, which have been below healthy levels for several years now.The question remains whether incentivizing home buying is what’s necessary for the housing market at the moment.$5,000 Tax Credit for Two Years for First-Time Home BuyersThe mortgage relief credit that targets home buyers would provide a tax credit of $5,000 for two years to first-time home buyers.Generally, this is defined as someone without ownership interest in the three years preceding the home purchase.In total, these new home buyers could snag $10,000 in tax savings over the first two years.A tax credit directly reduces your tax bill, unlike a deduction which simply reduces your taxable income.This piece of legislation is intended to tackle the high mortgage rates currently on offer, which nearly tripled from below 3% to above 8% recently.Per the White House fact sheet, the $10,000 in savings is the equivalent of reducing the borrower’s mortgage rate by more than 1.5 percentage points on a median-priced home.At last glance, the median home was valued at roughly $418,000. Of course, these savings only exist for two years. More on that in a moment.The Biden administration believes this credit could help more than 3.5 million middle-class families purchase their very first home over the next two years.$10,000 Tax Credit for Home SellersThe other mortgage relief credit would incentivize home sellers, many of whom have been reluctant to sell because of their very cheap mortgages.Known as the mortgage rate lock-in effect, it’s the concept of staying put for fear of losing your existing mortgage rate when moving. And having to replace it with a much higher one.To offset this lock-in effect, middle-class families who sell their starter home to another owner-occupant would receive a tax credit of up to $10,000.They define a starter home as one valued below the area median home price in the county.The Biden administration thinks this could unlock homes that no longer fit the needs of many households nationwide, and help an estimated three million families.On top of these tax credits, they are still pushing for $25,000 in down payment assistance to first-generation home buyers.And they’re targeting the elimination of certain closing costs, such as lender’s title insurance, which could save the average homeowner $750 when refinancing.But Won’t This Just Increase Demand at a Time When Supply Is Already Too Low?While the new proposals might be well-intentioned, one has to wonder if they won’t simply stoke demand at a time when supply remains far too low.Sure, there’s an incentive to both buy and sell a home with these tax credits, but it’s unclear how many existing owners would sell just to get the $10,000 tax credit.After all, if they’re sitting on a 2-3% 30-year fixed mortgage rate, it wouldn’t take long for the $10,000 to be absorbed via their new, much higher housing costs.Just pretend a family holds a $300,000 mortgage set at 2.75%. Their monthly principal and interest payment is $1,224.72.If they sold and then bought another property for say $400,000 with a rate of 6.5%, their new monthly P&I would be $2,528.27.That’s a difference of over $1,300 per month, which would eat up the $10,000 credit in less than eight months.These sellers would also have to incur moving costs, closing costs on a new mortgage, and compete with other home buyers to find a replacement property.The credit for first-time home buyers could also arguably result in hotter demand, even if more homes were coming online.It also seems that they’re banking on lower mortgage rates in the near future, at which point these first-time buyers would be able to get more permanent savings beyond year two via a rate and term refinance.In the end, it seems like we’re stuck between a rock and a hard place. Ultimately, the accommodative interest rate policy of the past decade created haves and have nots.And without a lot more inventory, or perhaps slightly lower mortgage rates that allow transactions to occur naturally again, it might be a while before things normalize again.

Influential government-related mortgage investor Fannie Mae has announced that a long-planned goal to make validation of certain mortgage information available in one fell swoop is becoming a reality.Fannie will allow 12-months of asset data to verify income and employment when it becomes available for opt-in use on March 29, and for 50% of those who piloted the automated process, it produced "some level of savings" in third-party report costs."With this new update in Desktop Underwriter, we are removing a hurdle from the loan application process and bringing greater speed, simplicity, and certainty to both lenders and borrowers," Cyndi Danko, senior vice president and chief credit officer, said in a press release.The move follows competitor Freddie Mac's expanded use of bank account data. Freddie also allows asset information to be used to validate income, assets and employment checks for certain loans. Verification of assets, income and employment have been attractive because Freddie and Fannie have offered upfront representation and warranty relief for it. Both also have used the bank data for cash-flow underwriting and rent payment validation.What's also significant is that with both competitors offering the process, it's possible for lenders to potentially use digital bank data regardless of which of the two they turn to for loan sales. (While the two aren't the only loan outlets in the U.S., they are major ones and often influential.)                                               "Now that you have parity between the two GSEs offerings, that's what's going to enable a broader lender engagement and utilization of this type of service," said Brian Francis, who oversees the Accountchek digital bank verification product for Informative Research.Variations in the two government-sponsored enterprises' processes regarding the uptake of the consumer-permissioned option, how often it validates all the data points, and how lenders handle the workflow will affect the extent of efficiency available, Francis said.Not every borrower will be verifiable through a single source as some may not have consistent deposit records reflecting employment income. Some other vendors charge mortgage firms separately for data needed at the lender level and Fannie's 12-month report, according to Francis. Also, certain lenders handle the workflow around digital data verification in terms of pulling digital bank, payroll or tax information as needed more manually than others.The success rate of single-source validation has long been an open question."You're getting a recurring direct deposit in 70% of the bank accounts that are coming through our system," Francis said, noting this may be roughly indicative of how often many people have employment income that's verifiable in this way, most commonly those with traditional salaries.Single-source validations may also cause a wrinkle depending on the extent to which employer names fail to match what's on deposits in situations such as when the payments are made in the name of the benefits provider.Both vendors and Fannie have been researching and developing ways to address situations like that since research into single source validations began in 2017, according to Francis."Those specific analyses are proprietary to Fannie. They've not shared them with us, but we've worked with them over the last seven years in helping them to understand the nuances," he said. (Fannie had not immediately responded to a follow-up inquiry on this point at deadline.)

In advance of the State of the Union speech, the White House announced tax credits proposals for certain homebuyers and a title acceptance pilot program that would eliminate the requirement for a lender title policy on certain conforming refinancings.A White House fact sheet in advance of tonight's speech listed several homeownership and rental initiatives that Pres. Biden is looking to push.The president is proposing a mortgage relief credit that, if Congress passes, would provide middle-class first-time home buyers with an annual tax credit of $5,000 a year for two years.It claims that would be the equivalent of reducing the interest rate by more than 1.5 percentage points and will help more than 3.5 million middle-class families purchase their first home.Meanwhile, to push more current homeowners to list their property for sale, the White House is calling on Congress to pass a one-year tax credit of up to $10,000 to middle-class families who sell their starter home to another owner-occupant. It defined that market as homes below the area median home price in the county. This proposal is estimated to help nearly 3 million families, the White House said.The White House also called for Congress to provide up to $25,000 in down payment assistance "to first-generation homebuyers whose families haven't benefited from the generational wealth building associated with homeownership," the fact sheet said. Another initiative focused on cutting the costs of homeownership will come from the Consumer Financial Protection Bureau, who will undertake rulemaking and provide guidance "to address anticompetitive closing costs imposed by lenders on homebuyers and homeowners," the fact sheet added.The Biden Administration also wants to build and/or preserve 2 million homes. It proposes expansion of the Low-Income Housing Tax Credit program to build or preserve 1.2 million more affordable rental units; and a new Neighborhood Homes Tax Credit, which if enacted, would lead to the construction or preservation of over 400,000 starter houses.Another proposal would ask Federal Home Loan Banks to double their annual contribution to the Affordable Housing Program to 20% of the prior year's net income from the current 10%, which will raise an additional $3.79 billion for affordable housing over the next decade.A new $20 billion competitive grant fund will be included in the president's budget proposal to support communities across the country to build more housing as well as lower rents and home purchase costs."Together with our partners across the federal government, we are committed to boosting our housing supply to increase affordability and removing barriers to advance homeownership," Department of Housing and Urban Development Secretary Marcia Fudge, said in a separate press release. The National Housing Conference called this the most consequential State of the Union speech when it comes to housing in over 50 years."President Biden's call for Congress to tackle the urgent matter of housing affordability through tax credits, down payment assistance initiatives, and other measures is warranted and represents a crucial step in easing the burden of high rents and home prices," David Dworkin, president and CEO, said in a statement. "We have a deficit of 3-5 million housing units in this country. We dug this hole over 15 years. We are going to have to get out of it the same way. One shovel at a time."Title trouble?In addition to the pilot program that would eliminate the requirement for lender title insurance on certain refiances, the government wants to hold a roundtable consisting of stakeholders, including consumer advocates and academics, to discuss the title insurance industry and analyze potential reforms.The negative impact of the pilot to title insurers is likely limited, said Bose George, an analyst with Keefe, Bruyette & Woods in a flash note."We expect the scope of title waivers to be narrow since it is part of a GSE pilot program," George said. "Further, we think Federal action on title insurance will be difficult to accomplish since title insurance is regulated at the state level."The American Land Title Association declared that the pilot program exposes consumers, lenders, and taxpayers to financial risks."The approval of this waiver is a hollow attempt by the White House to placate Americans' current economic frustrations," the trade group said in a statement. "By announcing this only hours before the State of The Union address, without outreach to, or engagement with, the title insurance industry, the Administration has reduced the crucial role of the industry to nothing more than a politicized talking point."This proposal would waive the need for a lender's title policy or attorney opinion letter "on certain low-risk refinance transactions where there is confidence that the property is free and clear of any prior lien or encumbrance," a statement from Federal Housing Finance Agency Director Sandra Thompson explained."The title acceptance pilot will make it possible to test whether allowing lenders to sell these refinance loans is a responsible approach to reducing the closing costs incurred by existing homeowners," Thompson said. "Lenders will also retain the option to provide evidence of clear title through other options, such as title insurance or an attorney opinion letter."But the ALTA declared this announcement was an unwelcome about-face from statements previously made by the FHFA and Fannie Mae last year about a similar program."In August, Fannie Mae and FHFA confirmed to ALTA that the title waiver pilot program was abandoned — a decision that was clearly overridden elsewhere in the Administration," the ALTA statement said.The Mortgage Bankers Association said the new pilot could undermine consumer protections, increase risk and reduce competition."In 2015, the industry implemented final rules from the Consumer Financial Protection Bureau making comprehensive reforms to mortgage disclosures to increase clarity and transparency and to help facilitate consumer shopping," Bob Broeksmit, the MBA's president and CEO, said in a statement. "In 2020, the CFPB reviewed and praised its own rules. Suggestions that another revamp of these rules is needed depart from the legal regime created by Congress in the Dodd-Frank Act and will only increase regulatory costs and make it untenable for smaller lenders to compete."The MBA otherwise welcomed the Biden Administration's focus on legislative and regulatory fixes that could increase the supply of both single- and multifamily housing and make homeownership more affordable and attainable."We will further analyze these initiatives — many of which require Congressional action —  as more information is released and will continue to work with the Administration, lawmakers on both sides of the aisle, and industry stakeholders on effective solutions that bolster housing supply, improve affordability for both renters and borrowers, and improve access to sustainable homeownership," Broeksmit said.Title insurance policies come in two forms: one portion covers the lender, while the second optional coverage is for the borrower. Loans sold to the government-sponsored enterprises typically require some form of protection for the lender's position on the title. Borrowers will retain the right to purchase their own policy, both the FHFA and White House explained."As with any pilot undertaken by an Enterprise, this effort will be subject to robust oversight by FHFA to monitor the effectiveness of the pilot in meeting its desired outcomes," Thompson said.However, the ALTA pointed to results from an Ernst & Young study, which claimed the title insurance and settlement services industry directly generated $30 billion of gross domestic product and 155,000 jobs in 2022."Despite economic challenges in 2022, the industry continued to deliver jobs, support small businesses, provide critical funding for community priorities and, importantly, protect millions of Americans' property rights," said Diane Tomb, ALTA's chief executive, in a press release announcing the survey results. The ALTA, whose members are challenged not just by competitive threats but lower mortgage originations, said the study found that title and settlement companies helped to identify and collect $3 billion in back federal income taxes, property taxes and unpaid child support. These companies also directly supported an estimated $13 billion in wages and benefits for those employed in the industry.

Anticipation for the spring homebuying season pushed the Fannie Mae Home Purchase Sentiment Index upwards.The HPSI grew to 72.8 in February, up 2.1 points from the month prior, marking a third month of consecutive growth. Year-over-year, the HPSI is up 14.7 points.  Optimism around home-selling conditions is the main factor buoying confidence of respondents, the government-sponsored enterprise said.The belief continues to hold among respondents that interest rates will come down over the next 12 months, though this assertion dropped by a percent from the month prior to 35%. Consumers are also starting to be more cheerful about their outlook pertaining to buying or selling a property."The HPSI increased for the third straight month, continuing its slow but steady rise from the low-level plateau observed through much of 2023; and consumer sentiment toward housing now rests firmly above where it was this time last year," said Doug Duncan, senior vice president and chief economist at Fannie Mae, in a press release. More consumers are starting to coalesce around the notion that it's a good time to sell a house. The share of people who felt this way grew to 65%, up from 60% last month. The share of consumers who believe it's a good time to buy also lurched upwards, though slightly, from 17% to 19%, results from the survey show. "Consumer attitudes toward home-selling conditions increased markedly in February, with current homeowners, in particular, expressing greater optimism that it's a 'good time to sell,' a development that may foreshadow an upcoming increase in existing home listings," Duncan said. "Additionally, despite the recent uptick in rates, consumers remain relatively optimistic that mortgage rates will decrease over the next 12 months. If their expectations come true and rates move closer to the 6-percent mark by the end of 2024, as we currently expect, then it's likely that consumer sentiment on both sides of the transaction will improve, perhaps leading to a further thawing of the housing market."In January, Fannie's economists predicted that mortgage rates would slip back under 6% by the end of the year and walked back predictions of a recession, forecasting the economy will experience positive growth. As of Feb. 29, Freddie Mac's Primary Mortgage Market Survey averaged 6.94%, following two consecutive weeks where the rate rose by 13 basis points."A decline in mortgage rates – and the resulting uptick in sentiment – would obviously bode well for the upcoming spring homebuying season, although affordability will likely remain a significant challenge for buyers, at least until there's a meaningful addition to net supply," Fannie's economist added.Looking ahead to the warmer months, industry stakeholders say home buying activity will differ from what was seen in 2020 and 2021 (when lower interest rates and work-from-home trends may have led to an anomalous market). Instead, school and work calendars will continue to have a larger effect on when buyers choose to enter the housing market.

"At Grasshopper we're treading lightly into AI, exploring it," said Christopher Mastrangelo, chief compliance officer at the bank, in an interview. A common lament among compliance leaders at banks is that there's never enough time or people to thoroughly suss out the many red flags of money laundering, fraud and other forms of financial crime.Grasshopper Bank, a New York financial institution with $733 million of assets, has given its compliance team an AI-based assistant to help with this work. The bank is using generative artificial intelligence from Greenlite to conduct the enhanced due diligence and monitoring of customers called for by the Bank Secrecy Act. This regulation requires banks to have controls in place and provide notices to law enforcement to deter and detect money laundering, terrorist financing and other criminal acts.This use case comes at a time when banks are increasingly getting hit with consent orders for their fintech partners' BSA compliance shortcomings and pressure mounts to handle BSA compliance, along with most other tasks, more efficiently. In an October survey of bank compliance officers conducted by Hummingbird, for instance, 93% said efficiency is a top concern at their company, and 87% said they're constantly under pressure to increase efficiency."It's good to find and create efficiencies, instead of having a human being going out and taking hours to pull in what a computer can pull in in five minutes," said Becki Laporte, strategic advisor for fraud and AML at Datos Insights, in an interview. "There's a huge benefit to that."Banks have used traditional AI, such as machine learning and neural networks, in anti-money-laundering and BSA compliance for several years. Using generative AI — predictive models that generate content — in such compliance is new territory. "At Grasshopper we're treading lightly into AI, exploring it," said Christopher Mastrangelo, chief compliance officer at the bank, in an interview. He was formerly a bank examiner at the Office of the Comptroller of the Currency and the Federal Reserve. "The partnership with Greenlite fit what we're looking to do with AI, which is to create efficiencies in our process." At Grasshopper, as at most banks, customers are risk-rated based on their activity, and the bank conducts periodic analysis of those with the highest risk ratings to meet BSA requirements. For instance, international companies with foreign transactions will typically have higher risk ratings. The enhanced due diligence includes a review of the nature of the business, its activities, its website location and any geographic risks. The generative AI model "doesn't remove the analyst from the equation," Mastrangelo said. But it does gather a lot of publicly available information and lets analysts make more informed decisions, he said.A human analyst doing enhanced due diligence on a small-business client — say, a bakery — spends a lot of time collecting data from different sources, according to Will Lawrence, CEO of Greenlite. "The first place they're going to go is the internet, to find open-source information about that bakery," Lawrence said in an interview. "They're also going to look at the internal documentation that the bank has about the bakery to make sure that their affairs are still in order and legitimate."The analyst might look at the bakery's transaction patterns to make sure they make sense for a company of that size and type. Greenlite's generative AI model would collect additional data and summaries about that bakery from many sources, including corporate registries, news articles, company websites and social media channels.Using AI to take some of the routine data collection work from investigators lets them focus on the most challenging, most complicated and most undetectable sources of fraud, Lawrence said. "We're providing that organization leverage by taking some of the very manual tasks from their plate," he said.Grasshopper is also using the technology to help vet new clients. As the bank does its onboarding due diligence, by collecting documents and conducting fraud reviews of potential new customers, the large language model helps gather data from additional public data sources. Greenlite produces a report that answers certain predetermined questions about the business, for instance about the geographies it operates in, its source of funds, its activities and its beneficial owners of the business. This is on top of the know-your-customer check the bank does when it onboards new customers. Fraud checks are also done separately, using a system from Alloy. This latest generation of AI powered by large language models is much better at parsing through unstructured data than older versions of AI, Lawrence said. It can look through a document and identify anything that doesn't match up with what the customer said at onboarding. It can analyze transactions to see if they line up with what the customer said about its expected activity.Greenlite's technology orchestrates across several models that are good at different tasks, Lawrence said. Some large language models, like Anthropic's Claude, are strong at document processing and reading through large amounts of text. Others are better at math, and still others, like OpenAI's GPT-4, are better at reasoning.There are risks, as always, to using generative AI in compliance. In addition to the risk that a large language model will "hallucinate" or completely make things up, there is the risk that they could pull information from websites that have been fabricated. "A human being might catch that, but a computer is not necessarily going to catch that," Laporte said.To prevent hallucinations and fabrications, Greenlite maintains an audit log of all sources used in any given investigation. The source for every piece of data in a Greenlite report is cited, Lawrence said. And the model doesn't make decisions, he said, it only provides information to human analysts who then use their own logic and analytical skills to draw their own conclusions and make a decision.Banks that use generative AI models in compliance need to make sure they test the system and not blindly rely on it, Laporte said. They need to document this testing and they need to be able to explain how it works to their regulator. In Grasshopper's case, the Greenlite software is not only helping with efficiency, it's providing more reliable and comprehensive data than human analysts typically can come up with, Mastrangelo said.Deployment took a few months and involved making sure the software worked well with existing systems and connected to the right data sources. The software has reduced the amount of time it takes to do an enhanced due diligence review by close to 70%, Mastrangelo said. Laporte sees other banks talking about using large language models for this same use case, but hasn't seen other banks actually using them in production yet."My perception is banks want to be ready for this, but they don't necessarily want to be first," she said. "I hear buzz and discussion, and I think there's an appetite for it."

Jerome Powell, chairman of the Federal Reserve, right, said the Fed's vice chair for supervision has the right to propose rules, but implementation is not guaranteed.Al Drago/Bloomberg Federal Reserve Chair Jerome Powell drew a clear line between the central bank's response to last year's bank failures and the joint regulatory effort to update capital requirements for large banks.During testimony in front of the Senate Banking Committee on Monday, Powell emphasized that the so-called Basel III endgame proposal is not a direct response to the failures of Silicon Valley Bank, Signature Bank and First Republic Bank last spring. Instead, he said, the true policy responses — related to supervision and liquidity — are still ongoing."We have taken and are taking many more steps to deal with the problems that revealed themselves with Silicon Valley Bank," Powell said, adding: "The Basel III rules are not directly related, they are not the thing that is directly related to Silicon Valley Bank." Powell spelled out the distinction during a contentious exchange with Sen. Elizabeth Warren, D-Mass., who accused the Fed chair of caving to pressure from banks and their lobbyists who have forcefully opposed the capital reform package since it was proposed last summer."You are the leader of the Fed and when the heat was on last year, you talked a lot about getting tougher on the banks, but now the giant banks are unhappy about that and you've gone weak kneed on this," Warren said. "The American people need a leader at the Fed who has the courage to stand up to these banks and protect our financial system."The exchange took place on the second day of Powell's semiannual report to Congress about the state of monetary policy. During his first round of testimony, which took place Wednesday in front of the House Financial Services Committee, the Fed chair called for "broad and material" changes to the proposed capital rule and left open the possibility of issuing a totally new proposal. Warren, a leading voice in Congress for more stringent bank regulation, argued that in making those comments, Powell had undermined his previous commitment to supporting Fed Vice Chair for Supervision Michael Barr's efforts to address the issues that led to last year's bank failures.Powell pushed back on this characterization, arguing that he has done "exactly what I said I would do." He also spelled out what he views as the limits of the vice chair for supervision's authorities for steering the Fed's regulatory policy making process."The vice chair for supervision has every right to bring proposals to the board. That has happened … but [he's] not the comptroller of the currency," Powell said. "When I do monetary policy, I have one vote, there's 11 other voters, that's the way it works. It's not different for the vice chair for supervision."The back-and-forth highlights a key point of frustration among lawmakers in both houses and on both sides of the aisle: the Fed's use of Silicon Valley Bank as a justification for increasing capital requirements.Indeed, Barr pointed to last spring's episode as evidence that even banks that are not systemically important in size can have destabilizing effects on the banking system if they fail, in the context of expanding certain capital requirements to all banks with at least $100 billion of assets. But he has also emphasized that last summer's capital proposal was meant to bring the U.S. into alignment with the global standards set by the Basel Committee on Banking Supervision in 2017. That distinction has not always rung through to members of Congress.Powell said the actual response to the issues related to Silicon Valley Bank's demise will take the form of new liquidity requirements — which he expects will surface later this year — and wholesale revisions to bank supervision. Powell noted that adjusting supervisory policies and practices throughout the entire Federal Reserve System is no small task, given that there are thousands of staffers working both for the Board of Governors in Washington and within the 12 regional reserve banks. He added that the Fed has spent a lot of time studying what happened and listening to various stakeholders to understand how supervisors can address issues quicker and more effectively."We're working hard to develop a new rulebook and another set of practices, which is still going to be evidence-based and fair, but is going to involve earlier interventions and more effective ones," Powell said. "This is work that's ongoing and will be for some time."During the hearing, Powell also addressed recent calls for updating the Fed's last-resort lending facility, the discount window, to address issues that arose during the failures of Silicon Valley and Signature. "There's a lot of work to do on the discount window," Powell said. "It needs to be brought up technologically into the modern age, we need to eliminate the stigma problem and we need to make sure banks are actually able to use it when they need to use it. That's a broad work program that we're on right now. It's important."

Lately, mortgage rates have surged higher, climbing from as low as 2% to over 8% in some cases.Despite this, home builders have been enjoying healthy sales of newly-built homes.And somewhat incredibly, they haven’t had to lower their prices in many markets either.The question is how can they continue to charge full price if financing a home has gotten so much more expensive?Well, there are probably several reasons why, which I will outline below.Home Builders Don’t Have Competition Right NowThe first thing working in the home builders’ favor is a lack of competition. Typically, they have to contend with existing home sellers.A healthy housing market is dominated by existing home sales, not new home sales.If things weren’t so out of whack, we’d be seeing a lot of existing homeowners listing their properties.Instead, sales of newly-built homes have taken off thanks to a dearth of existing supply.In short, many of those who already own homes aren’t selling, either because they can’t afford to move. Or because they don’t want to lose their low mortgage rate in the process.This is known as the mortgage rate lock-in effect, which some dispute, but logically makes a lot of sense.At the same time, home building slowed after the early 2000s housing crisis, leading to a supply shortfall many years later.Simply put, there aren’t enough homes on the market, so prices haven’t fallen, despite much higher mortgage rates.They Don’t Need to Lower Prices If Demand Is StrongThere’s also this notion that home prices and mortgage rates have an inverse relationship.In that if one goes up, the other must surely come down. Problem is this isn’t necessarily true.When mortgage rates rose from record lows to over 8% in less than two years, many expected home prices to plummet.But instead, both increased. This is due to that lack of supply, and also a sign of strength in the economy.Sure, home buying became more expensive for those who need a mortgage. But prices didn’t just drop because rates increased.History shows that mortgage rates and home prices don’t have a strong relationship one way or the other.Things like supply, the wider economy, and inflation are a lot more telling.For the record, home prices and mortgage rates can fall together too!Lowering Prices Could Make It Harder for Appraisals to Come in at ValueSo we know demand is keeping prices mostly afloat. But even still, affordability has really taken a hit thanks to those high rates.You’d think the home builders would offer price cuts to offset the increased cost of financing a home purchase.Well, they could. But one issue with that is it could make it harder for homes to appraise at value.One big piece of the mortgage approval process is the collateral (the property) coming in at value, often designated as the sales price.If the appraisal comes in low, it could require the borrower to come in with a larger down payment to make the mortgage math work.Lower prices would also ostensibly lead to price cuts on subsequent homes in the community.After all, if you lower the price of one home, it would then be used as a comparable sale for the next sale.This could have the unintended consequence of pushing down home prices throughout the builder’s development.For example, if a home is listed for $350,000, but a price cut puts it at $300,000, the other homes in the neighborhood might be dragged down with it.That brings us to an alternative.Home Builders Would Rather Offer Incentives Like Temporary BuydownsInstead of lowering prices, home builders seem more interested in offering incentives like temporary rate buydowns.Not only does this allow them to avoid a price cut, it also creates a more affordable payment for the home buyer.Let’s look at an example to illustrate.Home price: $350,000 (no price cut)Buydown offer: 3/2/1 starting at 3.99%Year one payment: $1,335.15Year two payment: $1,501.39Year three payment: $1,676.94Year 4-30 payment: $1,860.97Now it’s possible that home builders could lower the price of a property to entice the buyer, but it might not provide much payment relief.Conversely, they could hold firm on price and offer a rate buydown instead and actually reduce payments significantly.With a 3/2/1 buydown in place, a builder could offer a buyer an interest rate of 3.99% in year one, 4.99% in year two, 5.99% in year three, and 6.99% for the remainder of the loan term.This would result in a monthly principal and interest payment of $1,335.15 in year one, $1,501.39 in year two, $1,676.94 in year three, and finally $1,860.97 for the remaining years.This assumes a 20% down payment, which allows the home buyer to avoid private mortgage insurance and snag a lower mortgage rate.If they just gave the borrower a price cut of say $25,000 and no mortgage rate relief, the payment would be a lot higher.At 20% down, the loan amount would be $260,000 and the monthly payment $1,728.04 at 6.99%.After three years, the buyer with the higher sales price would have a slightly steeper monthly payment. But only by about $130.And at some point during those preceding 36 months, the buyer with the buydown might have the opportunity to refinance the mortgage to a lower rate.It’s not a guarantee, but it’s a possibility. In the meantime, they’d have lower monthly payments, which could make the home purchase more palatable.Home Price Cuts Don’t Result in Big Monthly Payment SavingsPrice Cut PaymentPost-Buydown PaymentPurchase Price$325,000$350,000Loan Amount$260,000$280,000Interest Rate6.99%6.99%Monthly Payment$1,728.04$1,860.97Difference$132.93At the end of the day, the easiest way to lower monthly payments is via a reduced interest rate.A slightly lower sales price simply doesn’t result in the savings most home buyers are looking for.Using our example from above, the $25,000 price cut only lowers the buyer’s payment by about $130.Sure, it’s something, but it might not be enough to move the needle on a big purchase.You could take the lower price and bank on mortgage rates moving lower. But you’d still be stuck with a high payment in the meantime.And apparently home buyers focus more on monthly payment than they do the sales price.This explains why home builders aren’t lowering prices, but instead are offering mortgage rate incentives instead.Aside from temporary buydowns, they’re also offering permanent mortgage rate buydowns and alternative products like adjustable-rate mortgages.But again, these are all squarely aimed at the monthly payment, not the sales price.So if you’re shopping for a new home today, don’t be surprised if the builder is hesitant to offer a price cut.If they do offer an open-ended incentive that can be used toward the sales price or interest rate (or closing costs), take the time to consider the best use of the funds.Those who think rates will be lower in the near future could go with the lower sales price and hope to refinance. Just be sure you can absorb the higher payment in the meantime.Read more: Should I use the home builder’s lender?

Mortgage rates declined for the first time in five weeks as investors finally digested news about inflation and the pace of Federal Reserve cuts of short-term rates.Rates for the 30-year conforming loan fell 6 basis points on March 7, to an average of 6.88% from 6.94% a week prior, the Freddie Mac Primary Mortgage Market Survey found. A year ago, it averaged 6.73%.Meanwhile, the 15-year fixed averaged 6.22%, down from last week's 6.26%, but it was up from 5.95% for the same time in 2023."Evidence that purchase demand remains sensitive to interest rate changes was on display this week, as applications rose for the first time in six weeks in response to lower rates," said Sam Khater, Freddie Mac chief economist, in a press release. "Mortgage rates continue to be one of the biggest hurdles for potential homebuyers looking to enter the market."The Mortgage Bankers Association's most recent Weekly Application Survey found a 10% week-over-week increase in submissions."Housing inventory remains tight and home prices are elevated, but first-time buyer interest is strong this spring," Bob Broeksmit, the MBA's president and CEO, said in a Thursday morning statement. "FHA purchase applications jumped 16%."Mortgage rates are starting to come down broadly as the Fed takes a more tempered approach towards quantitative tightening, said David Adamo of Luxury Mortgage."There is still a supply/demand imbalance but with construction of rental properties at an all-time high and rents coming down and vacancies rising there is an opportunity to fill the gap in supply by converting rental properties to available for sale housing stock to meet demand," said Adamo. "The expectation is that mortgage industry origination volume increases significantly this year and next as we recover from the post-pandemic environment."The benchmark 10-year Treasury yield peaked at 4.32% on Feb. 27. Since then, albeit with some ups and downs, it has dropped to 4.11% just before noon on March 7.Zillow's mortgage rate tracker had the 30-year FRM at 6.45% on Thursday morning, down from the prior week's average of 6.63%."Despite an uptick in inflation in January, Fed Chair Jerome Powell reaffirmed that the peak rate of the hiking cycle has been reached and that monetary policy is sufficiently tight to bring inflation down to the Fed's 2% inflation target," Orphe Divounguy, senior macroeconomist at Zillow Home Loans, said in a statement issued Wednesday night."This should ease anxieties that the Fed's inflation forecast may have changed and that it would not be prepared to recalibrate its key policy rate later this year," Divounguy continued.But it will not be a straight line path to lower yields for the 10-year Treasury and falling mortgage rates."Expect more rate volatility ahead as the Fed and investors continue to wait for more conclusive evidence of a return to low, stable and predictable inflation," Divounguy said. "This week's employment and wage growth data release will likely cause some repricing activity."