[Jack M.Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania and author of The Mortgage Encyclopedia. Throughout his career, Professor Guttentag has been concerned with the difficulties faced by consumers in the home loan market.]

Question: What do home mortgage loans including second mortgage loans, retail installment loans, automobile loans, home improvement loans, and mobile home loans have in common – aside from being loans to consumers? 

Answer: The interest charge sometimes is calculated monthly and sometimes daily. With a monthly interest rate (MIR), the borrower is charged for each month whereas with a daily interest rate (DIR) the borrower is charged for each day.

Why is this distinction important? Because DIRs are a potential trap for unwary borrowers, countless numbers of whom have found themselves permanently indebted, usually with no understanding of how it happened. The problem has been entirely overlooked by regulators, including the Consumer Financial Protection Bureau.

An Example:

Consider a 30-year loan for $100,000 with a rate of 6%. The monthly payment for both a MIR and a DIR would be $599.56, part of which pays the monthly interest charge, with the remainder allocated to principal. To calculate the interest charge on an MIR, the annual interest rate is divided by 12, then multiplied by the balance at the end of the preceding month to obtain the interest due for the month. If the loan balance on the 6% MIR is $100,000, the interest due for the month is .06/12×100, 000 = $500. The principal is 599.56 – 500 = 99.56.

With a DIR of the same amount and same annual rate, the daily interest is .06/365×100,000 = $16.44. The interest due for the month is 16.44×30 = $493.3 or 16.44×31 = $509.64, resulting in principal of 106.56 or 89.92, depending on whether the month has 30 or 31 days. [MORE: Go to link here.]

As most taxpayers know by now, the TCJA reduced the available mortgage interest deduction from $1,000,000, to $750,000.[1] Essentially, if one bought a home today and financed $1,000,000 of the purchase price[2] interest on only $750,000 of the loan would be deductible. That’s pretty straightforward. This applies to interest secured by a primary or secondary residence, so long as the combined loan amount – commencing in 2018 – does not exceed $750,000. Continue reading “Available Mortgage Interest Deduction under Tax Cuts & Jobs Act (“TCJA”)”

“Reports Of My Death Have Been Greatly Exaggerated” ~Mark Twain (1835 – 1910)

History Revisited. Remember when the Home Equity Line of Credit (aka “HELOC”) was used as an ATM?  Need money for a remodel, new car, kid’s college education, debt consolidation, etc? No problem!  Your bank or mortgage broker was more than willing to give you one, along with a shiny credit card to draw down the available funds. All you needed was equity in your home, that is, the money represented by the difference between its current value and the total mortgage indebtedness against it. Continue reading “After Tax Reform, Are HELOCs Dead?”

iStock_000010654155SmallBackground. Not long after the housing bust and collapse of affordable mortgage lending, the “new subprime” became the FHA, that government home loan program insured by the Federal Housing Administration, offering downpayments as low as 3.5%.[1]  According to the online site, Bankrate: Continue reading “Pssst! Wanna Get 3% Down Conventional Loan Today?”

DecisionAs with much that the CFPB does these days, there is some that is good, some bad, and some, just plain ugly.  And for a cynic like me, everything – even the good stuff – seems to be imparted with a slightly paternalistic and patronizing tone.

You see, in the CFPB world view, the American people are divided into two basic camps: One is made up of evil, bloodsucking, vampire squids, looking to latch onto members of the other camp; the gullible, naïve, dumb and dumber set, who were all born yesterday. Continue reading “TRID Fatigue? Here’s What Buyers Need To Know (In Plain English)”

CongressBackground.  It wasn’t that long ago, circa 2010, housing advocates were lobbying for tougher new laws to rein in the abuses of the easy money years. Now, thanks to Dodd-Frank and its henchman, the CFPB, some folks are saying the regulators have gone too far.

Today’s Regulatory Atmosphere. In a recent Housingwire article (MBA’s Stevens: Today’s housing policies fail American homeowners), the President of the Mortgage Bankers Association (“MBA”) told of packed house of industry members, that the current regulatory culture was “broken.”

“…David Stevens, the president and chief executive officer of the Mortgage Bankers Association, spoke with passion as he told the attendees of the MBA’s National Secondary Market Conference that today’s housing policies are “failing the American homeowner.”


‘Today the American Dream is in the penalty box, and the Justice Department and other enforcement agencies appear to be in the driver’s seat when it comes to the nation’s housing policy. Everyone working in the mortgage business feels like there is a giant target on their back,’ Stevens told the crowd.”


“And the fact is consumers and the housing market would all be better served if the tone in D.C. changed,” Stevens continued. “The negative rhetoric and the enforcement environment are hurting everyone – homebuyers, lenders and the stewards of the nation’s economy. Housing policy is failing today.”

“One area where Stevens sees a negative environment being created by regulators and legislators is the mortgage rate comparison tool created by the Consumer Financial Protection Bureau.”


“Today’s environment is not encouraging credit expansion,” Stevens said. ‘It’s forcing lenders to be overly conservative – ultimately failing entry-level homeowners on every front.’”

According to the Housingwire article, Mr. Stevens had three steps for improvement [the follow comments have been condensed]:

  • First, Stevens said the dialogue must change. “We’re operating in the safest, soundest lending environment in decades. Consumers should feel confident in applying for loans and purchasing homes,” Stevens said.

“Policymakers should champion this environment and do a victory lap letting consumers know they are well protected and that they can trust the system,” Stevens said. “The dialogue of distrust must end. Regulators should understand the power that their message has over the mortgage market and just how their messages influence behavior.”

  • The second change that Stevens called for is adjustment to be made to the current lending rules.

Stevens also said that the Qualified Mortgage rule itself doesn’t work as written and needs to be changed.

“The only reason QM is working today is because of the ‘GSE patch,’[1] without which we would be in a world of trouble. The hardwired 43% debt-to-income ratio is too high for some borrowers, and too low for others,” Steven said.

“Non-QM/non-agency loans are primarily going to the wealthier buyers. There is strength at the top end of the market for well-heeled borrowers seeking jumbo loans, but credit remains tight for first-time borrowers who often get lower-balance loans,” Stevens said. “This directly translates into strength at the high end of the market, while the entry-level buyers in most communities still lag behind.

  • Third, Stevens said that the questions surrounding the secondary market need to be resolved.

Stevens said that last week’s update into the single mortgage-backed security that is to be issued by both Fannie Mae and Freddie Mac is a step in the right direction.

“The single security will lead to more liquidity,” Stevens said. “The single security will lead to more confidence, better and more transparent data. Upfront risk share will lead to a broader risk share model that encourages more competition and brings more private capital back to the market.”

Conclusion.  Mr. Stevens’ comments deserve consideration.  In effect, he is saying that if the financing system is to work for everyone, the rules must be realistic.  Touting QM as a great idea, but diluting it by a “patch” which makes it unrealistic and unfair, gives the CFPB bragging rights for coming up with the wrong solution.

However, Mr. Stevens ignores an issue he probably could not have addressed had he wanted to: The bureaucrats at the CFPB are not in the business of getting along. They need to sow fear and distrust in consumers – otherwise their regulatory raison d’etre disappears. So if they are to keep growing, and overreaching – if you will – they need a boogeyman, and the financial services industry fits that bill in spades.

If things are to change, and perhaps they will, it needs to come legislatively.  The CFPB needs to be reorganized, downsized, and declawed.  There are those in Congress who are beginning to do just that.  More about this in another post. ~PCQ


[1] Quoting the Urban Institute in another Housingwire article (Urban Institute: Qualified Mortgage impact overblown) the “patch” is a result of the a very large QM exception that: “…allows the GSEs and government agencies such as the Federal Housing Administration to operate under their own standards for seven years or, in the case of the GSEs, when they exit conservatorship, whichever is sooner.”  [Italics Mine.] Thus, the high lending bar imposed by QM for residential mortgages, is largely diluted. As Mr. Stevens notes, “The only reason QM is working today is because of the ‘GSE patch.”


whiplash“24% of all purchase loans have a debt-to-income ratio greater than the CFPB’s Qualified Mortgage rule limit of 43% [of debt to income], a new series high.“  ~Mortgage Risk Index-March 2014 Release, AIE’s International Center on Housing Risk

Hmmm. I thought the CFPB was the new sheriff in town, protecting the Little Guy from the villainous Big Banks. Isn’t that why it created the Qualified Mortgage or “QM” rules?  Wasn’t QM that safe harbor, giving peace and comfort to lenders who stayed within the guidelines deemed “safe”?  Wasn’t a debt-to-income ratio[1] over 43% deemed “risky”?  And for those lenders foolish enough to stray outside of the QM box, they became subject to the draconian Ability to Repay, or “ATR” rules, which, if violated, gave borrowers the right to sue lenders for giving them loans they should not have taken out. Huh? Continue reading “Housing Risk In 2015: It’s Déjà Vu All Over Again!”

Mortgage PressureNationalmortgagenews.com recently carried a story (“Fannie Moves Aggressively on New Low-Down-Payment Loans”) by Kate Berry reporting on Fannie’s and Freddie’s [collectively, “GSEs”[1]] venture back into more risky lending. Perhaps the GSEs’ near-death experience in September-October 2008 did not leave a sufficiently lasting impression…. Continue reading “Fannie And Freddie Throwing Caution To The Wind: 3% Downpayment Loans!”

congresscloudsLudd·ite – noun \ˈlə-ˌdīt\:  one of a group of early 19th century English workmen destroying laborsaving machinery as a protest; broadly :  one who is opposed to especially technological change  Luddite adjective. http://www.merriam-webster.com/dictionary/luddite

If the shoe fits….  Hmmm. This sounds vaguely familiar today.  As a protest, one destroys the very thing upon which they have come to depend. I note that the dictionary says the term can be used as an adjective.  This suggests to me that in today’s parlance, it is primarily descriptive. I sense that calling someone a “Luddite” is not a ringing endorsement of their common sense. Continue reading “Congressional Luddites Seek to Dismantle Fannie and Freddie (Part One)”

FAQs PicIntroduction. The FAQs below come directly from the most recent CFPB guidelines for January 2014.  Parts One and Two can be found here and here. As I go through the rules I will supplement the FAQs.  This information does not apply to the Big Banks, e.g. B of A, Morgan Stanley, JPMorgan, etc.  Rather, it applies to “small creditors” such as community banks. Unfortunately, the regulators have sought to apply the ATR/QM rules even to Mom and Pop who may sell an occasional rental unit or two.[1] The CFPB gives “small creditors” or “small entities” certain underwriting latitude in the application of the ATR/QM rules. Generally, these are persons or entities with no more than $2 billion in assets that make no more than 500 mortgage loans per year. Originally, the small entity exceptions were intended to apply only to “rural or underserved counties,” but until January 10, 2016, the exceptions will apply to all small creditors, regardless of location. Caveat: This material below is informational only and does not constitute “legal advice.”  Moreover, it is summary only; for more information, the actual regulations should be reviewed.  [For full article, go to link here.]

[1] I maintain vehemently that on the state and federal levels, the CFPB rules should not apply to the occasional sale of residential property owned by persons who are not in the business of making such loans, when they “carry back the paper,” e.g. on a contract or note and trust deed. The fact that Oregon’s DFCS insists otherwise is a sad and disturbing commentary on the uber-regulatory mindset of governmental bureaucrats who would rather regulate than cogitate.  Any sentient human being who has a passing familiarity with the housing and credit crisis would know that the occasional sale of residential property by Mom and Pop who carry back the paper was never meant to be subject to the ATR/QM and mortgage loan originator laws.