Polite requests, urgent pleas, public shame and threats haven’t worked, so the Obama Administration has pulled out heavy — or at least heavier —artillery in its efforts to boost the success rate of the beleaguered Home Affordable Modification Program (HAMP).
It is withholding incentive payments to three leading lenders found to need “substantial improvement” in their handling of loan modification requests. Wells Fargo, Bank of America and JP Morgan all scored poorly on the Treasury Department’s performance matrix, which the department made public for the first time.
“The assessments are intended to be another tool to promote servicers to correct identified deficiencies so that they more effectively assist struggling homeowners," Tim Massad, acting Treasury Assistant Secretary for Financial Stability, told reporters.
The three banks collected a combined total of about $24 million in incentive payments in May but will not collect anything for modifications completed since until they address the deficiencies the Treasury review identified, primarily: Errors in determining borrower eligibility for assistance, failure to communicate effectively (or at all) with eligible borrowers and errors in calculating the incentive payments they were owed.
Wells Fargo and JP Morgan have both objected to the criticism of their modification efforts and Wells Fargo has said it will formally challenge the Treasury Department report.
"It paints an unfairly negative picture of our modification efforts and contradicts previous written assessments shared with us by the Treasury," a bank press statement asserted. "The report reviews activities that date back a year or more and in no way reflects the improvements Wells Fargo has made in our processes and the work we have done to help homeowners." The information used in the performance review “paints an unfairly negative picture of our modification efforts and contradicts previous written assessments shared with us by the Treasury,” the bank asserted.
Bank of America, on the other hand, which got the worst review, acknowledged the problems in key areas, “particularly those affecting the customer service experience.” But the bank also emphasized the “great progress” made toward correcting them. “In the first quarter, Bank of America was responsible for one of every four modifications completed under HAMP, [and] we believe future reviews will confirm that progress," a bank press statement asserted.
Treasury’s performance review underscores the criticism of HAMP that has surrounded the program since its inception, growing louder, angrier and more insistent, as foreclosures have far outstripped the modification efforts that were supposed to avoid them.
According to the Treasury report, HAMP participants approved only 20,034 trial modifications in April, the smallest number to date, while the number of modifications converted to permanent status declined to less than 30,000 for the month.
A report by the Government Accountability Office (GAO) also found fault with HAMP, citing the problems experienced by housing counselors working with borrowers seeing modifications. More than 76 percent of the counselors responding to the GAO survey described their experience as “negative” or “very negative” primarily because of long delays in reviewing modification requests, poor communication with borrowers, and lost paperwork, among other problems.
UNITED FRONT
Consumer advocates and financial industry executives don’t often agree on much, but they are arguing with close to one voice that the qualified residential mortgage (QRM) standards regulators have proposed as part of a legislatively mandated “risk retention” requirement will harm consumers and impede the housing market recovery.
Responding indirectly to the growing criticism of the proposed rules, and directly to separate letters signed by lawmakers (in a rare nonpartisan gesture) and by a coalition of industry and consumer groups, regulators recently agreed to extend the comment period on the rules, scheduled originally to end June, to August 1 “to allow interested persons more time to analyze the issues and prepare their comments."
The regulations were mandated by a provision in the Dodd-Frank financial reform legislation, requiring lenders to retain 5 percent of the risk on mortgage loans they originate and sell to investors, but directing financial industry regulators to define safe loans that would not be subject to the “skin-in-the-game” requirement. The standards the regulators proposed would require a minimum down payment of 20 percent and bar a number of ‘high-risk” loan characteristics, including balloon payments and negative amortization, among others.
It is the down payment requirement that consumer advocates and industry executives find most objectionable. Regulators argue that these ultra-conservative underwriting standards are needed to prevent a recurrence of the financial meltdown that was triggered in part by overly lax lending standards. But critics say the rules go too far and will deny loans to prospective borrowers who could safely manage mortgage payments but can’t amass a 20 percent down payment.
"If this rule goes through as it stands, the demographic of borrowers who get (favorable rates) will be white and wealthy," David Stevens, chief executive officer of the Mortgage Bankers Association and former commissioner of the Federal Housing Administration, told USA Today. "African-American, Latino and first-time home buyers will be charged higher prices," he warned.
A study by Lending Tree estimated that nearly 80 percent of the loans originated between 1997 and 2009 wouldn’t have met the proposed QRM standards.
Another study by the National Community Reinvestment Coalition (NCRFC), a consumer advocacy group, found little relationship between down payment amounts and default risks. In that analysis of more than 1 million loans, default rates for borrowers making minimal (3 percent) down payments were 0.26 percent compared with a 0.14 percent rate for borrowers putting 20 percent down.
“It’s still a very acceptable level of default,” NCRC president John Taylor told USA Today.
Concern about the QRM standards is growing and the pushback is becoming stronger. The three senators who drafted the risk retention requirement in the financial reform legislation say regulators misinterpreted the directive and have asked them to scale back the regulation.
"I am thoroughly disappointed that the regulators did not follow our legislative intent and instead are promulgating a rule that would restrict access to affordable mortgages in this country," Sen. John Isakson (R-GA) Isakson, one of the authors of the provision said in a letter to the regulators. "We don’t have a down payment problem in this country, but rather an underwriting problem. I strongly urge regulators to rework their overly rigid down payment requirement for QRM. If left as is, it would make recovery in the housing market almost impossible," he added. Sen. Mary Landrieu (D-LA) and Sen. Kay Hagan (D-NC), co-authors of the provision, also signed the letter.
In the House, nearly 300 representatives signed a letter asking regulators to reduce the 20 percent down payment requirement. Obama Administration officials have signaled that they, too, have become concerned about the unintended consequences of the QRM regulations.
Speaking recently at an industry conference, Jeffrey Goldstein, a Treasury Department under-secretary for domestic finance, told industry executives, “We are seriously considering feedback and are committed to getting this rule right….”
WHAT’S WRONG WITH THIS PICTURE?
Phil Angelides, chairman of the Financial Crisis Inquiry Commission, poses that question, pointedly, in an op-ed article published in the Washington Post. His panel blamed Wall Street largely for the problems that wrecked the housing market and nearly destroyed the nation’s financial infrastructure – a view shared at least in part by most of the analysts who have studied the causes of the financial collapse.
But three years after the fact, Angelides notes, Wall Street is flourishing while Main Street still flounders. The problem, he suggests, is not the failure of those involved to learn from history but their ability to rewrite it.
Angelides skewers in equal measure:
- Rep. Paul Ryan (R-WI), chairman of the House Budget Committee, for “disregarding the reality that two-thirds of the deficit increase is directly attributable to the economic downturn and bipartisan fiscal measures adopted to bolster the economy.”
- Former Federal Reserve Chairman Alan Greenspan for forgetting his admission earlier this year that deregulation was partly to blame for the meltdown and now condemning “the current ‘anything goes’ regulatory ethos” that seeks to strengthen regulatory oversight.
- “Most” Congressional Republicans for “ignor[ing] the evidence of pervasive excess that wrecked our financial markets and attempt[ing] to cut funding for the regulators charged with curbing it.”
“Does historical accuracy matter?” Angelides asks. “You bet it does.” Ignoring the true causes of the financial crisis will prevent policymakers from implementing the measures needed to prevent another crisis in the future, he warns, and “will divert us from the urgent task of putting people back to work and creating real wealth for America’s future…. We can still get history and the future right,” Angelides concludes, “but time is running out.”
OPT-IN QUESTIONS
Bankers have been touting the high “opt-in” rate for consumers, who are deciding they want to retain overdraft protection for their checking accounts. But consumer advocates say the statistics reflect “aggressive and misleading” advertising that is persuading many consumers to accept a service they don’t want and often don’t understand.
A Federal Reserve rule adopted last year requires financial institutions to obtain permission from consumers instead of charging overdraft fees automatically – a common industry practice in the past.
Since the new rules took effect, financial institutions, facing the loss of millions of dollars in revenue from overdraft fees, have been promoting overdraft protection in campaigns encouraging customers to opt-in and accept the coverage.
There is some evidence that, for some banks at least, these efforts are working. A recent study by the Pew Health Group estimates that consumers will spend nearly $40 billion this year on overdraft penalty fees compared with $18.6 billion in 2000.
But another study by the Center for Responsible Lending (CRL) found that the opt-in rate for consumers is not as high as industry executives have claimed –33 percent rather than the 46 percent cited in an American Bankers Association study. And many of the consumers who opted in did so based on “deceptive” information about the nature of the protection and its cost, CRL contends.
According to the study, of the consumers who opted in, 60 percent said they did so to avoid a fee if their debit card was declined (in fact, CRL notes, there is no fee if a debit charge is declined) and 64 percent cited a desire to avoid bouncing paper checks, which overdraft protection won’t prevent. Nearly half of those who opted in said they did so mainly so their bank would stop bombarding them with marketing material urging them to take that step.
“These findings strongly suggest that an opt-in rate of 33 percent exaggerates interest in high-cost overdraft coverage for debit card transactions,” the CRL study concludes. “Rather, the banks succeeded in confusing and wearing down some of their customers to the point that they accepted a product that would ultimately cost them unnecessary, exorbitant fees.”
Some industry executives have disputed the CRL’s opt-in statistics but Bank of America, which eliminated its overdraft fees on debit cards last year, isn’t among them. The bank responded to consumers who said they’d rather have debit charges declined than pay a fee to cover them, Andrew Plepler, consumer policy executive for the bank, told USA Today. “It’s very much considered a punitive fee that customers do not like,” he noted.
TAKE THIS JOB AND….
With the national unemployment rate still topping 9 percent and the media filled with articles about the uncertain economic outlook, you might think workers who have jobs would be loath to leave them. Apparently not. About one-third of American workers are thinking seriously about leaving their current employers, a recent survey by Mercer LLC, a human resources consultant, found. That’s up from 32 percent who were entertaining similar thoughts about seeking opportunities elsewhere.
Younger employees are more restless than older ones, with 44 percent of those 24 or younger considering leaving their jobs compared with 40 percent for those between 25 and 34. But the survey found evidence of growing dissatisfaction and disaffection among workers of all ages.
More than 20 percent said that while they aren’t thinking about leaving their current jobs, they don’t feel “engaged” by them and they are becoming less satisfied with their compensation and their benefits. Only 53 percent of respondents to this survey said they were happy with their salary, down from 58 percent in 2005; and 68 percent rated their benefits as “good” or “very good” compared with 76 percent in the earlier survey.
“They feel less attached to the organization emotionally and psychologically, and they don’t necessarily believe that the organization they work for has their best interests in mind,” Jason Jeffay, a senior partner at Mercer, observed.
It is the poor housing market more than anything else, that is keeping disaffected workers tethered to jobs they don’t like, Jeffay told Bloomberg News. “Their ability to relocate, which has traditionally been a strength of the American labor market, is no longer a factor,” he noted.
