Homeowners in Massachusetts and other states have successfully challenged foreclosures initiated by lenders and servicers that could not document their right to foreclose. But what about the innocent buyers who purchase properties at foreclosure sales later found to have been improper? Should they be allowed to retain ownership of those homes?
The Massachusetts Supreme Judicial Court is going to consider that question in a case that is being closely watched by industry executives nationwide. The state’s high court ruled previously in another closely watched case (U.S. Bank v Ibanez) that because the lender did not own the mortgage at the time, a foreclosure was invalid. In this case (Bevilacqua v. Rodriguez), the court is reviewing a lower court ruling that the buyer who purchased the home at the Ibanez foreclosure does not have a valid claim to it.
The buyer, Bevilacqua, had submitted a “try title” petition, asking the Massachusetts Land Court to verify his title to the property, but the court ruled that, because the foreclosure sale was invalid, Ibanez did not have standing to initiate that action. In his appeal, Bevilacqua contends that the quitclaim deed he received at the foreclosure sale gave him “record title,” and sufficient standing to use the “try title” process.
“If the [Land Court] decision is upheld, and generally applied, it likely will have adverse implications for hundreds or even thousands of Massachusetts property owners if they find themselves in Bevilacqua’s shoes,” the Mortgage Bankers Association wrote in a friend-of-the-court brief.
Representing the state, Assistant Attorney General John Stephen argued that while Bevilacqua’s position as an “innocent buyer,” who purchased the property in good faith “engenders some sympathy,” it doesn’t alter the underlying legal principle: The deed he received was invalid and, as a result, “he lacks standing to bring a try title action.”
The court is expected to issue its decision before the end of this year.
INFORMATION GAP
Consumers know considerably less about mortgages than they think – and considerably less than they need to know to make informed choices, a recent study has found. Actually, the study, by Zillow.com, found consumers to be close to clueless about the relative advantages and disadvantages of the home financing options available to them and “ill-prepared” to obtain a mortgage loan. Even more disturbing, consumers don’t appear to be aware of how little they know.
Although the home buyers surveyed answered questions incorrectly about half the time, more than half (56 percent) said they felt confident about their understanding of mortgages and the home financing process. The other 44 percent were more realistic, admitting that their knowledge of mortgages was less than complete.
The Zillow survey, conducted jointly with the polling company Ipsos, also found:
· More than one-third of the respondents didn’t know the fees lenders charge for credit reports and appraisals vary and may be negotiable.
· Forty five percent thought all borrowers should always pay discount points to lower their rates.
· Fifty seven percent didn’t understand how adjustable rates work.
· Thirty-seven percent did not understand that a loan “prequalification” was not the same as an approval.
· Forty two percent thought FHA loans were available only to low-income, first-time buyers.
The survey results highlight the need for better borrower education, Erin Lantz, director of Zillow Mortgage Marketplace, said. “Most people wouldn’t jump out of a plane if they didn’t know how to use a parachute,” he noted, “yet each year many buyers commit to the larges loan they will take out in their lifetimes without understanding essential information about mortgages.”
UNFOUNDED FEARS
Industry executives warned that new credit card regulations, mandating clearer disclosures, limiting penalty rates and barring some pricing practices deemed abusive, would increase credit card costs and otherwise harm consumers. But those negative impacts haven’t materialized, according to a recent study, which found that the new rules, which were phased in over several months last year, are working pretty much as intended.
The study, by Pew Charitable Trusts, compared rates and terms offered by the 12 largest bank- and 12 largest credit union-card issuers, controlling a combined 90 percent share of outstanding credit card debt. Late payment charges declined from a median of $39 in March of 2010 to between $25 and $35 in January of this year, the study found. The average interest rate on existing card balances fell from 14.67 percent to 13.44 percent during that time period, while annual fees (which lenders had predicted would soar) remained unchanged at a median of $59 for bank-issued cards. (Industry analysts pointed out that the study did not reflect the large number of cards that now carry variable rates, which will rise when the prime rate increases.) Transaction surcharges for cash advances and balance transfers also increased only slightly. The number of issuers charging annual fees did increase, however, from 14 percent to 21 percent.
“Whatever increases in advertised rates we saw going into 2010 have not continued into 2011,” Nick Bourke, director of Pew’s Safe Credit Cards Project, told reporters.
Credit unions continue to offer lower rates and less punitive terms for members, according to the survey, which found credit union penalty rates unchanged at $25 (compared to a median of $39 for banks). Only 11 percent of banks now impose over-limit fees, but all of the largest credit unions have eliminated those fees entirely.
Overall the survey results indicate that the Credit Card Accountability responsibility and Disclosure Act has done more to benefit consumers than to disadvantage them, Bourke noted. The law and its implementing regulations created “a new equilibrium,” he added, eliminating many of the practices deemed abusive while increasing protections for consumers and creating a more competitive marketplace. “Consumers are enjoying safer, more transparently priced credit cards,” Bourke said, while banks and credit unions “are able to compete on a more level playing field."
CFPB STILL UNDER ATTACK
Republican lawmakers who opposed the creation of the Consumer Financial Protection Bureau are doing everything they can to clip the fledgling agency’s wings before it gets off the ground. Senate Republicans lobbed the most recent procedural boulder, saying they won’t approve any nominee President Obama submits to head the agency unless Democrats agree to change the agency’s structure and funding mechanism.
House Republicans are backing several bills that would make those changes, but the Senate, still controlled by Democrats, is unlikely to approve them – hence the threat by Senate Republicans to make reform of the agency a prerequisite for their approval of a director.
The lawmakers made that demand in a letter to President Obama, signed by 44 Republican Senators, including Senate Minority Leader Mitch McConnell (R-KY) and Sen. Richard Shelby (R-AL), ranking member on the Senate Banking Committee. ““No person should have the unfettered authority presently granted to the director of the [CFPA],” the letter asserted, adding, “we believe the Senate should not consider any nominee to be CFPB director until the [agency] is properly reformed.”
The key changes on which they are insisting – creating an oversight board to review decisions of the director and funding the agency through the Congressional appropriation process rather than directly from the Treasury – would undermine the agency’s independence and fatally dilute its power to protect consumers, the CFPB’s supporters contend.
“The consumer agency’s sole mission is to protect American families and provide the tools they need to make smart financial decisions,” Amy Brundage, a White House spokeswoman, said in a press statement, reiterating the president’s support for the CFPA and his commitment to ensure its authority and independence. “For far too long, American consumers have fallen victim to fraud, misleading claims and powerful special interests, and the president believes that American families who were the hardest hit by this financial crisis deserve an independent watchdog to protect consumers and prevent predatory lending and other abuses in the future, “ Brundage added.
Industry analysts suggest that the latest move by Republicans – linking structural change to the approval of an agency director — is really an attempt to block the appointment of Harvard Law Professor Elizabeth Warren — the leading candidate for the position, without opposing her publicly.
Anticipating difficulty winning the votes needed to confirm Warren, who first proposed the creation of an independent consumer protection agency, Obama appointed her as a special adviser to the Treasury, with responsibility for organizing the agency and getting it ready to begin operating by July 21.
Some analysts are now warning that the Republican strategy may backfire. Blocking the nomination process, they note, may force Obama to make a recess appointment, and without a nomination battle to consider, he is likely to choose Warren, giving her at least a two-year tenure at the agency’s helm.
“I don’t think this was [Sen. Shelby’s] intention,” one blogger wrote recently. “But after the nomination and recess appointment, maybe Warren can send him a box of chocolates or something.”
PILING ON
New regulations may have stabilized credit card costs for consumers (see related item) but many financial institutions are boosting existing fees for other products and services and adding an array of new charges. A few examples culled from recent press reports:
- Many banks are increasing the minimum balance required for a free checking account or eliminating fee checking entirely. (Bankrate.com reported recently that 65 percent of the largest banks and thrifts are offering free checking accounts, down from 76 percent in 2009 and the first decline in this area since 2003.
- Chase has doubled the monthly charge on its basic checking account from $6 to $12.
- Bank of America is now charging $35 for overdrafts of more than $10 and is imposing a penalty rate of 30 percent on new credit card charges if customers pay after the due date.
Industry executives say they are simply trying to compensate for losses resulting from new credit card regulations, caps on debit card transfer fees, and other regulations that are cutting into their revenue stream. “You are going to see a lot of creativity and innovation to recoup revenue losses,” Carol Kaplan, a spokesman for the American Bankers Association (ABA), told USA Today.
Some bank customers are either adjusting their accounts to avoid fees (if they can); others are grumbling about the costs but accepting them. But some are following the advice of Consumer Reports, among others, and joining credit unions or opening accounts in community banks, which are not following the upward fee trend.
A study by Moebs Services, a banking industry research firm, found that the number of credit unions offering free checking increased by 9 percent between July 2010 and February 2011, while the number of community banks offering them increased by 1 percent. “To paraphrase Mark Twain, the death of free checking has been greatly exaggerated,” Michael Moebs, chief executive of the firm, observed.
According to Moebs, the nation’s largest banks lost 5 million checking account customers last year and will likely lose another 8 million by the end of this year, reducing their share of that market from 45 percent in 2009 to 35 percent.
“It costs about $300 on a fully absorbed cost basis to operate a checking account, and with fees falling below these costs, the average checking account at a Wall Street bank is unprofitable,” Moebs, explained. Because community banks and credit unions can operate profitably below the $300 cost level, he predicts, “they will continue take market share away from the larger banks.”
