Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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If Shakespeare were writing today, he might still advise killing all the attorneys first. But if he followed a current trend, he might also suggest drawing a bead on appraisers as well. Real estate and financial industry trade groups, led by home builders and real estate brokers, are blaming flawed appraisals for depressing home values, delaying real estate closings and exacerbating the housing downturn.

Testifying at a recent Congressional hearing, spokesmen for the National Association of Home Builders (NAHB) said appraisers are inappropriately using distressed sales as comparables in their valuation of market transactions, without adjusting for the condition of the properties or for the fact that they are not willing buyer-willing seller market transactions.

“You can’t compare a well-constructed new home with a foreclosed property that has been vacant for months and was probably neglected for a long time before it was vacated,” NAHB Chairman Joe Robson complained. Robson pointed to a recent survey in which 26 percent of the builders responding complained that they are losing sales because appraisals are coming in below the contract price buyers have agreed; 60 percent of the respondents agreed that “inadequate” appraisals are causing serious problems and 54 percent said appraisals are coming in at less than the cost of building the homes.

The NAHB wants financial industry regulators and the Department of Housing and Urban Development to adopt appraisal rules that would require appraisers to expand the sales time frame and the geographic area permitted for comparable values in areas with a high concentration of distressed sales. Failure to produce truly comparable values for market transactions “is needlessly driving down home values and forestalling an economic recovery,” the NAHB complained in a recent press statement.

The National Association of Realtors (NAR) shares those concerns. Poor appraisals are “snowballing,” Lawrence Yun, the NAR’s chief economist, complained in his June housing report. “Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed or discounted sales.” If these problems aren’t corrected quickly, Yun warned, the nation’s economic recovery may be delayed and foreclosures will continue to rise.

The Realtors and the home builders are targeting flawed appraisals generally and the new Home Valuation Code of Conduct (HVCC) specifically in their criticism. The product of an agreement New York Attorney General Andrew Cuomo negotiated with Fannie Mae and Freddie Mac, the new appraisal code is designed to prevent lenders, Realtors, builders and mortgage brokers from influencing what are supposed to be the independent judgments of appraisers. Among other provisions, the code prevents mortgage brokers from selecting appraisers and bars contacts between a financial institution’s loan originators and employees in its in-house appraisal division. Critics say the new rules have led lenders to work through third-party appraisal management companies, which select the appraisers — a process that, critics say, is driving up appraisal costs and compromising appraisal quality. The main critique: management companies select appraisers based on their price and turn-around time, rather than their market knowledge or professional competency.

“This is not only preventing the housing market from recovering,” Marc Savitt, president of the National Association of Mortgage Brokers. ‘It is destroying the housing market. We’re eliminating the competition, and we all know what happens when you eliminate competition. Prices go up.”

The NAMB is seeking a court injunction barring implementation of the new appraisal code. The trade group has also joined the NAHB, the NAR, and several other industry trade associations in supporting proposed legislation that would impose an 18-month moratorium on the enforcement of the appraisal rules.

The Federal Housing Finance Board, the chief regulator for Fannie and Freddie, rejected suggestions that the HVCC is responsible for depressing home values. “Market participants should appreciate the difficulty facing appraisers when valuing properties in a declining market, especially when sharply dropping home prices and foreclosures are prevalent. These challenges exist with or without the code,” the board said in a press statement.

But while defending the HVCC as a necessary and appropriate response to a mortgage lending environment that had become “too aggressive and placed pressure on the appraisal process,” the FHFB has directed Fannie and Freddie to clarify the appraisal rules, which both companies have done. Fannie issued clarifying information in April; Freddie followed up with substantially similar guidance in July, emphasizing that lenders should use appraisers with “clear experience” in the market in which properties are located and clarifying that the rules do not prohibit appraisers from talking to real estate agents, as many had assumed.

The guidance also clarifies that while the appraisal code requires appraisers to use “appropriate comparable sales” in their valuations, it does not establish standards defining “appropriate” comparables. “For example,” the Freddie Mac guidance explains, “we do not require appraisers to use REOs, foreclosures or short sales.” However, the guidance adds, “if the appraiser determines that these are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use.” Appraisers must also certify that the selected comparables “are those most similar to the subject property,” the guidance adds.

Both the NAR and the NAHB issued press statements welcoming the guidance as a good “first step” toward resolving industry concerns about the HVCC. But the trade groups also said they will continue pressing Congress to approve the 18-month moratorium, in the NAR’s words, “to further address the unintended consequences of this new rule.”


Credit unions, accustomed to coming out on top in comparisons with banks (better rates, better service, more member-oriented) found themselves tarred unfavorably with the same brush recently in articles discussing the anti-consumer characteristics of payday loans.

“Short-term loans offered by some credit unions as alternatives to high-cost payday loans are as risky and deceptive as those they’re supposed to replace….” An article in USA Today, asserted. The article explained that many credit unions are offering short-term loans as alternatives to payday products, but some of those loans ‘are only marginally cheaper than payday loans,” Lauren Saunders, an attorney with the National Consumer Law Center, told the newspaper.

The article cited as an example a $400, 14-day loan offered by Nevada Federal Credit Union, with a zero annual percentage rate and an application fee of $70. While that is half the fee charged a comparable loan, the article acknowledged, it still works out to an APR of 455 percent.

The Credit Union National Association (CUNA) responded quickly, complaining that the article did not accurately describe the alternative payday products credit unions are offering or their commitment to use those products to help their members escape the debt cycle payday loans can create.

CUNA’s complaints, echoed in letters to USA Today from several credit unions, produced a follow-up article the next day that CUNA described as “more comprehensive and more positive.” The second article, providing what CUNA termed “broader credit union perspectives,” emphasized efforts by credit unions to link their short-term loan alternatives to financial education programs aimed at helping low-income borrowers improve their financial condition.

The dust-up over credit unions’ payday alternatives comes as more banks are entering the payday market, using national bank exemptions from state usury limits to skirt interest rate caps many states have imposed in an effort to drive payday lenders out of their markets. Federal bank regulators are beginning to question some of those bank products, however. “We need to make sure there‘s no predatory lending and also ensure that there are no risks to the institutions,” a spokesman for the Office of Thrift Supervision told Business Week, recently.

Separately, the National Credit Union Administration (NCUA) published a letter to credit unions two weeks ago, alerting them to the “risks, compliance issues and responsibilities associated with operating a payday lending program. The guidance advises credit unions to:

  • Set “borrower and program limits” to avoid an undue concentration of payday loans in their portfolios.
  • Design their programs to encourage members to shift to more “traditional” loan products.
  • Limit the number of payday loans and rollovers allowed.
  • Impose “substantial waiting period” between loans.
  • Allow payday borrowers to rescind the loan within 24 hours at no charge.
  • Offer financial counseling to borrowers who obtain short-term loans.

The guidance also emphasizes that credit unions can address the negative perception of payday loans by clearly disclosing to borrowers “the costs and risks” of the loans.


Credit union executives and their trade associations may be feeling a little bit like catchers on javelin teams these days. While they were responding to an unfavorable article in USA Today criticizing credit unions’ payday loan alternatives, (see above), another USAT article blasted credit unions for offering “controversial” and “anti-consumer” overdraft protection plans. Critics quoted in this article complained that credit unions, like banks, rely excessively on overdraft fees as a source of income, to the detriment of consumers who pay for the protection, often unaware that they are receiving it.

“Beware of short-term rates on credit union loans,” the article warned. The report featured overdraft protection programs offered by several credit unions serving federal government employees, noting the irony that Congress is considering legislation that would impose restrictions on overdraft plans. “It is disappointing if the most influential Washington, D.C. credit unions are using practices designed by consultants to extract money [from] their members,” Ed Mierzwinski, consumer program d director for the U.S. Public Interest Research Group, said in the article. “Government credit unions should serve as a model for what’s right rather than a poster child for what’s wrong,” he added.

Dan Mica, president and CEO of the Credit Union National Association, rejected the criticism, arguing in a press statement that the programs are “consistent with credit unions’ philosophy and mission to meet members’ financial needs and resolve short-term financial problems. Credit unions offering overdraft protection have to charge fees covering their costs, Mica said, “in order to make the business model work on a service that a number of members value and are willing to pay for. The fact is,” he added, “credit unions generally offer this service to save members the high cost and embarrassment of a bounded check.”

Fred Becker, president of the National Association of Federal Credit Unions (NAFCU), also defended the service, noting in the article that the fees charged for overdraft protection benefit the members of non-profit cooperatives, through the reduced fees and higher savings rates credit unions are able to offer.

Congress and federal regulators are considering proposals to increase consumer protections attached to overdraft programs; the most likely change is an “opt-in” requirement, under which financial institutions would have to receive permission from consumers before offering overdraft protection and charging for it. Consumer advocates are also demanding that banks and credit unions reject point-of-sale transactions that would result in an overdraft instead of honoring the transaction and charging a fee for the overdraft.

Testifying at a Congressional hearing on the issue earlier this year, CUNA representatives supported measures that would curb abusive practices, but argued that any legislation must strike a balance between the need for consumer protections and the need to avoid regulations that would burden financial institutions or make overdraft programs uneconomic for them.


The Federal Trade Commission (FTC) has joined forces with law enforcement officials in 19 states in a nationwide effort to combat loan modification fraud. Dubbed “Operation Loan Lies, the initiative involves 189 separate actions targeting individuals or entities accused of deceptively marketing foreclosure rescue and mortgage modification services.

“These con artists see the high foreclosure rates as an opportunity to prey on people in distress,” FTC Chairman Jon Leibowitz said. “They promise to rescue homeowners in troubled financial waters, but after they take their money they throw them an anchor instead of a lifeline. People facing foreclosure should avoid any company or individual that requires a fee in advance, guarantees to stop a foreclosure or modify a loan, or advises the homeowner to stop paying the mortgage company,” Leibowitz emphasized in a press conference.

As part of this new enforcement effort, the FTC announced four new lawsuits, bringing to 14 the number of actions the commission has initiated against loan modification companies. Defendants named in the newest suits are: Lucas Law Center, Loss Mitigation Services, and Apply2Save (an Internet company) and US Foreclosure Relief. The suits seek millions of dollars in civil penalties, restitution for victims and injunctions prohibiting the companies from marketing modification and foreclosure relief services in the future. Although the suits target operations in 19 states, they were announced in California, where the scams originated.

California Attorney General Edmund Brown, who joined Leibowitz at the press conference, vowed “to do everything we can to stop” the foreclosure and loan modification scams, “realizing that there are more rates to come out of their holes than we can stomp on. But we will keep doing the best we can,” he said, “because it is horrible to take advantage of somebody who is vulnerable with their family exposed to foreclosure.” 


Here’s a bit of news guaranteed to smother any nascent optimism that recent positive economic reports might be encouraging. Almost half of U.S. homeowners with a mortgage will be upside down on those loans before the housing market begins to recover, analysts at Deutsche Bank are predicting. A recent study by analysts Karen Weaver and Ying Shen estimates that 26 percent of mortgaged homes – 1.4 million properties – were under water at the end of March. That ratio will increase to 48 –recent – 25 million properties – as prices continue to decline through the first quarter of 2011, the Deutsche Bank study concludes.

“If our home-price forecast is correct, roughly one in two mortgage borrowers and one in three homeowners will owe more than their home is worth,” Weaver told CNN-Money. “That’s a dramatic shift from the past several decades,” she noted, “when housing was the foundation of middle class wealth.”

Making matters worse, this report suggests, many “severely underwater” borrowers may conclude that their home values will never recover and walk away from their homes, even if they can afford make their mortgage payments.

The Deutsche-Bank study finds the highest default rates in payment option adjustable rate mortgages, estimating that 77 percent of borrowers with those loans are currently underwater and 89 percent will be by 2011.

A separate study by the Government Accountability Office (GAO) also spotlights those loans, estimating that 30 percent of them are already seriously delinquent. “We are particularly concerned about [these loans],” William Shear, a GAO director, testified at a recent Joint Economic Committee hearing, “because so many are recasting and becoming less affordable to those homeowners.” These loans are difficult to modify, industry analysts note, because their payments are already extremely low.

The GAO report, focusing on the performance of non-prime loans, wants that another foreclosure wave is building. Approximately 25 percent of the 5.2 million subprime loans that are “still active” are seriously delinquent, defined as 90 days or more behind or already in foreclosure, according to the report. ‘As a result,” the report predicts, “hundreds of thousands of additional nonprime borrowers are at risk of losing their homes in the near future.”