In a still lagging effort to get ahead of a rising foreclosure tide, Congress has approved the Help Families Save their Homes Act. The measure revises an existing program – Hope for Homeowners – which has fallen well short of predictions that it would help more than 300,000 struggling homeowners avoid foreclosure by refinancing unaffordable, adjustable rate loans into lower-cost FHA-insured mortgages.
In fact, only about 50 borrowers have obtained loans under the program, because of obstacles the new legislation aims to overcome. The major changes:
- Reduce up-front charges for borrowers;
- Reduce the amount of future appreciation borrows who refinance under the program must share with lenders;
- Increase the maximum loan-to-value ratio for qualifying loans, which has the effect of reducing the “haircut” participating lenders must accept; and
- Establish a “safe harbor” protecting servicers who modify loans from law suits filed by investors or other third parties, as long as the modifications are consistent with the terms of Hope for Home Owners or the “Making Home Affordable” (MHA) program the Obama Administration launched last summer.
In another step designed to jump start Home for Homeowners, the Administration is now requiring that lenders offer qualified borrowers a refinancing option under Hope for Homeowners before turning to the MHA modification plan. The new MHA guidelines also include incentives for servicers and borrowers to pursue “short sales and deeds in lieu of foreclosure when modifications aren’t a viable option for the borrower, and provide additional modification incentives payments to lenders, servicers, and investors in areas where home prices are still declining. In another key change, the revised guidelines require participating servicers to modify a second lien under terms matching the modification of a first mortgage.
Financial institutions receiving federal bail-out funds are required to offer MHA modifications to eligible borrowers if the modification costs are lower than the losses resulting from a foreclosure. So far, 14 mortgage servicing companies have signed on to participate in the Administration’s program, offering “trial modifications” to an estimated 55,000 borrowers to date. Under the program, borrowers must make three consecutive monthly payments before the modification becomes permanent.
Separately, the Federal Housing Finance Agency reported that Fannie Mae and Freddie Mac have refinanced a combined total of 3,650 mortgages under the refinancing component of the MHA program.
In a less encouraging sign, industry executives and consumer advocates are reporting that lenders and servicers are struggling to keep up with growing demand for loan modifications, while foreclosures continue to mount. According to Realty Trac, foreclosure filings totaled 342,000 in April, beating the March record and exceeding the year-ago pace by 32 percent. Based on those numbers, a Realty Trac spokesman told CNN-Money, “We had been predicting 3.4 million filings for the year, but we’ll blow those numbers out of the water.”
The near-term outlook is not encouraging, as mortgage payment problems spread from the subprime and investor markets to previously stable borrowers with prime loans, in trouble now because of the economic downturn. Mark Zandi, chief economist at Moody’s Economy.com describes this as the “third wave” of mortgge foreclosures, “and it’s intensifying,” he told the New York Times.
More than 1.5 million prime mortgages fell into “troubled’ categories between November and February, meaning the borrowers were at least 90 days delinquent, had received a foreclosure notice, or had lost their homes.
Given those numbers, some analysts view the varied foreclosure prevention programs as the equivalent of putting a finger – or several fingers – in a large and weakening dike. Alan Reskin, chief international strategist at RBS Greenwich Capital, is among the skeptics, telling the Times, “I don’t think there’s any chance of government measures making more than a small dent [in foreclosures].”
CREDIT CARD WARNINGS
No more free lunch! That’s the faintly threatening message credit card issuers are delivering to consumers who pay off their balances every month and thus avoid interest charges and penalties for paying late. The credit card reform legislation that President Barack Obama signed into law last week will prohibit a host of common industry practices that, industry executives say, have made the cards attractive and inexpensive for many consumers. The problem with those practices, critics say – and the reason for the new legislation – is that they were misleading, “abusive,” and unfairly “gouged” the lower-income consumers, who were most likely to pay higher rates and incur “excessive” penalty fees.
Key provisions of the new law will require issuers to give 45 days’ advance notice before increasing rates on future charges and wait until consumers are 60 days late in making scheduled payments before penalizing them by increasing the rate on their existing balance. Additionally, the legislation requires card companies to send bills at least 21 days before the payment due date and to apply payments above the minimum to the highest-rate balance first when consumers have charges subject to different rates. The new law also requires issuers to obtain affirmative approval (opt-in) from borrowers before automatically honoring and imposing fees for over-balance charges.
“The law fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk,” Ed Yingling, chief executive of the American Bankers Association, told reporters. “It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate.”
Industry analysts say card issuers, who derived close to 70 percent of their income from interest charges –much of that in the form of penalty fees – will increase costs for all users and curb the availability of credit to higher-risk, lower-income consumers to compensate for the revenue losses they anticipate under the new legislation. Convenience users should also expect to see companies re-introduce annual fees and scale back or eliminate generous reward programs, analysts say.
“Those that manage their credit will in some degree now subsidize those that have credit problems,” Yingling said.
That may be the case, consumer advocates respond; but it is no les fair, and probably fairer, than having lower-income consumers subsidizing the more affluent, as they have under a business model that relied on penalty fees and poorly disclosed policies that increased the likelihood consumers would have to pay them.
It is no doubt true that the industry’s business model will change, Gail Hillebrand, a senior lawyer at Consumers Union, told the New York Times. “But that is because the business model doesn’t work for the public.”
RETHINKING FEDERAL PREEMPTION
The U.S. Supreme Court is expected to issue a ruling this summer that may or may not limit the authority of federal bank regulators to preempt the application of state laws and regulations to federally chartered depository institutions. But regardless of how the court rules, the Obama Administration is reversing the aggressive preemption course former President George Bush followed during his two terms in office. Obama has directed the heads of all federal agencies to review the legal basis for any rules issued in the past 10 years preempting state laws.
“The purpose of this memorandum is to state the general policy of my Administration that preemption of state law by executive departments and agencies should be undertaken only with full consideration of the legitimate prerogatives of the states and with a sufficient legal basis for preemption,” the memorandum, issued May 20th, said. Where the review indicates that the preemption can’t be justified, the memo continues, administration officials “should initiate appropriate action, which may include amendment of the relevant regulation.”
Banking industry executives are most familiar with, and generally supported, the broad preemption authority the Office of the Comptroller of the Currency has asserted to preclude state enforcement of consumer protection laws – the focus of the pending Supreme Court decision (Cuomo vs. The clearing House Association.) But Bush Administration officials regularly inserted preemption language in preambles to federal regulations, short-circuiting enforcement of “dozens” of restrictive state and local laws that businesses opposed.
Echoing an argument that state officials have voiced repeatedly – most recently in briefs opposing the OCC’s preemption authority -- the Obama memorandum notes, “Throughout our history, state and local governments have frequently protected health, safety and the environment more aggressively than has the national Government…. Executive department and agencies should be mindful that in our Federal system, the citizens of the several states have distinctive circumstances and values, and that in many instances, it is appropriate for them to apply to themselves rules and principles that reflect these circumstances and values….”
Consumer advocates have welcomed the change in position, which, they say, appropriately recognizes that states are best-equipped and most committed to protecting their citizens. “The President clearly understands the important role that state and local governments play in our constitutional system and has displayed a very different vision of our Constitution than president Bush displayed in his eight years,” Doug Kendall, president of the Constitutional Accountability Center, told the Washington Post.
The American Association for Justice, representing trial lawyers, agreed, asserting in a press statement, “[The President’s memorandum] makes clear that the rule of law will once again prevail over the rule of politics.”
While consumer groups found the President’s memo reassuring, business lobbyists found it “troubling.” Federal preemption is essential, they said, to preclude a patchwork of inconsistent state laws and regulations. “Manufacturers sell products into a national market, and a single national regulatory standard helps ensure predictable treatment in the courts,” Rosario Palmieri, vice president for legal and regulation policy at the National Association of Manufacturers, said in a press statement. “It is unwise,” he continued, ‘to replace a regulatory system based on objective science and agency experts with a 50-state patchwork of often arbitrary jury decisions.”
MINORITIES LOSING GROUND
A version of the “last hired-first fired” employment adage is playing out in the housing market. Minorities, who made the largest percentage gains in home ownership during the housing boom, are losing ground at the fastest rate as the market and the economy slide.
After growing steadily between 1995 and 2005, ownership rates for Native-born Latinos and African Americans have declined for the past four years -- falling by 2.6 percent for Hispanics and by just under 2 percent for African-Americans. Ownership rates for Whites have also declined, but by a smaller (1.2 percent) margin, according to a recent study by the Pew Hispanic Center.
The study cites two primary reasons for the disparities:
Rising unemployment rates. Hispanics have been especially hard-hit, the study notes, because of their over-representation in the battered construction industry, where they hold one-in-four jobs.
Subprime loans, which minorities obtain in much larger numbers than Whites. In 2006, the last year of the housing boom, more than half (52.8 percent) of the mortgages obtained by Blacks and 44.9 percent of those for Hispanics were subprime, compared to 17.5 percent for Whites. In 2007, when the housing downturn began ands subprime lending began to fade, minorities were still receiving subprime loans in large and disparate numbers: 27.6 percent for Hispanics and 33.5 percent for Blacks, compared with only 10.5 percent for Whites.
The narrowing of the home ownership gap between minorities and whites, touted as a major benefit of the decade-long housing boom, was actually built on subprime sand, according to Kevin Stein, associate director of the California Reinvestment Coalition, who told the New York Times: “Basically, that gap was closed on poor loans that never should have been made and wound up harming folks and their neighborhoods.”
Although the ownership gap is still narrower today than it was a decade ago, it remains wide at 74 percent for whites compared with 48.9 percent for Hispanics and 47.5 percent for Blacks.
TAX CREDIT CONVERSION
The Department of Housing and Urban Development (HUD) is bending the rules for FHA-insured mortgages, to allow first-time home buyers to use the $8,000 tax credit Congress included in last year’s economic stimulus package as a down payment.
The new policy will allow buyers to benefit immediately from the financial assistance, HUD Secretary Shaun Donovan said in announcing the change. Procedurally, the FHA will convert the credit into cash by approving “bridge loans” to meet the down payment requirement. In a recent speech to industry executives attending a National Association of Realtors housing summit, Donovan termed the new initiative “a real win for everyone, helping buyers purchase homes and bolstering the sagging housing market.
Industry executives applauded the move. The National Association of Home Builders predicts that easing the down payment could stimulate more than 300,000 new and existing home sales by year-end, double the total the trade group had been predicting.
But critics warn that HUD’s policy moves dangerously in the direction of the lax lending standards that contributed to the housing market’s collapse. “All it succeeds in doing…is pulling sales forward and encouraging speculative buyers into the market,” Michael Widner, an analyst with Stifel, Nicolaus Equity research, told American Banker. “While that may look good for a quarter or two, we already know how it could potentially end.”
Other critics say the “flexible” use of the tax credit looks a lot like the no-down-payment loans that are over-represented in today’s foreclosure rates and have hints as well of the seller-assisted down-payment program that HUD blamed for producing outsized defaults on FHA loans. The effort to jump-start sales is short-sighted, Widner warned in the American Banker interview. “I don’t embrace the view that the urgency of excess inventory justifies a return to looser lending standards to encourage higher homeownership.”