Three months ago, Treasury Secretary Timothy Geithner summoned lenders and loan servicers to Washington to express his and the Obama Administrations intense displeasure at the slow pace at which the industry was modifying the mortgages of struggling homebuyers. Apparently, that slap heard round the world – or at least, round the financial community – had an effect.
Two weeks ago, Geithner announced that participants in the Home Affordable Mortgage Program (HAMP), the Administrations flagship foreclosure prevention initiative, had modified 500,000 loans, reaching the Administration’s goal three weeks before the November 1 deadline Geithner had set when he called industry executives’ on the carpet.
Equally important, Geithner told reporters during a press conference announcing the achievement, the modification pace is now exceeding foreclosure sales. “That’s an important shift,” Geithner said, noting that “half-a-million families – about 40 percent of those deemed eligible for HAMP assistance — have seen their mortgage payments reduced.
Geithner barely had time to announce those statistics, let alone celebrate them, before the Congressional Oversight Panel responsible for monitoring HAMP, published a report criticizing the program and questioning its long-term success.
“Serious concerns remain about the program’s scope, scale and permanence,” Elizabeth Warren, the Harvard Law professor, who chairs the panel, told reporters. “In particular,” she said, “it isn’t clear that 500,000 modifications will be enough to put a serious dent in the foreclosure crisis or to dampen the impact of foreclosures on the broader economy.”
Underscoring that point, the committee’s report notes that based on the Treasury Department’s best case projection of completing 25,000 to 30,000 modifications per week going forward, “fewer than half of the predicted foreclosures would be avoided.” The 500,000 modifications logged to date are “relatively small in relation to the magnitude of the foreclosure crisis,” the report says.
The major problem with HAMP, the report suggests, is that it targets a crisis that has largely receded – subprime mortgage defaults – rather than the one that is unfolding as rising unemployment pushes more “prime” homeowners with good credit histories and conventional mortgages into default, and as still-soaring foreclosures depress home prices, leaving more owners upside down, with loans that exceed the value of their homes.
The oversight committee recommends that Congress adjust HAMP to make it more responsive and more effective. Specifically, the report suggests, the program should be redesigned to:
- Target the increasing number of homeowners with “negative equity,” who pose a growing risk of strategic (intentional) as well as unavoidable defaults.
- The most effective tool for helping these households, reducing the principal balance, is an alternative that lenders and servicers, to date, have been reluctant to use.
- Anticipate and respond proactively to the wave of interest rate resets on payment option adjustable rate and interest only mortgages “looming in the near future.” (A separate report by the Office of the Comptroller of the Currency and the Office of Thrift Services found that 15.2 percent of all payment option ARMs were “seriously delinquent” and 10 percent were in the foreclosure process in the second quarter, compared with 5.3 percent and 2.9 percent, respectively, of all mortgages.
- Add enforcement teeth to HAMP to address “noncompliance” by program participants. “It is critical that the program have strong, appropriate sanctions to assure that all participants follow program guidelines,” the oversight report emphasizes.
FASTER TRACK
Bankers, fighting what appears to be a losing battle to fend off restrictions on overdraft protection programs are also now facing the unappealing prospect of an accelerated implementation date for new credit card regulations.
The new rules, slated to take effect next year, are mandated by the Credit Card Protection and Responsibility (CARD) Act, which established a phased implementation schedule for the strengthened consumer protections and expanded disclosure requirements the statute creates. Two provisions — requiring credit card issuers to give consumers 45 days’ advance notice (rather than 30) before increasing the rates or otherwise altering the terms of their credit card agreements, and requiring issuers to mail bills at least 21 days before the due date — took effect August 20. The balance of the requirements were not supposed to kick in until February of 2010, year, to give financial institutions the time they said they needed to overhaul their policies and their processing systems.
But widespread complaints that lenders have been hiking rates, freezing credit lines and terminating cards in advance of the new rules have infuriated legislators, leading to demands to move up the implementation schedule. Rep. Carolyn Maloney (D-NY), who sponsored the CARD Act in the House and Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, are co-sponsoring a bill that would set a December 1 implementation date, necessary, Maloney said, because of the “breadth and depth” of the rate hikes credit card companies have been imposing.
Credit unions have joined other financial institutions in lobbying furiously against the accelerated compliance timetable. In a letter to legislators, Fred Becker, president and CEO of the National Association of Federal Credit Unions, argued that credit unions “did not cause the problems the [CARD Act] seeks to address, yet they would be disproportionately impacted by a shorter effective date for the new…rules.” Becker urged lawmakers to hold a hearing to assess the impact on financial institutions and to find “other possible solutions to address the problems the bill is targeting.”
Frank has not been sympathetic to those pleas. In a press conference announcing the move to speed up implementation of the credit card rules, Frank said he was “disappointed that too many credit card companies used the time they told us they needed to get their software adjusted” to increase rates and make another changes in advance of rules that would restrict those moves. “That simply is not acceptable,” he stated.
With an accelerated compliance schedule in prospect, Bank of America announced that it will not implement any changes in terms on consumer credit cards, including “risk or economic-based repricing,” between now and when the new card rules take effect. Frank said that policy undermines the arguments of lenders who say they can’t meet the earlier compliance date. If one bank can comply immediately, he said, all should be able to do so.
“Every other credit card company should follow suit,” Sen. Christopher Dodd, chairman of the Senate Banking Committee, agreed. “This Congress has made it clear that abusive credit card practices are no longer acceptable,” he added.
B of A officials said they were responding to “concerns expressed to us by our customers.” Those “concerns” have taken the form of an outpouring of consumer anger and a torrent of negative publicity excoriating financial institutions for racing to boost rates and make other changes that the new credit card rules will restrict or prohibit.
A study by the Pew Foundation, found that the lowest advertised rates on 400 credit cards have increased by an average of 2 percent since December, while more than half of those issuers have shifted from fixed to adjustable rates.
In a recent survey by Consumer Reports, 32 percent of the respondents said they had paid off and closed accounts since January of last year, and half of them said they were responding to changes in terms that they didn’t’ expect or deemed unjustified or unfair. Only 41 percent said they were “Highly satisfied” with card issuers, which Consumer Reports said is one of the lowest satisfaction rates for all of the services the company tracks.
Banking industry executives say no one should be surprised that credit card issuers are trying to shore up their revenues before new rules, limiting their ability to adjust card terms, take effect. “Banks have been losing money since late 2008 and are projected to lose money into [next year],” Nessa Feddis, a spokesman for the American Bankers Association (ABA), told MSNBC. “There’s no way Congress could have taken away revenue sources….such as certain kinds of fees and rate hikes, without anticipating that others would appear,” she said.
In fact, industry executives arguing against the CARD Act warned that its implementation would increase costs, limit credit availability, and ultimately harm the consumers the legislation is intended to protect. Among other provisions, the statute:
- Prohibits issuers from raising consumer’s card rate (absent a contract provisions calling for the adjustment) unless payments are at least 60 days delinquent;
- Bars “universal default” rate hikes, triggered by payment problems on unrelated accounts;
- Prohibits double-cycle billing;
- Requires clearer and more detailed disclosures of credit card terms and costs; and
- Limits marketing of credit cards to minors.
Rep. Frank says he is confident the House will approve the accelerated implementation date “within a couple of weeks,” but analysts say the outlook is less certain in the Senate, where Sen. Dodd is expected to have trouble mustering the votes required to move the measure out of his committee and onto the Senate floor.
Like Reps. Frank and Maloney, Dodd has also expressed concern about the reports of widespread increases in credit card rates and he has asked federal regulators to enforce a provision of the CARD Act, requiring issuers to review every six months any rate increases imposed after January 1 of this year. That provision requires issuers to reduce the rate if the borrowers’ credit risk has improved or if the other financial circumstances triggering the increases no longer exist.
“I ask you to immediately notify all credit card companies under your respective jurisdictions that they will be accountable or all interest rate increases during this time period and will be subject to the review requirement once it takes effect,” Dodd wrote in a July 10th letter to the regulators. “The look-back provision will serve as a deterrent,” he added, “only if it will be implemented and enforced effectively.”
CREDIT CRUNCH
Momentum appears to be building in Congress to extend and possibly expand the $8,0000 first-time buyer tax credit, but it’s not clear how quickly lawmakers will act or how much of an extension they will approve — if any.
The prospect of keeping the credit alive beyond its scheduled November 30 expiration date is among several measures Congress and the Obama Administration are considering to bolster a fragile economic recovery and counter unemployment rates that are expected to remain high well into next year.
While acknowledging the boost the credit has provided to the housing market, the White House has not committed to extending it. Press Secretary Robert Gibbs told reporters recently that Obama’s economic advisors are assessing the credit’s impact on home sales and will make a recommendation that the president will consider.
The National Association of Home Builders (NAHB) and the National Association of Realtors (NAR) have mounted a furious lobbying campaign, trying to persuade the President and Congress not only to extend the credit, but also to expand it to all home buyers by eliminating the income restrictions and the first-time buyer requirement.
Testifying at a hearing before the House Financial Services Committee, NAHB Chairman Joe Robson estimated that extending the credit for a year will increase home purchases by 383,000 over the next 12 months and “help mitigate the foreclosure crisis by whittling down inventory….This stimulus alone would create nearly 350,000 jobs over the coming year, which is exactly what the economy needs right now,” Robson said.
“The credit is working,” NAR Regional Vice President Joseph Canfora, added. Testifying for the real estate trade group, Canfora said the 355,000 to 400,000 transactions directly attributable to the credit “made a significant dent in the housing inventory and will help to stabilize home prices” going forward. Conversely, both Canfora and Robson warned, allowing the credit to expire will undermine the housing market and put the entire economic recovery at risk.
“The more robust the credit and the greater its duration, the greater the chance that the housing market can perform its traditional role of helping the economy move out of a recession,” Canfora said.
Critics say the cost of the credit – estimated at $30 billion to $35 billion if the existing program is extended for a year - exceeds its benefits. Like the Obama Administration’s “cash for clunkers” program for the automobile market, critics say, the tax credit is simply accelerating home purchases that most consumers would have made anyway.
Politics, as much as economics, are driving this debate. In the Senate, Majority Leader Harry Reid (D-NV), representing one of the states hardest hit by the housing downturn, and facing a tough reelection bid, is backing a six-month extension of the credit, while Democrats in the House are reportedly leaning toward a more modest temporary fix – allowing buyers to qualify for the credit as long as they have a signed purchase contract in hand by November 30. Under current rules, buyers must actually close on their purchases by the program’s expiration date in order to receive the credit.
The House, meanwhile, has enacted a measure extending the credit for a year for military personnel, foreign service officers and members of the intelligence community serving overseas. The bi-partisan legislation, co-sponsored by Rep. John Tanner (D-TN) and Ed Whitfield (R-KY), also waives the repayment requirements for military families who use the credit to purchase a home, but are then forced to sell, because of government orders, within the five year penalty period.
The House approved the measure unanimously; the Senate has not yet considered it.
UNDER THE RADAR
Forget about GDP, the stock market, home sales, and all those other standard economic indicators; it’s sales of men’s underwear that you should be tracking for clues about future…ups and downs.
That’s not as offbeat a theory as you might think. Mainstream economists, including former Federal Reserve Chairman Alan Greenspan, have cited the underwear index as one of the indicators they watch, noting that sales rise steadily in good times but fall when money (if not the garments themselves) becomes tight.
“It’s simply a bellwether,” bill Patterson, a senior analyst at Mintel, a consulting firm, explained to the New York Times. “When people are feeling confident, they spend more. The last thing you’re going to do when you’re short on cash is go and replace your underwear.”
If that theory holds, a recent report from NDP Group counts as good news. The consulting firm notes that after declining by 12 percent through the end of January, men’s underwear sales leveled off in February and March. An analysis from Mintel, another consulting firm, is considerably less reassuring. Mintel predicts that sales will decline by another 2.3 percent this year, and won’t begin to bounce back until well into 2013. According to MSN Money columnist Michael Brush, who reported that bad news, “That’s four more years of saggy elastic and threadbare cotton.”
