by Peter Boutell, Santa Cruz Sentinel
A few weeks ago I wrote that today’s mortgage guidelines were more lenient and loan approvals were easier to come by than they were 25 years ago. However, today’s loan approvals are much more complicated. They are taking more time, requiring more documents, and require more explanations to borrowers.
Our government has taken over Fannie Mae and Freddie Mac and in an attempt to prevent another meltdown in the mortgage industry, has instituted a wave [as in tsunami] of regulations that we all must adhere to in order to remain in the mortgage business. These regulations have added an enormous amount of paperwork that must be provided by and produced by lenders and borrowers alike. The regulations were supposed to make it harder for unscrupulous lenders to take advantage of unsuspecting borrowers while at the same time make it harder for fraudulent borrowers to take advantage of lenders. These new rules were also designed to make comparison shopping easier so that borrowers could save money. Needless to say, the consequences of these strict guidelines have not produced the intended results.
Not surprisingly, one of the results of these guidelines is that mortgages are taking much longer to process than in the past because mortgage lenders are overwhelmed with meeting these requirements. The amount of paperwork now required to close a purchase or refinance loan is triple what we used to have to produce. The quality-control systems that we must have in place require verifying and re-verifying information received, which takes countless employee hours.
While there are always exceptions, the paperwork that must go into a borrower’s file has grown exponentially over the years. With tax returns, bank statements, appraisal, preliminary title report, etc. it is not uncommon to have a file that is 375 pages thick. We recently had a file that grew to 784 pages! These files take time to put together, time to review and time to approve. Once we have all the pages that will be required for a file, the file goes in line to be underwritten [we have heard that some banks are taking 15 or more days just in the underwriting queue]. Once approved by the underwriter, the file goes in line to have the loan documents prepared. The documents are then sent to the title company, where the borrowers sign everything [some 50-60 signatures required just on the loan documents] and then the documents are returned to the lender’s funding department where they are reviewed again and the last minute quality-control checks for employment, credit and bank accounts are conducted.
It is a small miracle if the mortgage process can be completed within a 30-45 day period. Some banks are taking 60 or more days to close. In the days of old we were able to complete this process in as few as 5-10 business days. If we lenders, Realtors, title and escrow people, etc. can all stay calm and support each other by setting appropriate expectations, we will have smoother and more timely escrows.
by MBA via Real EstateRama
The Mortgage Bankers Association (MBA) today announced it has completed the transition, announced in September, and will resume support for the Mortgage Industry Standards Maintenance Organization, Inc. (MISMO®). With the successful transition, MISMO will now focus efforts on regulatory implementation and advocating for broader adoption of data standards throughout the industry.
“MBA supports greater efficiency and lower costs throughout the industry by advocating for broad adoption of industry consensus standards developed by MISMO. We are actively engaging both regulators and industry in this effort,” said MBA President and CEO David H. Stevens. “MBA will also provide educational opportunities aimed at helping industry and government better understand and implement MISMO standards. Standardization and transparency are critical to the return of investor confidence and liquidity in the mortgage marketplace, and MISMO has a crucial role to play. I would recommend that MBA members become MISMO subscribers in order to help guide this effort.”
To assist with these efforts, MBA has hired Cindy Bojokles to be its Director of Industry Standards. In this role, Bojokles is responsible for supporting and advancing the activities of MISMO. Bojokles will work closely with industry executives to increase the standards available to the industry. Bojokles will also help government agencies understand the benefits of adopting the voluntary consensus standards developed by MISMO.
“Cindy has spent over 15 years working on data standards, data quality and business solutions for the mortgage industry. Her detailed knowledge of technology and business processes will prove invaluable to MBA and the mortgage industry as it continues to advance MISMO and industry standards,” said Stevens.
The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.
The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.
Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.
A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.
‘Change Their Votes’
“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”
The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.
The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort — and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011.
The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.
“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”
Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.
JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation.
Howard Opinsky, a spokesman for JPMorgan (JPM), declined to comment about Dimon’s statement or the company’s Fed borrowings. Jerry Dubrowski, a spokesman for Bank of America, also declined to comment.
The Fed has been lending money to banks through its so- called discount window since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.
“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”
The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should “lead to praise of the Fed, that they took this extraordinary step and they got it right,” says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland.
The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.
The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.
The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment.
The six — JPMorgan, Bank of America, Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley — accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and investment- services firms, the data show. By comparison, they had about half of the industry’s assets before the bailout, which lasted from August 2007 through April 2010. The daily debt figure excludes cash that banks passed along to money-market funds.
While the emergency response prevented financial collapse, the Fed shouldn’t have allowed conditions to get to that point, says Joshua Rosner, a banking analyst with Graham Fisher & Co. in New York who predicted problems from lax mortgage underwriting as far back as 2001. The Fed, the primary supervisor for large financial companies, should have been more vigilant as the housing bubble formed, and the scale of its lending shows the “supervision of the banks prior to the crisis was far worse than we had imagined,” Rosner says.
Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.”
On Jan. 14, 2009, six days before the company’s central bank loans peaked, the New York Fed gave CEO Vikram Pandit a report declaring Citigroup’s financial strength to be “superficial,” bolstered largely by its $45 billion of Treasury funds. The document was released in early 2011 by the Financial Crisis Inquiry Commission, a panel empowered by Congress to probe the causes of the crisis.
Andrea Priest, a spokeswoman for the New York Fed, declined to comment, as did Jon Diat, a spokesman for Citigroup.
“I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability,” says Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee.
Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.
“We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.
“We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”
Frank co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, billed as a fix for financial-industry excesses. Congress debated that legislation in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival.
It would have been “totally appropriate” to disclose the lending data by mid-2009, says David Jones, a former economist at the Federal Reserve Bank of New York who has written four books about the central bank.
“The Fed is the second-most-important appointed body in the U.S., next to the Supreme Court, and we’re dealing with a democracy,” Jones says. “Our representatives in Congress deserve to have this kind of information so they can oversee the Fed.”
The Dodd-Frank law required the Fed to release details of some emergency-lending programs in December 2010. It also mandated disclosure of discount-window borrowers after a two- year lag.
TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says.
“Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it,” Shaffer says.
Congress, at the urging of Bernanke and Paulson, created TARP in October 2008 after the bankruptcy of Lehman Brothers Holdings Inc. made it difficult for financial institutions to get loans. Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion.
Lawmakers knew none of this.
They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible.
Mark Lake, a spokesman for Morgan Stanley, declined to comment, as did spokesmen for Citigroup and Goldman Sachs.
Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.
Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard — the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.
If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks.
Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking.
“Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse,” says Dorgan, who retired in January.
Instead, the Fed and its secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble.
Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data.
For so few banks to hold so many assets is “un-American,” says Richard W. Fisher, president of the Federal Reserve Bank of Dallas. “All of these gargantuan institutions are too big to regulate. I’m in favor of breaking them up and slimming them down.”
Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker, according to data compiled by Bloomberg. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.
‘Wanted to Pretend’
“The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out,” says Anil Kashyap, a former Fed economist who’s now a professor of economics at the University of Chicago Booth School of Business. “They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous.”
Bank of America took over Merrill Lynch & Co. at the urging of then-Treasury Secretary Paulson after buying the biggest U.S. home lender, Countrywide Financial Corp. When the Merrill Lynch purchase was announced on Sept. 15, 2008, Bank of America had $14.4 billion in emergency Fed loans and Merrill Lynch had $8.1 billion. By the end of the month, Bank of America’s loans had reached $25 billion and Merrill Lynch’s had exceeded $60 billion, helping both firms keep the deal on track.
Wells Fargo bought Wachovia Corp., the fourth-largest U.S. bank by deposits before the 2008 acquisition. Because depositors were pulling their money from Wachovia, the Fed channeled $50 billion in secret loans to the Charlotte, North Carolina-based bank through two emergency-financing programs to prevent collapse before Wells Fargo could complete the purchase.
“These programs proved to be very successful at providing financial markets the additional liquidity and confidence they needed at a time of unprecedented uncertainty,” says Ancel Martinez, a spokesman for Wells Fargo.
JPMorgan absorbed the country’s largest savings and loan, Seattle-based Washington Mutual Inc., and investment bank Bear Stearns Cos. The New York Fed, then headed by Timothy F. Geithner, who’s now Treasury secretary, helped JPMorgan complete the Bear Stearns deal by providing $29 billion of financing, which was disclosed at the time. The Fed also supplied Bear Stearns with $30 billion of secret loans to keep the company from failing before the acquisition closed, central bank data show. The loans were made through a program set up to provide emergency funding to brokerage firms.
“Some might claim that the Fed was picking winners and losers, but what the Fed was doing was exercising its professional regulatory discretion,” says John Dearie, a former speechwriter at the New York Fed who’s now executive vice president for policy at the Financial Services Forum, a Washington-based group consisting of the CEOs of 20 of the world’s biggest financial firms. “The Fed clearly felt it had what it needed within the requirements of the law to continue to lend to Bear and Wachovia.”
The bill introduced by Brown and Kaufman in April 2010 would have mandated shrinking the six largest firms.
“When a few banks have advantages, the little guys get squeezed,” Brown says. “That, to me, is not what capitalism should be.”
Kaufman says he’s passionate about curbing too-big-to-fail banks because he fears another crisis.
‘Can We Survive?’
“The amount of pain that people, through no fault of their own, had to endure — and the prospect of putting them through it again — is appalling,” Kaufman says. “The public has no more appetite for bailouts. What would happen tomorrow if one of these big banks got in trouble? Can we survive that?”
Lobbying expenditures by the six banks that would have been affected by the legislation rose to $29.4 million in 2010 compared with $22.1 million in 2006, the last full year before credit markets seized up — a gain of 33 percent, according to OpenSecrets.org, a research group that tracks money in U.S. politics. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate, OpenSecrets.org reported.
Lobbyists argued the virtues of bigger banks. They’re more stable, better able to serve large companies and more competitive internationally, and breaking them up would cost jobs and cause “long-term damage to the U.S. economy,” according to a Nov. 13, 2009, letter to members of Congress from the FSF.
The group’s website cites Nobel Prize-winning economist Oliver E. Williamson, a professor emeritus at the University of California, Berkeley, for demonstrating the greater efficiency of large companies.
In an interview, Williamson says that the organization took his research out of context and that efficiency is only one factor in deciding whether to preserve too-big-to-fail banks.
“The banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process,” Williamson says. “The big banks have incentives to take risks they wouldn’t take if they didn’t have government support. It’s a serious burden on the rest of the economy.”
Dearie says his group didn’t mean to imply that Williamson endorsed big banks.
Top officials in President Barack Obama’s administration sided with the FSF in arguing against legislative curbs on the size of banks.
On May 4, 2010, Geithner visited Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission.
At the meeting with Kaufman, Geithner argued that the issue of limiting bank size was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman.
Anthony Coley, a spokesman for Geithner, declined to comment.
Lobbyists for the big banks made the winning case that forcing them to break up was “punishing success,” Brown says. Now that they can see how much the banks were borrowing from the Fed, senators might think differently, he says.
The Fed supported curbing too-big-to-fail banks, including giving regulators the power to close large financial firms and implementing tougher supervision for big banks, says Fed General Counsel Scott G. Alvarez. The Fed didn’t take a position on whether large banks should be dismantled before they get into trouble.
Dodd-Frank does provide a mechanism for regulators to break up the biggest banks. It established the Financial Stability Oversight Council that could order teetering banks to shut down in an orderly way. The council is headed by Geithner.
“Dodd-Frank does not solve the problem of too big to fail,” says Shelby, the Alabama Republican. “Moral hazard and taxpayer exposure still very much exist.”
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says banks “were either in bad shape or taking advantage of the Fed giving them a good deal. The former contradicts their public statements. The latter — getting loans at below-market rates during a financial crisis — is quite a gift.”
The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.
The Fed funds also benefited firms by allowing them to avoid selling assets to pay investors and depositors who pulled their money. So the assets stayed on the banks’ books, earning interest.
Banks report the difference between what they earn on loans and investments and their borrowing expenses. The figure, known as net interest margin, provides a clue to how much profit the firms turned on their Fed loans, the costs of which were included in those expenses. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during reporting periods in which they took emergency loans.
The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show.
The six biggest U.S. banks’ share of the estimated subsidy was $4.8 billion, or 23 percent of their combined net income during the time they were borrowing from the Fed. Citigroup would have taken in the most, with $1.8 billion.
“The net interest margin is an effective way of getting at the benefits that these large banks received from the Fed,” says Gerald A. Hanweck, a former Fed economist who’s now a finance professor at George Mason University in Fairfax, Virginia.
While the method isn’t perfect, it’s impossible to state the banks’ exact profits or savings from their Fed loans because the numbers aren’t disclosed and there isn’t enough publicly available data to figure it out.
Opinsky, the JPMorgan spokesman, says he doesn’t think the calculation is fair because “in all likelihood, such funds were likely invested in very short-term investments,” which typically bring lower returns.
Even without tapping the Fed, the banks get a subsidy by having standing access to the central bank’s money, says Viral Acharya, a New York University economics professor who has worked as an academic adviser to the New York Fed.
“Banks don’t give lines of credit to corporations for free,” he says. “Why should all these government guarantees and liquidity facilities be for free?”
In the September 2008 meeting at which Paulson and Bernanke briefed lawmakers on the need for TARP, Bernanke said that if nothing was done, “unemployment would rise — to 8 or 9 percent from the prevailing 6.1 percent,” Paulson wrote in “On the Brink” (Business Plus, 2010).
Occupy Wall Street
The U.S. jobless rate hasn’t dipped below 8.8 percent since March 2009, 3.6 million homes have been foreclosed since August 2007, according to data provider RealtyTrac Inc., and police have clashed with Occupy Wall Street protesters, who say government policies favor the wealthiest citizens, in New York, Boston, Seattle and Oakland, California.
The Tea Party, which supports a more limited role for government, has its roots in anger over the Wall Street bailouts, says Neil M. Barofsky, former TARP special inspector general and a Bloomberg Television contributing editor.
“The lack of transparency is not just frustrating; it really blocked accountability,” Barofsky says. “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”
In the end, Geithner had his way. The Brown-Kaufman proposal to limit the size of banks was defeated, 60 to 31. Bank supervisors meeting in Switzerland did mandate minimum reserves that institutions will have to hold, with higher levels for the world’s largest banks, including the six biggest in the U.S. Those rules can be changed by individual countries.
They take full effect in 2019.
Meanwhile, Kaufman says, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”
by Mark Fleming via American Banker
At the end of October, the Obama Administration announced changes to the Home Affordability Refinance Program that conceivably will make as many as 2 million more homeowners eligible for refinancing over the next two years. This will lower the default risk for the government sponsored entities and their ultimate backers, the American taxpayers, and should provide some level of economic stimulus.
But it will help housing only indirectly, because it doesn’t address the two strongest headwinds that are depressing housing prices: negative equity and shadow inventory. Addressing these challenges will require new thinking on the strategic use of principal reductions. Although the cost of this approach would be significant, it could be far less than the $699-billion price tag usually associated with negative equity and could save as many as three million more at-risk homeowners.
The drop in mortgage rates to record lows in 2011 has not resulted in the expected surge in refinances. The reasons for the lack of refinance activity include: the prevalence of negative equity; insufficient borrower credit quality or income; GSE hurdles, such as loan-level price adjustments, and investors’ unwillingness to give up their rights to require lenders to repurchase loans that did not meet GSE guidelines. Repurchase risk makes lenders less willing to take on more liability and due diligence risk (although Harp II attempts to address some of these concerns).
There already have been many government efforts to aid borrowers in refinancing, which include version one of Harp, Hope for Homeowners and the FHA Short Refinance program. They have not produced sufficient volume to dramatically influence housing market conditions because the eligibility criteria were too tight, the rates offered were too high, or borrowers had qualification constraints.
We have seen adjustments made to Harp, but only time will reveal the full economic stimulus effect of increased refinance activity.
It’s important to note that a bond investor’s interest income is a borrower’s interest expense. That means that refinancing millions of borrowers and offering them lower rates would reduce household mortgage expenses, but it would also reduce investors’ interest income by roughly the same proportion.
History, as a guide, shows that in prior large refinance waves, with only one exception, there was no real discernable impact on consumer spending. The only exception occurred in 2003, when the mortgage market experienced the largest refinance wave ever recorded. Even then, the impact on consumer spending was small and transitory, and the potential refinance wave this time would be smaller. In any case, refinancing existing mortgage balances does not address the fundamental issue of negative equity.
The large number of homes with negative equity is holding back purchase demand for homes by reducing household mobility and elevating the risk that seriously delinquent borrowers will move into foreclosure because they don’t have enough equity to refinance or sell their homes.
As of the third quarter, 22 percent of U.S. homes — nearly 11 million borrowers — were upside down. The average such borrower was upside down by $65,000 and aggregate negative equity was more than $699 billion. If negative equity diminishes, it will greatly aid the housing market recovery by unlocking pent-up demand and reducing foreclosure risk. As would be expected, re-default rates for modifications with principal reduction are much lower than other modification.
There are many concerns with principal reduction, but moral hazard and costs to banks and taxpayers are the two that stand out.
Moral hazard occurs when individuals behave differently when insulated from risk than they do when fully exposed. If servicers give principal reductions to borrowers who are delinquent and in a negative equity position, which insulates them against negative-equity risk, borrowers who are current may purposely become delinquent so that they can also receive a principal reduction.
However, there are many ways to deal successfully with moral hazard:
- Servicers can offer borrowers a principal reduction, but at some cost. This would be similar to a car insurance deductible and could be structured in different ways. For example, servicers could reduce principal in exchange for the borrower giving up a portion of future appreciation.
- A shared-appreciation mortgage that reduces principal could be taxed as a capital gain rather than as ordinary income as is the case today.
- Servicers could also change mortgage terms to include recourse in the event of a default, such as the right to non-housing assets in addition to foreclosing.
Basically, servicers could address the moral-hazard risk associated with principal reduction through appropriate loan terms.
The cost of principal reduction is another large hurdle. It’s certain that not all $699 billion dollars in negative equity needs to be forgiven. There are 6.3 million borrowers with first liens only who are current on their mortgage payments and underwater by an average of $52,000, representing $314 billion in total. Within that segment, servicers could target moderately upside down borrowers (110% to 150% LTV) who are most likely to respond to principal-reduction offers. That would help nearly 3 million borrowers (or nearly one third of all negative equity borrowers), at a cost of $118 billion. Although $118 billion is clearly not trivial, it is much more manageable than $699 billion.
Streamlined refinance plans will improve household monthly obligations but it remains to be seen if the will create meaningful economic stimulus. Plans to reduce principle are more likely to greatly aid the housing market recovery by unlocking pent-up demand and reducing foreclosure risk. It is important that these plans also have features that address the moral hazard risk. Targeting principle reductions as described above would aid the greatest number of borrowers for the least amount of money, reduce current and future distressed shadow inventory and put less downward pressure on prices today and in the future.
by Sarah Davidson via Mortgage Introducer
John Hindle, acting smaller firms manager at the FSA, said reporting suspicion of fraud was “highly valuable” even if brokers had little factual evidence.
He said: “We take all fraud seriously, soft or hard, and as such we would encourage brokers to be reporting all those circumstances.
“We as investigators at the FSA very rarely get handed a well-proven case. It hardly ever happens. Investigations take a huge amount of work and we tend to start with the suspicion – it’s that kind of intelligence that is highly valuable to us.”
And Tom Spender, head of retail enforcement at the FSA, added: “It’s all about building up an intelligence profile.
“You might not have the full answer or the full case but if three or four people raise suspicions about one person that is logged at lenders, networks and with us. It builds a critical mass of suspicion that might trigger an investigation.”
Spender added that it was also far better for brokers to “self-report” than to find themselves caught up in suspected fraud where they might have been aware of a problem.
He said: “It’s much better for a broker to self-report a problem rather than for a problem to be identified to us by a lender and then we go searching.
“A lot of cases don’t proceed to a formal enforcement path and one of the reasons we take into account before deciding where we put our scare enforcement resources is whether the broker finally clicked, realized their involvement and reported it. We really take that into account and it’s very much in the favor of the broker.”
Robert Sinclair, director at AMI, said the industry had failed to help brokers think if they come clean in this type of scenario they would be safe from the authorities.
He said: “It’s that horrible feeling if you’re the broker and you get the fourth application through and then suddenly think things don’t look right. Do I keep my mouth shut, not take any more but hope I’ll get away with it or do I blow the whistle? And where does that leave me?
“Brokers don’t feel comfortable that they would be safe in that situation.”
But Hindle said: “So long as due diligence is followed with integrity then you could feel comfortable that you were doing the right thing by blowing the whistle we would expect brokers to blow the whistle in that scenario.”
Meanwhile Rob Killeen, director at London-based broker Capital Fortune, said reporting suspicions about other introducers was imperative to deter fraudsters.
He said: “If people think there has to be firm black and white evidence against them before they even get reported to the FSA then that’s the tip of the iceberg and will leave 99% of people’s behavior unchanged.”
Killeen, who practiced as a barrister in London for 12 years prior to becoming a mortgage broker in 2005, said the reluctance to report suspected fraud reminded him of attitudes to domestic violence.
“In 2002 and 2003 the police wouldn’t make any arrests around domestic violence because if there was no firm evidence and she wasn’t black and blue then the police just weren’t interested.
“There was a huge campaign with lawyers that made sure police took those cases seriously. The result was police would get involved when there were just allegations that someone may be committing domestic violence behind closed doors.
“Mortgage fraud is very much a behind closed doors situation and brokers should be reporting sharp practices. Until we move away from that culture of acceptance, which I think we are but there’s a long way still to go, we’ll never eradicate fraud.”
WOOD FOR THE TREES
But Pat Bunton, director of operations and compliance at London & Country, raised concerns about the practicalities of reporting brokers without firm evidence.
He said: “If you are going to start saying this guy has done this wrong you need to be clear they have actually done something wrong.
“Otherwise we will just have chaos; if you suddenly ask brokers to report every suspicion they have it would be unstructured and you won’t see the wood for the trees.
“There also wouldn’t be enough resource to investigate all of those cases. But where you have clear evidence that something untoward has happened that certainly should be reported and the regulator should commit to investigating that as well.”
by Natalie Dolce via Globe St.
ANAHEIM, CA-The US economy is sluggish…GDP growth after the recession should be sustained 4% to 5% to compensate for the downfall, but it is at a subpar performance—at 1% to 2%. So said National Association of Realtors’ chief economist, Lawrence Yun at the NAR conference on Friday at the Anaheim Convention Center, an event that expected to draw approximately 18,000 realtors and guests. “The unemployment rate is still at 9% and if this current slow expansion were to persist at this rate, it would take 10 years to bring it to where it needs to be.”
Despite the high rate of unemployment, Yun did focuses on the positives, noting that “at least job creation is happening…though slowly.”
Corporate profits are record high, said Yun. “Not only a Disney, Microsoft or Apple-type company, but the financial industry has recovered nicely as well,” he said. There is plenty of cash within companies, he said, which is another improving factor, but the issue, he said, is that they aren’t spending their cash.
“Businesses have been collecting plenty of profit, but they are hesitant to spend,” he said. “The good news, is that because of the healthy cash situation of large businesses, I don’t see another US hitting another recession coming up in the next few years.”
It has never been a better time to borrow money and go out and spend it, Yun said, but companies aren’t borrowing. Another struggle for the US, according to the economist is that small businesses aren’t recovering. “Small businesses cannot go to Wall Street and borrow money, so they rely on their housing equity to start their small businesses but because of weak housing equity recovery, which is the source of funds for small business owners, small businesses will continue to struggle,” he said.
Other improving factors for the CRE world, according to Yun, include: no recession in sight despite shaky Europe; stock market recovery from 2008…including REIT; huge corporate cash reserves; expanding corporate cash reserves; expanding international trade; commercial prices bottomed and rising; international buyers taking advantage of currency; and inflation hedge.
Earlier in the day, during an opening session, NAR president Ron Phipps outlines obstacles and opportunities facing the real estate industry. “For the first time in generations, the American dream of homeownership is being threatened,” said the broker-president of Phipps Realty in Warwick, RI. “We need to keep housing first on the nation’s public policy agenda, because housing and home ownership issues affect all Americans.”
According to Phipps, “mortgage availability remains a real concern since the private market has yet to return. While the housing market is still in recovery, we firmly believe that lower loan limits will only further restrict the mortgage markets.”
NAR’s 2012 president, Moe Veissi, also shared his perspective and insights into some key issues facing the industry. “It’s a difficult time in many ways for real estate; some would go as far to say that homeownership itself is under attack.” With that said, he pointed out that challenging times often present opportunities.
Mortgage Group Will Honor Industry Trailblazers at the 2011 MPact Conference and Expo
The Five Star Institute, a mortgage industry group, announced today that it plans to honor several distinguished women in mortgage and the housing industry at the 2011 MPact Conference and Expo, held Dec. 4-6, 2011.
MPact will feature the honorees at the 2011 Top Women in the Mortgage and Housing Industry Banquet immediately before former U.S. Secretary of State Condoleezza Rice delivers her keynote address.
The Five Star Institute developed a list of several criteria to assess and determine final candidates for the banquet. The criteria included industry impact, "Big Picture" thinking, name brand equity and reputation, and a record of accomplishment with other companies.
The Five Star Institute is pleased to announce the following final honorees:
- Caren Jacobs Castle, President, United States Foreclosure Network
- Francene DePrez, CRP/SGMS, President, Fidelity Residential Solutions
- Colleen Hernandez, President and CEO, Homeownership Preservation Foundation
- Margaret M. Kelly, CEO, RE/MAX World Headquarters
- Christine Larsen, COO of Trust and Securities Processing Division, JPMorgan Chase
- Rebecca Mairone, National Mortgage Outreach Executive, Bank of America
- Roseanna McGill, Chairman, PrimeLending
- Frances Martinez Myers, President, Employee Transfer Corporation/ETCREO Management
- Deb Still, President and CEO, Pulte Mortgage
- Ivy Zelman, CEO, Zelman & Associates
"This select group of mortgage and housing industry leaders gives testimony to the strength of our democracy and exemplifies the importance of real leadership, above and beyond gender," says Ed Delgado, CEO of the Five Star Institute. "It is our great esteem and pleasure to recognize these trailblazers for their substantive and continuing contributions to our industry and markets at a time when we need strong leadership the most."
Additionally, the 2011 MPact Conference and Expo is focused on increasing the viability and success of mortgage industry professionals working in originations, servicing, data and analytics, and the secondary market.