WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) issued an order against ACI Worldwide and one of its subsidiaries, ACI Payments, for improperly initiating approximately $2.3 billion in unlawful mortgage payments transactions. ACI’s data handling practices negatively impacted nearly 500,000 homeowners with mortgages serviced by Mr. Cooper (formerly known as Nationstar). By unlawfully processing erroneous and unauthorized transactions, ACI opened homeowners to overdraft and insufficient funds fees from their financial institutions. Today’s order requires ACI, among other things, to pay a $25 million civil money penalty.

“The CFPB’s investigation found that ACI perpetrated the 2021 Mr. Cooper mortgage fiasco that impacted homeowners across the country,” said CFPB Director Rohit Chopra. “While borrower accounts have now been fixed, we are penalizing ACI for its unlawful actions that created headaches for hundreds of thousands of borrowers.”

ACI (NASDAQ:ACIW) is a publicly traded firm headquartered in Elkhorn, Nebraska. The company offers payment processing services across a wide range of industries including utilities, student loan servicing, healthcare, education, insurance, telecommunications, and mortgage servicing. ACI counts more than 6,000 firms as customers, and the company claims to process more than 225 billion consumer transactions annually. The company processes mortgage payments through the Automated Clearing House (ACH) network. For 2022, ACI reported revenue of $1.422 billion and net income of $142 million.

Mr. Cooper was one of ACI’s largest mortgage servicing customers until at least 2021. Mr. Cooper services the mortgages of more than four million borrowers and collects their monthly mortgage payments. Many homeowners with mortgages serviced through Mr. Cooper chose to schedule their monthly mortgage payments using ACI’s Speedpay product, which allowed the company to automatically transfer homeowners’ authorized mortgage payments from their personal bank accounts to Mr. Cooper.

On Saturday, April 24, 2021, impacted account holders began noticing inaccuracies in their account balances. Immediately, people began experiencing negative financial consequences. At one bank, for example, more than 60,000 accounts experienced more than $330 million in combined unlawful debits by that morning. Among these account holders, approximately 7,300 had their available balances reduced by more than $10,000—overnight.

The CFPB found that ACI’s actions violated federal consumer financial protection laws, including the Consumer Financial Protection Act and the Electronic Fund Transfer Act and its implementing rule, Regulation E. Specifically, the company harmed homeowners by:

Illegally initiating withdrawals from borrower bank accounts: ACI initiated approximately 1.4 million ACH withdrawals on behalf of Mr. Cooper from homeowners’ accounts on April 23, 2021, without a valid written authorization. This included initiating electronic fund transfers on days when they were not scheduled and initiating multiple transfers from the same accounts on the same day.

Improperly handling sensitive consumer data: As one of the largest global providers of payment services, ACI handles sensitive financial data of millions of homeowners and other consumers. The unlawful transactions, and the subsequent harm they caused, occurred as a direct result of the company’s inappropriate use of consumer data in its testing process. Specifically, the company failed to establish and enforce reasonable information security practices that would have prevented files created for testing purposes from ever being able to enter the ACH network.

This is the CFPB’s first action addressing unlawful information handling practices in processing mortgage payments. Last year, the CFPB issued an enforcement circular describing how shoddy data handling practices can constitute violations of the Consumer Financial Protection Act.

Enforcement Action

Under the Consumer Financial Protection Act, the CFPB has the authority to take action against companies that violate federal consumer financial protection laws, including engaging in unfair, deceptive, or abusive acts or practices. The CFPB also has authority to enforce the Electronic Fund Transfer Act and its implementing rule, Regulation E.

On Friday, April 23, 2021, ACI conducted tests of its electronic payments platform. But instead of using deidentified or dummy data in its tests, ACI used actual consumer data it had received from Mr. Cooper, which included names, bank account numbers, bank routing numbers, and amounts to be debited or credited. During its performance testing, ACI improperly sent several large files filled with Mr. Cooper’s customer data into the ACH network, unlawfully initiating approximately $2.3 billion in electronic mortgage payment transactions from homeowners’ accounts. None of the nearly 500,000 impacted borrowers anticipated, authorized, or were aware of these transactions until after they had been processed by their respective banks.

The order requires ACI to:

Stop its unlawful practices: ACI must adopt and enforce reasonable information security practices, and is prohibited from processing payments without obtaining proper authorization. It is also prohibited from using sensitive consumer financial information for software development or testing purposes without documenting a compelling business reason and obtaining consumer consent.

Pay $25 million in penalties: ACI is required to pay a $25 million penalty to the CFPB, which will be deposited into the CFPB’s victims relief fund.

Read today’s order.

Consumers can submit complaints about mortgage products and other financial products and services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees who believe their companies have violated federal consumer financial protection laws, including the Electronic Fund Transfer Act and its implementing rule, Regulation E, are encouraged to send information about what they know to whistleblower@cfpb.gov. To learn more about reporting potential industry misconduct, visit the CFPB’s website.

The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.

Source: https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-aci-worldwide-illegally-processing-2-3-billion-mortgage-payments-homeowners-did-not-authorize/

Summary

The housing boom has lasted longer than housing bears have expected, with shares of homebuilders seeing significant gains.

The iShares Home Construction ETF is up 33% for the year and SPDR S&P Homebuilders ETF has a 27% YTD return.

Why won’t the housing market turn when every economic indicator says it should? I’d argue that new home sales have held up largely because of homebuilders offering buyers teaser rates.

Homebuilders are using short-term mortgage buydowns to attract buyers, but this could lead to chaos as payments automatically reset to higher amounts. This is particularly risky for jumbo mortgages.

I estimate that 600,000 to 700,000 households could face rate resets in the next year, which could quietly put pressure on the economy and housing market.

Recent data shows what was a surprisingly strong spring selling season for homebuilders and an existing home sales market that has rebounded in price, even amidst plunging volumes. For shares of homebuilders, this means that the pandemic boom in new construction has carried on longer than most analysts thought it would. The iShares Home Construction ETF (BATS:ITB) is up roughly 33% for the year, and the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) also clocks in at a 27% YTD return. Over the full business cycle, however, publicly traded homebuilders are lousy businesses. Homebuilders are highly leveraged, highly cyclical businesses. Historically, they’ve had poor returns on capital compared with the market at large and tend to go bust during recessions– a fact that is somewhat hidden by survivorship bias when looking at historical returns.

More recently in 2022, this led to the question of whether homebuilders trading for 5x peak earnings or so were good value investments or value traps. I’ve repeatedly taken the position that they’re value traps, but now here we are with homebuilder stocks having rocketed back to all-time highs since the October lows, along with many of the most speculative corners of the market.

The one factor that I massively underestimated was the prevalence of short-term mortgage rate buydowns provided by homebuilders. How these typically work is that builders will buy down borrowers’ mortgage rates for 1-3 years, at which point the mortgage resets to a higher monthly payment. Common forms include 3-2-1 (i.e. 3% reduction in interest in year 1, 2% in year 2, and 1% in year 3), and 2-1.

Research shows that around 75% of builders are using them, with the greatest concentrations of use in Texas and the Southwest. On a $500,000 loan with a 2-1 and prevailing mortgage rates at 7%, the monthly payment would be $2,684 in year 1, $2,997 in year 2, and $3,326 in year 3. By and large, this allowed builders to sell homes that would have piled up by offering teaser payments that reset to levels that are technically legal, but often at rather uncomfortable debt-to-income ratios when combined with property tax increases and skyrocketing utility bills. Throw in some cheap construction and 110-degree summer temperatures, and you have a recipe for potential regret, especially for out-of-state buyers.

Fannie Mae and Freddie Mac restrict buydowns that exceed these thresholds (because of the potential for fraud and abuse), but highly publicized troubles at lenders like First Republic (OTCPK:FRCB) show that the jumbo market has seen some more exotic underwriting. The unspoken implication here is that lenders, real estate agents, and builders are selling these to buyers with the implicit or explicit suggestion that they should refinance down the road and lower their payments, (a.k.a. the infamous “date the rate, marry the house” sales pitch). That works if interest rates go down, but interest rates have actually gone up and the Treasury now has a boatload of deficit-financed debt to sell, which threatens to push mortgage rates above 8% by late summer. Fannie Mae and Freddie Mac at least force buyers to qualify for the payments after they reset, but it’s not clear whether the jumbo market has the same level of protection.

Mortgage buydowns may be innovative for builders, but they’re not newly invented. One of the untold stories of the 2008 financial crisis was the role that homebuilder rate incentives had in fueling the crisis. Adjustable rate mortgages get all the attention for massive balloon payments, but the story in jumbo mortgages was actually quite similar. Many, many buyers who bought in 2005 and 2006 had their mortgages reset in 2008 and 2009 after their rate buydowns expired, and their assumptions about mortgage rates turned out to be wildly wrong. In fact, jumbo mortgage rates hit nearly 8% in early 2009. That’s because jumbo mortgages are heavily dependent on credit, which rapidly tightened then starting in 2007 and also is tightening now. Only after the economy recovered did mortgages start to get cheaper again.

This means that taking out a jumbo mortgage because you think you can refinance it later is riskier than you think! It’s smart for homebuilders to offer these and it extended the business cycle long enough for investors to make profits. However, these rate resets are potentially disastrous for buyers making huge economic bets with scarce information about whether they’ll truly be able to refinance for cheaper rates.

Jumbo Mortgage Rates- 2007-2013

Different data sources on mortgages will generally show slightly different numbers, the main reason being that many mortgage rate surveys don’t count points charged to acquire the loan. But jumbo mortgage rates rose in the early stages of the 2000 recession. And throughout the 2008 recession, we see here that jumbo mortgages actually rose significantly.

So how many people have these rate buydowns? A minority of builders do buy the rate down for the whole 30-year term and a few buyers pay cash, so I think a fair estimate is that roughly 50% of new home buyers have rate buydowns that are 3-2-1 or faster. Roughly 600,000 new homes were sold in 2022, and this year is tracking for about 800,000. Divide by two, and we can ballpark that maybe 600,000 to 700,000 households have rate reset balloon payments coming due over the next couple of years. It may not sound like much, but that’s a figure roughly equal to all of the homes in the US currently listed for sale. Since housing supply for sale is low compared to the size of the overall housing stock, it could change the supply/demand dynamics considerably. My guess is that this will start to quietly become a problem for new homeowners, as we’re just now starting to see rates reset from last summer when mortgage rates first hit 6%.

For jumbo buyers, these can amount to payment hikes of $1,000 to $2,000 per month. Jumbo buyers aren’t likely to get much sympathy from the Fed or Treasury either, as encouraging marginal holders to sell is part of the process of bringing supply and demand back into balance. The strategy of taking out a mortgage and trying to refinance is somewhat better for those buying lower-priced homes with conventional mortgages. At lower mortgage amounts, the government is more likely to intervene to help you if things go south. Still, I wouldn’t expect a whole lot of help without unemployment rising sharply, in which case many buyers will need to sell anyway, driving down prices. Now add student loans restarting, with 40 million borrowers affected. Interesting times indeed.

The Cure For High Prices Is High Prices

While homebuilders have done well, the looming oversupply in rental housing and falling margins for homebuilders will continue to accelerate. If current trends hold, new homes could soon be cheaper than existing homes, which almost never happens. Builders are aggressively discounting homes, including using rate buydowns, and it’s allowing them to offload houses.

But as a recent report from Reventure Consulting shows, much of this new construction is far out from existing cities, which may help explain why there has been relatively little pressure on the existing home sales market so far. For example, this is a map of new construction in North Texas, where much of the new construction is an hour or longer drive to the city itself. In the 2008 real estate bubble, these kinds of homes were the hardest hit, particularly in areas like Arizona, Las Vegas, and the Inland Empire of California.

But with the median prices of new homes falling from $497,000 at the pandemic peak to $416,000, it’s only a matter of time before buyers start responding in earnest to the market signal they’re being given. As prices for new construction continue to fall, it’s going to pressure the existing home sales market because the two are nearly perfect substitutes. And ask yourself, with new home prices already falling to near the levels of existing homes, who’s going to buy the next 1.7 million units under construction, and at mortgage rates of 7% or more?

Homebuilders clearly had some hefty profit margins to work with in 2022 when they began discounting inventory. But the next 1.7 million houses under construction will be a much tougher proposition to sell or rent. Rents are now falling, interest rates continue rising, and there’s little long-term demographic demand for housing in excess of what’s already been pulled forward. While housing market bears may have been early in calling a downturn, underlying demographic trends likely mean they won’t be wrong about the ultimate destination.

With these in mind, I’m highly skeptical of stocks like Lennar (LEN) now trading for 10.5x earnings, D.R. Horton (DHI) trading for 11.5x earnings, and even from Toll Brothers (TOL) trading for 7.8x. If builders want to buy down mortgages for the full 30-year term for borrowers it’s fine, but doing so affects margins similarly to how price cuts would. When most of the industry is offering short-term teaser rates to new home buyers, the very clear risk is that the houses they sell come back onto the market when the mortgages reset, just like they did in the 2000s, but on a smaller scale. This, combined with the massive wave of construction hitting the market means homebuilder profit margins likely won’t stop falling when they hit 0%.

Key Takeaways

The housing market has been surprisingly strong in 2023, despite the ratio of a typical mortgage payment to a typical wage reaching a level surpassing the 2000s housing bubble.

One reason that the housing market hasn’t turned down as sharply as feared may be due to widespread mortgage rate buydowns by builders.

Many buyers are rolling the dice and betting that they can refinance in a couple of years for a lower interest rate before their payments reset, but jumbo mortgage rates in particular tend to rise, not fall during a recession.

Will home buyers who bought in 2022 with mortgage buydowns sell en masse when their payments reset this year and next? We’ll see.

It remains to be seen whether the economy will achieve a soft landing, but the widespread existence and adoption of mortgage rate buydowns are likely to exacerbate the swings of the business cycle. Count this as one more data point suggesting a soft landing is less likely than pundits think.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Source : https://seekingalpha.com/article/4617622-us-homebuilder-mortgage-rate-buydowns-starting-to-expire

The Maryland governor recently signed HB 1150 (the “Act”), which subjects certain shared appreciation agreements (SAAs) to the Maryland Mortgage Lender Law. Under the Act, the term “loan” now “includes an advance made in accordance with the terms of a shared appreciation agreement.” An SAA is defined by the Act to mean “a writing evidencing a transaction or any option, future, or any other derivative between a person and a consumer where the consumer receives money or any other item of value in exchange for an interest or future interest in a dwelling or residential real estate, or a future obligation to repay a sum on the occurrence of [certain] events,” such as an ownership transfer, a repayment maturity date, a consumer’s death, or other events. The Act specifies that a loan is subject to the state’s mortgage lender law if the loan is an SAA and “allows a borrower to repay advances and have any repaid amounts subsequently readvanced to the borrower.”

Interim guidance released by the Maryland Commissioner of Financial Regulation further clarifies that SAAs are mortgage loans, and that those who offer SAAs to consumers in the state are required to obtain a Maryland mortgage lender licensing unless exempt. Under the Act, the commissioner will issue regulations addressing enforcement and compliance, including SAA disclosure requirements. The Act takes effect July 1. However, for SAA applications taken on or after July 1 (and until regulations are promulgated and effective), the commissioner will not cite a licensee for disclosure requirement violations, provided the licensee makes a good faith effort to give the applicant specified information within ten days of receiving an application. Licensees will be required to provide the information again at least 72 hours before settlement if the actual terms of the SAA differ from those provided in the initial disclosure.

WASHINGTON, D.C. – Four federal agencies jointly pledged today to uphold America’s commitment to the core principles of fairness, equality, and justice as emerging automated systems, including those sometimes marketed as “artificial intelligence” or “AI,” have become increasingly common in our daily lives – impacting civil rights, fair competition, consumer protection, and equal opportunity.

The Civil Rights Division of the United States Department of Justice, the Consumer Financial Protection Bureau, the Federal Trade Commission, and the U.S. Equal Employment Opportunity Commission released a  joint statement outlining a commitment to enforce their respective laws and regulations.

All four agencies have previously expressed concerns about potentially harmful uses of automated systems and resolved to vigorously enforce their collective authorities and to monitor the development and use of automated systems.

“Technology marketed as AI has spread to every corner of the economy, and regulators need to stay ahead of its growth to prevent discriminatory outcomes that threaten families’ financial stability,” said CFPB Director Rohit Chopra. “Today’s joint statement makes it clear that the CFPB will work with its partner enforcement agencies to root out discrimination caused by any tool or system that enables unlawful decision making.”

“We have come together to make clear that the use of advanced technologies, including artificial intelligence, must be consistent with federal laws,” said Charlotte A. Burrows, Chair of the EEOC. “America’s workplace civil rights laws reflect our most cherished values of justice, fairness and opportunity, and the EEOC has a solemn responsibility to vigorously enforce them in this new context. We will continue to raise awareness on this topic; to help educate employers, vendors, and workers; and where necessary, to use our enforcement authorities to ensure AI does not become a high-tech pathway to discrimination.”

“We already see how AI tools can turbocharge fraud and automate discrimination, and we won’t hesitate to use the full scope of our legal authorities to protect Americans from these threats,” said FTC Chair Lina M. Khan. “Technological advances can deliver critical innovation—but claims of innovation must not be cover for lawbreaking. There is no AI exemption to the laws on the books, and the FTC will vigorously enforce the law to combat unfair or deceptive practices or unfair methods of competition.”

“As social media platforms, banks, landlords, employers, and other businesses that choose to rely on artificial intelligence, algorithms and other data tools to automate decision-making and to conduct business, we stand ready to hold accountable those entities that fail to address the discriminatory outcomes that too often result,” said Assistant Attorney General Kristen Clarke of the Justice Department’s Civil Rights Division. “This is an all hands on deck moment and the Justice Department will continue to work with our government partners to investigate, challenge, and combat discrimination based on automated systems.”

Today’s joint statement follows a series of CFPB actions to ensure advanced technologies do not violate the rights of consumers. Specifically, the CFPB has taken steps to protect consumers from:

Black box algorithms: In a May 2022, circular the CFPB advised that when the technology used to make credit decisions is too complex, opaque, or new to explain adverse credit decisions, companies cannot claim that same complexity or opaqueness as a defense against violations of the Equal Credit Opportunity Act.

Algorithmic marketing and advertising: In August 2022, the CFPB issued an interpretive rule stating when digital marketers are involved in the identification or selection of prospective customers or the selection or placement of content to affect consumer behavior, they are typically service providers under the Consumer Financial Protection Act. When their actions, such as using an algorithm to determine who to market products and services to, violate federal consumer financial protection law, they can be held accountable.

Abusive use of AI technology: Earlier this month, the CFPB issued a policy statement to explain abusive conduct. The statement is about unlawful conduct in consumer financial markets generally, but the prohibition would cover abusive uses of AI technologies to, for instance, obscure important features of a product or service or leverage gaps in consumer understanding.

Digital redlining: The CFPB has prioritized digital redlining, including bias in algorithms and technologies marketed as AI. As part of this effort, the CFPB is working with federal partners to protect homebuyers and homeowners from algorithmic bias within home valuations and appraisals through rulemaking.

Repeat offenders’ use of AI technology: The CFPB proposed a registry to detect repeat offenders. The registry would require covered nonbanks to report certain agency and court orders connected to consumer financial products and services. The registry would allow the CFPB to track companies whose repeat offenses involved the use of automated systems.

The CFPB has also launched a way for tech workers to blow the whistle. The CFPB encourages engineers, data scientists and others who have detailed knowledge of the algorithms and technologies used by companies and who know of potential discrimination or other misconduct within the CFPB’s authority to report it. CFPB subject-matter experts review and assess credible tips, and the CFPB’s process ensures that all credible tips receive appropriate analysis and investigation.

The CFPB will continue to monitor the development and use of automated systems, including AI-marketed technology, and work closely with the Civil Rights Division of the DOJ, FTC, and EEOC to enforce federal consumer financial protection laws and to protect the rights of American consumers, regardless of whether legal violations occur through traditional means or advanced technologies.

The CFPB will also release a white paper this spring discussing the current chatbot market and the technology’s limitations, its integration by financial institutions, and the ways the CFPB is already seeing chatbots interfere with consumers’ ability to interact with financial institutions.

Read today’s Joint Statement on Enforcement Efforts Against Discrimination and Bias in Automated Systems. 

Read Director Chopra’s Prepared Remarks on the Interagency Enforcement Policy Statement on “Artificial Intelligence.”

Consumers can submit complaints about other financial products and services, by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees who believe their company has violated federal consumer financial laws, including violations involving advanced technologies, are encouraged to send information about what they know to whistleblower@cfpb.gov. To learn more about reporting potential industry misconduct, visit the CFPB’s website.

The Consumer Financial Protection Bureau (CFPB) is a 21st-century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.

Source: https://www.consumerfinance.gov/about-us/newsroom/cfpb-federal-partners-confirm-automated-systems-advanced-technology-not-an-excuse-for-lawbreaking-behavior/