The housing crisis, which was supposed to sort itself out over time, has lingered and deepened instead, spewing a continuing stream of foreclosures into already burgeoning inventories, depressing home prices and, in the view of many economists, impeding the economic recovery. That consensus view has led the Obama Administration and Congress to refocus attention on efforts to keep struggling homeowners in their homes and streamline the foreclosure process, hoping, at a minimum, keep an already grim situation from getting worse.
Administration officials reportedly are considering a number of options, including asking Fannie Mae and Freddie Mac relax the loan-to-value requirements that are preventing many under-water borrowers from refinancing into lower-rate mortgages that would ease their financial burden and reduce their foreclosure risks.
The Federal Housing Administration (FHA) recently announced one new initiative that would allow unemployed borrowers with FHA-insured loans to miss up to 12 months of loan payments without facing foreclosure while they look for work. Another new FHA program establishes a $1 billion fund to provide interest-free loans of up to $50,000 to help unemployed homeowners remain current on their mortgages.
Both the House and Senate are also considering measures aimed at reducing foreclosures. In the House, Rep. March Kaptur (D-OH) is sponsoring a resolution urging President Obama to declare “a national residential mortgage foreclosure emergency” imposing a temporary moratorium on foreclosure actions. A Senate bill, co-sponsored by Sens. Jeff Merkley (D-OR) and Olympia Snowe (R-ME), calls for a number of mortgage servicing reforms, including an independent third-party review before lenders can foreclose on homeowners.
“We won’t get the economy moving again until we deal with the foreclosure crisis,” Merkley said in introducing the measure as an amendment to a broader economic development bill.
Banking industry executives and many economists oppose both the House and Senate measures, arguing that they delay foreclosures that will occur eventually, thereby prolonging the housing market downturn. In a letter to Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY), the American Bankers Association argues:
“The on-going price declines in the housing market, foreclosures relating to job losses, and other impacts of the recent recession are devastating to borrowers and lenders alike. This legislation, however, will only exacerbate an already difficult situation. Delaying legitimate foreclosures and increasing costs associated with them will only prolong the pain of the current situation.”
Industry executives are backing another measure, sponsored in the House by Rep. Bill Posen (R-FL), that would allow lenders to count modified loans on their books as assets rather than liabilities. Under this measure, a loan would be considered to be “accruing” as long as it is current and the borrower has not missed a payment in the preceding six months.
Industry executives say the measure would address the artificial constraints on lending created by overly restrictive examination standards. But banking industry regulators say the bill simply mirrors existing examination standards, but goes beyond them, allowing lenders to ignore problems of which they are aware and understating both their risks and their capital requirements.
“Institutions could disregard currently available borrower financial information indicating that the borrower lacks the ability to repay the principal and interest on the loan going forward,” George French, deputy director of the Federal Deposit Insurance Corporation’s (FDIC’s) risk management division, testified at a hearing on the measure. “This in turn would enable institutions to include accrued but uncollected interest income in regulatory capital, when its collection in full is not expected,” he explained.
Simon Johnson, a professor of entrepreneurship at the Massachusetts Institute of Technology, agreed. The regulatory forbearance the bill mandates has been applied in the past, he told legislators at the House hearing. The result: The savings and loan crisis of the late 1980s that decimated the S&L industry and resulted in a $150 billion clean-up.
Policy makers should be requiring financial institutions to build their capital cushions, Johnson argued, not allowing them to pretend they have more capital than they do.
“GIVE ME THE BARE NECESSITIES…”
Americans are cutting back, tightening up and doing without in the face of the continuing economic downturn, denying themselves luxuries and limiting expenditures to life’s essentials. This is not surprising. It’s the way rational consumers usually behave when the outlook is uncertain and their finances are constrained. In that respect, consumer behavior in this downturn is no different than it has been in the past, with one exception: The definition of “essentials” seems to have changed. To the traditional list -- food, shelter, clothing, and the like – many consumers have added cell phones and Internet access.
In a recent Financial Literacy Opinion Index poll sponsored by the National Foundation for Credit Counseling, consumers had no problem eliminating premium coffee, on-line shopping and eating out from their budgets. Only 1 percent of respondents listed those items as the “last thing” they would sacrifice in the interest of austerity and only 8 percent balked at eliminating cable TV. But more than half (53 percent) said they couldn’t do without their cell phones and 32 percent identified Internet access as the service they would be least likely to eliminate.
"People have chosen technology over eating, drinking and shopping, the preferred pastimes of just a few short years ago," Gail Cunningham, a spokeswoman for the NFCC, told reporters. "Staying connected is apparently considered the new must-have."
The results aren’t surprising, Cunningham noted. Computer use “has become ingrained” in the lives of many consumers, and many have eliminated their land lines, relying entirely on cell phones. Cunningham described the poll results overall as “encouraging,” indicating, she said, that consumers “appear to have thought through their cost-cutting decisions and made wide choices. "This level of awareness will not only help people ride out the difficult economic times they're currently experiencing, but result in a more stable financial future," she predicted.
FILLING A GAP
Credit unions have been increasing their commercial lending activity slowly but steadily for years. For the most part, that trend has remained under the radar – until recently. The decline in bank lending to small businesses has highlighted the extent to which credit unions are filling that void. USA Today is the latest media source to spotlight the development. A recent article notes: “As banks have been slow to start lending again, credit unions have gotten a head start.”
The article cites Credit Union National Association (CUNA) statistics indicating that credit union business lending increased by 3 percent over the past year while bank lending in the area declined by 5 percent.
The article describes the experience of one borrower – the owner of a medical supply business in Ohio — who turned to credit unions when unable to obtain the line of credit he needed from a bank.
The article also notes the continuing effort by credit unions to increase the current 12.25 percent of assets cap on the business loans they can originate, and the continuing banking industry opposition to that effort. Pending measures that would double the cap to 27.5 percent of assets “would allow a credit union to look and act just like a bank, without the obligation to pay taxes or have bank-like regulatory requirements applied to them," Stephen Wilson chairman of the American Bankers Association (ABA), testified at a recent hearing on the measure.
Credit union executives counter that they are filling a void the bankers have created (by reducing their lending), meeting a need for small business capital that would otherwise go unmet.
FEEL GOOD DEBT
This seems a bit counterintuitive, but a recent study has identified a direct link between the debt levels of young adults and their self-esteem: The higher their debt load, the more confident these consumers feel.
Researchers at Ohio State University analyzed how young adults between the ages of 18 and 27 felt about student loans and total credit card debt, focusing specifically on how their debt burden increased or reduced their sense of being in control of their life and their confidence about achieving their life goals. Their conclusion: “Debt can be a positive resource for young adults, but it comes with significant dangers,” according to Rachel Dwyer, an assistant professor of sociology at Ohio State and the study’s lead author.
The researchers assumed going into the study that young adults would view student loans positively – as an investment in their future — but view credit card debt more negatively. In fact, the more than 3,000 young adults interviewed felt positively about both kinds of debt.
It is possible, Dwyer suggested, that some study participants used credit cards to pay for educational expenses; but it is also possible, she said, that they feel good about credit card debt because “it allows them to buy the things they want without having to delay gratification.”
The study found that feelings about debt vary depending on income level, with the lowest income consumers getting the biggest confidence boost, from both student loans and credit card debt. Student loan debt had little impact on middle-income respondents but they did derive positive feelings from credit card debt. The most affluent got no boost at all from debt in either category.
“The groups that most need the debt – the middle and lower classes – get the most benefits to their self-concept,” Dwyer observed, ‘but they may also face the greatest difficulties in paying off what they owe.”
Age also appears to affect attitudes toward debt with the positive feelings about it declining as respondents get older and find that repaying debt is not as easy as they expected.
“We found that the positive effects [of debt] may wear off over time,” Dwyer said, “but they still have to pay the bills. The question is whether they will be able to.”
BACK TO THE FUTURE
Record low interest rates are encouraging some homeowners to convert their 30-year mortgages into shorter-term (15-years or less) obligations while leading other borrowers to look more favorably at adjustable rate mortgages that many had come to view as high-risk and partly responsible for the financial meltdown.
Starting rates for 5-1 ARMs (fixed for five years and adjusting annually after) at around 3.25 percent, apparently, are overcoming those fears. Approximately 12 percent of the mortgages originated in the first quarter of this year were ARMs compared with 9 percent in the fourth quarter of 2010, according to data compiled by Inside Mortgage Finance. That is well below the 45 percent ARM market share at the height of the housing boom, but the first significant uptick since the market crashed, suggesting that the perceived risk of these loans is diminishing for both borrowers and lenders.
Industry executives say ARMs were painted unfairly and incorrectly as high-risk and inappropriate for all borrowers. “By and large, the ARM market was polluted by the abuses that went on with subprime mortgages,” Guy Cecala, publisher of Inside Mortgage Finance, told The New York Times. The adjustable loans lenders are originating today, he noted, are going to borrowers with solid credit histories who understand and are able to manage the terms. That, Cecala said, is why “both borrowers and lenders are getting more comfortable with ARMs again.”
The choice of 15-year over 30-year terms is even more clear-cut: Lenders prefer shorter-term liabilities and borrowers want to reduce both the term and cost of their debt. But the preference for shorter-term mortgages also reflects a shift in attitudes toward both homeownership and debt, some analysts believe.
Many owners have concluded they won’t be able to sell their homes in the foreseeable future, and so are looking to minimize the cost of owning it, analysts suggest. And consumers generally are going “back to the future” – viewing debt as the negative it used to be rather than the intelligent financial management tool it became during the housing bubble.
Borrowers increasingly are viewing a home mortgage as their parents and grandparents did, one mortgage broker told American Banker. “You pay it off and you try to get back to being debt free.”