It’s back – the bankruptcy cram down proposal, that is. Despite predictions that it was unstoppable after winning overwhelming support in the House, the measure, giving bankruptcy judges the authority to rewrite residential mortgages, flamed out in the Senate, unable to survive a blistering assault by the banking industry. Even its strongest supporters pronounced the legislation dead after only 45 Senate Democrats voted for it.
“What planet were you on?” Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, responded to a reporter who asked about the bill’s prospects. “Do I think there is a likelihood we could overturn a 51-45 vote?” he continued. “[The answer is] no.”
Few disagreed with him at the time. But a few analysts suggested that if foreclosures continued to soar and the Obama Administration’s efforts to aid struggling homeowners, through a sweeping loan modification initiative, fell short, the prospects for approving the cram down measure would improve. That appears to be the case.
At a recent Congressional hearing, Frank and other legislators decried the slow pace and lackluster results to date of the Home Affordable Modification Program (HAMP), the Administration’s flagship foreclosure prevention initiative, which has produced only 360,165 trial modification agreements since March. That represents about 12 percent of the nearly 3 million borrowers estimated to be eligible for consideration under the program and is well short of the Administration’s goal of 500,000 modifications by November 1. Given those numbers, Frank said, he is leaning toward adding the cram down measure to the financial reform legislation that will follow health care on the Congressional agenda.
“The best lobbyists we have for getting [the cram down measure] passed are the loan servicers who are not doing a very good job of getting mortgages modified,” Frank said at the hearing.
“People in the servicing industry and in the broader financial industry must understand that if this last effort to produce significant modifications fails,” he told reporters later, “the argument for reviving the [cram down measure] will be extremely strong. And I think there is a substantial chance the outcome will be different.”
The “disappointing” modification totals, combined with still soaring foreclosure and delinquency rates, are leading some of the legislators who opposed cram down to rethink their position and to reconsider the arguments of cram down advocates that borrowers need the leverage cram down will provide to force reluctant lenders and servicers to renegotiate their loans.
Industry executives say they are doing all they can to overcome the systems and staffing deficiencies that have impeded the processing of modification requests. “The entire mortgage servicing industry is racing against the clock to stem the tide of foreclosures and home loss,” Jack Shakett, who heads credit loss mitigation strategies” for Bank of America, testified at the Financial Services Committee hearing. And while the modification totals are still disappointing, he acknowledged, they do reflect steady progress. Bank of America, which ranked near the bottom in the Treasury Department’s first HAMP report, issued in July, doubled the number of three-month modifications initiated in August.
The problem Bank of America and other HAMP participants are confronting is, despite those gains, the number of foreclosures continues to rise, suggesting the image of a gerbil on a wheel that succeeds in running faster, but without making any forward progress.
Nearly one in twelve borrowers were at least 90 days delinquent on their mortgages or in foreclosure in the second quarter, according to the Mortgage Bankers Association; 358,471 borrowers received foreclosure notices in August —up 18 percent compared with the same month a year ago. More disturbing than that upward trend, analysts say, is the evidence that prime borrowers with conventional loans are replacing subprime borrowers with funky mortgages as the primary driver of the foreclosure trend. The key problem is no longer adjustable rate mortgages resetting at unaffordable rates but job losses that are making it difficult for prime borrowers to hold on to their homes. And that is a problem HAMP is not designed to address, Rep. Spencer Bachus (R-AL), the ranking Republican on the Financial Services Committee — and a leading Congressional opponent of the cram down measure — argued at the recent hearing. HAMP, he insisted, was “flawed from its inception. The only way to stop this epidemic of foreclosures is to get the economy rolling again.”
While the economics surrounding the foreclosure trend may have changed, the political landscape behind the cram down initiative has also shifted in at least two respects:
- Industry executives have argued – and recent statistics confirm – that lenders and servicers are making progress in overcoming some of HAMP’s start-up problems. But the negative publicity has been unrelenting. Media reports highlighting the plight of borrowers, who wait endlessly for responses to modification requests, only to have their applications rejected improperly or without explanation, have fed and cemented the perception that banks and servicers are less than enthusiastic participants in the modification efforts.
“[Industry executives] said, ‘you do it this way and you hold your mouth and you stand on just your left leg, and if you do all that, we’ll have lots of modifications,” Brad Miller (D-NC), a primary sponsor of the House cram down measure, told Huffington Post. “We’ve done all this stuff the industry helped to draft,” he added, “and nothing, nothing has happened.” - Cram down supporters have complained that the bill might have won Senate approval had it received stronger and more public support from President Obama. That part of the equation may change, too. Some analysts speculate that Obama may now see the enactment of the bankruptcy reform measure as a way to offset the backlash from voters infuriated by the failure to curb executive salaries and bonuses that are widely perceived as not just excessive but offensive following the federal “bail-out” of the financial industry.
- Financial industry lobbyists contend that the arguments against the cram down legislation are as strong and as persuasive today as they were a few months ago, when the Senate voted overwhelmingly against the measure. “Barney Frank can threaten to bring back [cram down] all he wants, but he will never get it past the Senate in its most recent form,” Josh Rosner, an analyst with Graham Fisher & Company, told DS News.
- Publicly, industry executives and their trade groups agree with him, but privately, they acknowledge some concern. In any event, they aren’t taking another favorable Senate vote for granted. After Frank told reporters he was planning to revive the cram down proposal, the Mortgage Bankers Association quickly issued a press statement repeating the industry’s warning that the measure would be counterproductive, reducing the availability of mortgage credit for borrowers and extending rather than ameliorating the housing downturn.
- “Allowing judges to retroactively modify borrowers’ mortgage balances will destabilize a mortgge market that desperately needs stability right now,” MBA Chairman David Kittle said. Noting that the most recent HAMP report indicates notable progress toward meeting the modification goals, he added, “Loan modifications don’t happen overnight. We ought to let this program, still in its early stages, continue to take hold, rather than rushing to pass a measure that will do more harm than good.” ?
CREDIT UNIONS VS. CRA —AGAIN
Proposals to extend the Community Reinvestment Act (CRA) to credit unions bear some resemblance to the computer game “whack-a-mole.” Every time industry trade groups think they’ve defeated this initiative, it pops up again.
The House Financial Services Committee is scheduled to hold a hearing this week on “issues related to the CRA.” And among the issues legislators will be considering once again is whether credit unions – at least the largest of them – should have the same statutory community investment obligations as banks.
With an obvious eye on that upcoming hearing, the National Community Reinvestment Coalition (NCRC) — a Washington, D.C.-based consumer advocacy organization — published a report concluding that, on the whole, “large credit unions do not serve people of modest means as well as mainstream banks.”
The NCRC used Home Mortgage Disclosure Act (HMDA) data for three years (2005-2007) to compare the records of banks and credit unions in the origination of home purchase, refinance and home improvement loans. On the 69 fair lending indicators the study used, banks outperformed credit unions 64 percent to 65 percent of the time.
Credit unions disagree with those conclusions, to put it mildly. “It is clear the report is not worth the paper it’s printed on,” Mike Schenk, vice president of economics and statistics for the Credit Union National Association (CUNA), told News Now, CUNA’s on-line news publication. Schenk cited three major flaws in the study’s methodology:
- It did not consider the field-of-membership limitations affecting one-third of credit unions, serving approximately 20 percent of all credit union members. Defined by their affinity groups, the membership of these credit unions, “by definition will not perfectly reflect the income or racial make-up of the geographic community in which they are located,” Schenk noted. While one-fourth of credit unions have community charters and are not confined by FOM limitations, Schenk acknowledged, many of those credit unions converted only recently. “What does the NCRC analysis do to account for these fundamental differences?” he asked. “Nothing.”
- The NCRC analysis focused only on “prime” loans, a “glaring oversight,” Schenk said, for a study that “presumes to gauge the effectiveness of lending to lower-income individuals.”
- The study used “disparity ratios” as a primary measure of lending compliance. But disparities in loan approval and rejection rates are “a horrible metric,” Schenk said, and a far from accurate measure of “lender effectiveness.” Using the NCRC’s disparity ratios for 2007, he said, banks outperformed credit unions on 23 of 42 published metrics. But based on the underlying data for those ratios, he noted, credit unions outperformed banks on all the key measures. “Credit unions approved mortgage loan applications at higher rates – usually much higher rates – and they denied applications at lower rates – usually much lower rates” than banks. “This is true in almost every single demographic group analyzed, among every loan type analyzed and across each of the three years of data analyzed,” Schenk noted.
This is not the first time NCRC has produced a report questioning credit unions’ record of serving low- and moderate-income consumers (a 2005 report —“Credit Unions: True to their Mission?” —was equally critical) nor is NCRC the only organization to raise that question. A 2006 report by the Government Accountability Office (GAO) found similarly that credit unions serve a lower percentage of low- and moderate income people than banks and have a higher percentage of upper-income members.
In its most recent report, the NCRC found that banks consistently outscored credit unions in both denial rates for under-served borrowers and in the percentage of loans originated to those groups, while banks and credit unions performed equally in the approval disparity measures for all three years studied.
Banks were also “consistently more successful” in originating home purchase, refinance and home improvement loans for underserved borrowers and communities, but “surprisingly,” the NCRC study notes, credit unions originated a higher percentage of home purchase and refinance loans to low- and moderate-income borrowers overall. “While credit unions are to be commended for this,” the report concedes, “it is notable that banks were more successful than credit unions in lending to the most economically disenfranchised low- and moderate-income borrowers” – minorities, women, and borrowers in minority communities.
The NCRC report makes several recommendations, primary among them, imposing CRA obligations on larger credit unions. This would “invigorate the credit union movement as a whole,” the NCRC suggests by enabling larger credit unions to identify “overlooked and profitable opportunities in working and minority neighborhoods.” Smaller credit unions would also benefit from this policy change, the report contends, because CRA would encourage larger credit unions “to increase their level of deposits and investments in community development credit unions and low-income credit unions dedicated to serving low-income people and neighborhoods.”
CUNA perceives ulterior motives in both the timing of the NCRC study (just ahead of this week’s Congressional hearing on the CRA) and in its conclusions. The community group, Schenk noted, benefits “indirectly” if more institutions are subject to the CRA, because “many of its member organizations receive significant funding from banks as part of [their] CRA investment obligations.”
The NCRC has also formed “strategic partnerships” with many of the large national banks, which have led past efforts to extend CRA to credit unions. “It would not surprise me if these considerations influenced the study’s methods and its conclusions,” Schenk said.
A DOWNWARD TREND
Small business and community development loans originated by federally insured banks and savings institutions both declined last year, as the weak economy and turmoil in the financial markets took a large bite out of both areas.
In its annual analysis of data reported by institutions covered by the Community Reinvestment Act (CRA), the Federal Financial Institutions Examination Council (FFIEC) found that small business loans declined by 20 percent in number and by 10 percent in dollar amount in 2008 compared with 2007, reflecting “a significant reduction in small business credit card activity and reductions in lines of credit” by the 965 institutions submitting the CRA lending reports.
The proportion of loans to smaller firms (with assets of $1 million or less) also declined from 38 percent in 2007 to 32 percent last year, continuing a downward trend since1999, when the share of loans to smaller companies peaked at 60 percent. The FFIEC attributed the decline primarily to “a substantial increase in lending to larger firms through lines of credit, renewals of credit lines with larger limits, and credit cards. Te decline also reflects that fact that some banks no longer request revenue-size information from business customers [and so] no longer report which, if any, ‘small business’ loans were extended to small businesses,” the FFIEC explained.
Community development lending activity also declined last year, by about 5 percent, with 712 (74 percent) of the reporting institutions originating loans in this category, down from 746 institutions in 2007. If loan originations and purchases are combined, the dollar volume of community development increased by nearly 14 percent, to $72.5 billion from $63.8 billion, but most of that increase was attributable to loan purchases. The number of loan originations declined by nearly 30 percent (from 31,267 in 2007 to 22,134 last year) while the dollar volume dropped by 23 percent, to $48.8 billion from $63.3 billion.
IN PRAISE OF ARBITRATION
While consumer advocates generally abhor mandatory arbitration in consumer contracts and are making progress in their efforts to bar those provisions, one liberal think tank is urging bank regulators and the Obama Administration to use mandatory arbitration as a tool to encourage more lenders and loan servicers to modify the mortgages of homeowners facing foreclosure.
Mandatory arbitration “dovetails” nicely with the Home Affordable Mortgage Program (HAMP), the Obama Administration’s key foreclosure prevention initiatives, a report, published by the liberal Center for American Progress, suggests. (See related item) HAMP “ensures that eligible homeowners receive the modifications for which they qualify,” the report notes, while mandatory arbitration gives the parties an opportunity to identify foreclosure alternatives in situations where modification is not possible.
As HAMP is currently structured, the report, argues, borrowers have no opportunity to negotiate the lender’s base-line decision about whether they qualify for a modification, no avenue for appealing negative decisions o for challenging the lender’s assumptions about the borrower’s financial status, the property’s value, or local market conditions.
The report suggests that the federal government take several steps to make mandatory arbitration part of state and federal foreclosure prevention efforts, including:
- Funding state and local mandatory mediation programs;
- Requiring mediation for all federally-insured mortgages; and
- Requiring all servicers participating in HAMP to go through arbitration with borrowers when modifications aren’t possible.
In addition to identifying borrowers who were improperly denied modifications, the report says, mandatory arbitration will create an opportunity to fashion “graceful exits” for struggling homeowners that are more beneficial to all parties than a foreclosure would be to any of them.
ACROSS STATE LINES
All 50 states plus the District of Columbia and Puerto Rico have adopted the nationwide protocol for information sharing and coordination of multi-state exams, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators announced recently in the first joint report of the Multi-State Mortgage Committee.
The report highlights an ongoing initiative, begun two years ago, to improve oversight of multi-state mortgage companies. According to the report, 55 state regulatory agencies have signed the agreement and many have begun the first coordinated multi-state examinations the protocol prescribes. “This initiative is about uniformity in approach and modernization of processes,” the report notes, adding, “States have been hard at work for nearly two years delivering an examination format that is not only effective, but efficient for regulators and stakeholders.”
The multi-state examination effort builds on the nationwide mortgage licensing system introduced in January, 2008. The CSBS predicts that 46 states will be participating by January, 2010 and the remainder are expected to join by the following year. The system currently contains more than 11,000 companies and 66,469 loan originators.
In addition to highlighting the mortgage company supervision protocol, the report covers participation in several other multi-state initiatives, including: The federal/state subprime mortgage lending pilot to examine the origination of non-traditional mortgage loans; development of regulatory guidance and the model examination guidelines to improve consistency in mortgage regulation; creation of reverse mortgage examination guidelines to address emerging abuses; development of examination standards to determine mortgage lenders’ consideration of a borrower’s ability to repay; and creation of uniform standards for accreditation of state agencies’ mortgage supervision programs and training of mortgage examiners.
