Inflation Threatens and Evictions Loom

Two major issues dominated the news in late July: Inflation – whether it is, is not a problem or is likely to be one; and the prospect that millions of renters would be evicted from their homes as a federal moratorium barring evictions for nonpayment of rent expired. 

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No!  No way!  Absolutely not!  Never mind.  That pretty much summarizes the dramatic reversal in policy that led the Bush Administration to support a reduction in the capital requirements for Fannie Mae and Freddie Mac, freeing the secondary market giants to play a larger role in efforts to contain the damage caused by the subprime mortgage crisis. 

The discovery three years ago of serious accounting breaches at both Government Sponsored Enterprises (GSEs) had strengthened the arguments of critics calling for stricter oversight of the companies and urging significant reductions in their size and operations.  As part of the fallout from the accounting problems, the GSEs’ primary regulator, the Office of Federal Housing Enterprise Oversight (OFHEO) had required both Fannie and Freddie to meet higher capital requirements.  It was that requirement the agency eased last week, as the Bush Administration, which had been insisting that stricter controls on the GSEs were essential, instead turned to them for help in easing the credit crunch that continues to grip the financial markets.

Emphasizing that Fannie and Freddie have corrected the deficiencies that led to their accounting problems, the OFHEO reduced the capital surcharge it had imposed from 30 percent to 20 percent.  As a result, Fannie and Freddie will now have to hold capital representing 3 percent of the mortgages they retain in their portfolios, down from 3.25 percent. Analysts say this will allow them to purchase an additional $200 billion in mortgages this year, providing a significant liquidity boost to the credit-constrained secondary mortgage market.

Housing industry executives welcomed the action, saying it will go a long way toward stimulating the refinancing of existing mortgages and the financing of new home purchases, both stalled by past loan losses and future fears that are making lenders reluctant to approve new loans and making investors unwilling to purchase securities backed by them. 

But critics warned that easing capital requirements for the GSEs is the wrong move at the wrong time, increasing the risk that they may require a taxpayer bail-out should housing market problems persist and deepen. Both Fannie and Freddie reported large quarterly losses ($3.56 billion and $2.5 billion respectively), leading them to raise a combined total of $13 billion in new capital in recent weeks through the sale of preferred stock, and highlighting the concerns of critics.

 “I think it’s very dangerous and a sign that people are very frightened,” Thomas Stanton, an instructor at Johns Hopkins University, told The New York Times.  “At a time in which finance companies are holding questionable assets and facing losses,” he noted, “regulators typically require more capital, not less.”

Responding to critics, OFHEO Director James Lockhart insisted that Fannie and Freddie have repaired their balance sheets and strengthened their internal controls, ensuring their ability to manage market risks.  “The companies are safe and sound and they will continue to be safe and sound,” Lockhart told reporters adding, “We wouldn’t have done this if they didn’t have all the [necessary risk management] controls in place.”

As part of the new capital directive, Fannie and Freddie have agreed to raise “significant” additional capital, but neither the GSEs nor the OFHEO have specified how much capital the companies must raise, in what form, and over what period of time.

Fannie and Freddie have indicated that they will use their increased portfolio capacity to purchase at least some subprime loans, enabling borrowers facing payment increases on adjustable rate mortgages to refinance into fixed-rate loans.  The companies have also said they intend to increase their purchases of conventional loans, to help the broader markets by keeping loan rates down.  “Ultimately, we hope it means that homebuyers get a lower-cost mortgage to buy a home, we hope it means borrowers facing payment spikes can refinance into a safer loan and thereby avoid losing their homes, and we hope it means working families living in jumbo loan markets can get a mortgage at a lower conforming rates,” Daniel Mudd, CEO of Fannie Mae, said at a press conference.  Easing the GSEs’ capital constraints “will provide stability in a market that needs additional help,” Mudd added.

“Everybody should be happy about what’s going on today,” Richard Syron, chairman and chief executive of Freddie Mac, added.  “It shows the best of the regulatory system.”


Wait until next year.  That’s when Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, says that panel will begin taking a long, hard look at the Community Reinvestment Act (CRA). And among the questions legislators will be considering is whether the stature requiring banks to meet the credit needs of their communities, with an emphasis on low- and moderate-income consumers and neighborhoods, should apply to credit unions, too. (Massachusetts already imposes a CRA requirement on state-chartered credit unions, one of only a few states to do so.)     

In an interview with CongressDaily, Frank suggested that he might consider paring a CRA requirement with pending legislation that would ease other regulatory restrictions on federally-chartered credit unions, in effect splitting the difference with banks, which support the CRA requirement for credit unions but oppose the regulatory relief measure. 

A recent hearing convened by Frank to marl the CRA's 30th anniversary fount credit unions, not surprisingly,in the spotlight as bankers pressed their argument that the statute should apply to credit unions, too.  Testifying for the Independent Community Bankers Association (ICBA), Cynthia Blankenship, vice chairman and chief operating officer of Bank of the West pointed to studies that, she said, “have shown consistently…that banks actually do a better of fulfilling the credit unions’ mission than the credit unions when it comes to lending to low- income and minority borrowers. “ICBA believes the national Credit Union Administration had the right idea when it adopted CAP (the Community Action Plan) and took a giant step backward when it repealed the rule the following year,” she added.

Blankenship was referring to a regulation the NCUA adopted about eight years ago that would have required credit unions to demonstrate that they were serving all segments of their fields of membership, including specifically low-income members.  The regulation, dubbed “CRA-lite” at the time, was subsequently withdrawn in the face of withering opposition from credit unions, but continuing concern about the issue led the NCUA to develop a pilot program last year collecting data from credit unions documenting their service to low-income membersan agency task force recommended recently that the NCUA make this data collection program permanent.

Credit unions, for their part, maintain that as member-owned and member-oriented institutions, they serve their members by definition and don’t need a statutory requirement to do so.  In a letter to members of the Financial Services Committee, NAFCU President Fred Becker noted that CRA was enacted specifically “to punish banks and thrifts for engaging in discriminatory practices, such as redlining and disinvestment.  Credit unions were not included under CRA,” Becker argued, “because there has never been any evidence credit unions engaged in these illegal and abhorrent activities.” 

In his letter, Becker cited statistics from the most recent Home Mortgage Disclosure Act (HMDA) reports, indicating that credit unions have a better record of lending to low- and moderate income borrowers than banks. “While banks and thrifts claim they are making more loans to LMI and minority households,’ Becker wrote, “what they don’t tell you is that they are happy to charge those populations more as well.  Some might calls this the equivalent of redlining these populations in the 21st Century,” he suggested. 


The chorus cautioning seniors about the risks of reverse mortgages has acquired another voice.   The Financial Industry Regulatory Authority (FINRA), which oversees the securities industry, issued an alert last week advising homeowners considering these products to “make informed decisions and carefully weigh all [your] options before proceeding.  And if you do decide a reverse mortgage is for you,” the alert emphasizes, “be sure to make prudent use of your loan.”

FINRA’s advice to seniors makes many of the same points other reverse mortgage critics (including Members Mortgage President Joe Zampitella) have made:

  • The loans are “quite expensive.”
  • Borrowers don’t have to repay the reverse loan, but they risk foreclosure if they can’t pay property taxes, insurance and home maintenance costs.
  • “Even if you can keep up with these payments,” the alert warns seniors, “you may get to the point that you want or need to move into a smaller home or into an assisted living facility….At that point, your loan will come due, and with compounded interest [owed], you may be surprised to find out how much you owe.”  The obligation to pay that debt, the alert notes, “may restrict your future housing choices.”

To protect themselves and make informed choices, FINRA advises seniors to: Weigh all their options; make sure they understand the risks, costs, and fees involved in a reverse mortgage; “recognize the full impact” of their decision; and “get independent advice.”  Additionally, the alert urges seniors to “be skeptical” of proposals to use reverse mortgages as part of an investment strategy, and to make sure they “ask the right questions” about proposed investment strategies and about reverse mortgages themselves.  


If there is one piece of advice virtually all financial advisers give to virtually all of their clients, it is this:  Don’t touch your retirement savings.  But tightening credit and rising mortgage payments are forcing growing numbers of consumers to do precisely that.  The portion of workers with an outstanding loan from their 401(k) retirement plans grew from 11 percent in 2006 to 17 percent last year, according to a survey by Transamerica Center for Retirement Studies. 

Other recent reports have confirmed that trend.  For example, J.P. Morgan Chase’s analysis of 350 plans nationwide found the number of participants who took loans from their 401(k) plans increased by seven percent in the last half of 2007 after falling 15 percent over the previous two-and-one-half years. 

The Transamerica survey of 2,000 full-time employees at for-profit companies found that nearly half of these borrowers took money from their retirement accounts to pay off debt last year, up from 27 percent in 2006.  For many, that move was a last-ditch effort to prevent foreclosure, Anne Lester, a senior portfolio manager at J.P. Morgan Asset Management told WSJ. “We found a strong correlation between parts of the country where foreclosure rates were high and there was a rise in 401(k) loans or hardship withdrawals,” she said.

Administrators responsible for other large retirement plans report that participants are using their savings to maintain their standard of living as they grapple with mortgages they can’t afford, maxed-out credit cards, and the rising cost of utilities, gasoline, and groceries.  

While withdrawing money from the plans is a quick way cope with an immediate cash crunch, the increase in such loans is “an alarming trend,” Transamerica Center President Catherine Collinson told the Wall Street Journal. Statistics compiled by the Center for Retirement Research, reported recently by the Associated Press, underscore that concern. 

“Based on current savings rates,” the AP article notes, “the center estimates that 43 percent of households risk not being able to fund the same standard of living during retirement as they have in their working years. That percentage increases to 49 percent for Americans between 36 and 43 whose main retirement plans are 40(k) accounts, not employer-funded pension plans like older generations.” 


It’s not just us. Eighty percent of the public in Italy, 67 percent in France, 52 percent in the U.S. and 41 percent in Britain believe their countries are doing poorly in key economic areas, especially in the management of retirement and health care systems, according to a Harris Interactive/France24/International Herald Tribune survey.

Perceptions are somewhat better in Germany, where only 36 percent say their country is doing badly and Spain, where 30 percent feel that way. Spaniards registered higher levels of satisfaction and lower levels of dissatisfaction to the key health and retirement questions than any other group included in the survey of 6,676 adults in six countries between January 10 and 21, 2008.

But the public mood in most of these countries turns decidedly glum when respondents are asked if they think their countries are headed in the right direction. Sixty five percent of Americans say the answer is a resounding no.  More than half of the French and British respondents (56 percent and 54 percent, respectively) and nearly half of those in Germany (49 percent) and Spain (48 percent), agree that their countries have veered off course.  

Retirement worries are a major reason for these global concerns.  When asked how their respective retirement systems are doing today, the portions of respondents answering either “badly” or “very badly” were Italy, 73 percent; France, 70 percent; Germany, 69 percent; U.S., 65 percent; Great Britain, 64 percent; and Spain, 58 percent.

Large numbers of respondents in all of the countries also described their economies as doing “badly” -- Italy, 75 percent; France, 70 percent; U.S., 63 percent; Spain, 52 percent; and Great Britain, 45 percent. Germany was the only country in which more people surveyed thought things are going well (36 percent) than badly (27) percent.

Questions about affordability and purchasing power – important issues for retirees – found that large numbers of adults in all six countries believe things are going badly, with the French (84 percent) and Italians (80 percent) responding most negatively.

“Overall, the governments of these six counties have their work cut out for them in trying to shake this sense of gloom and doom from their citizens,” the survey’s authors concluded.