Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

Read More

The Treasury Department’s first published review of the Home Affordable Modification Program (HAMP) results to date did nothing to refute complaints that the centerpiece of the Obama Administration’s foreclosure prevention efforts is falling well short of expectations.

The 38 lenders and servicers participating in HAMP have requested financial information from nearly 1.4 million delinquent borrowers facing foreclosure, offered three-month “trial” modifications the government program requires to 406,542 of them, and initiated trial modifications for only 235,427 borrowers. That’s hardly a drop in a foreclosure bucket that added 360,000 filings in July — a 32 percent increase over the same month a year ago — as 1 in every 350 homes received at least one foreclosure-related notice during the month.

The gap between institutions at the top of the list (reporting many modifications) and those at the bottom (reporting few or none) was wide. Among the nation’s largest institutions, J.P. Morgan Chase had the best record to date, offering trial plans to 30 percent of its 394,075 eligible borrowers (delinquent by 60 days or more) and starting modification plans for 20 percent of them. Bank of America, by contrast, has offered modification trials to only 15 percent of its 800,000 eligible borrowers and has begun modification trials for only 27,985 – 4 percent of the bank’s eligible pool.

Release of the first HAMP report card followed a high-level meeting Treasury Secretary Tim Geithner demanded with HAMP participants in July, at which he made it clear that Administration officials are not happy with their modification efforts. The HAMP report, issued a few days later, put a statistical exclamation point on that assessment.

The Administration is “disappointed” in the results of this review, Michael Barr, Treasury Assistant Secretary for Financial Institutions, told CNN-Money. “We think [participants] could have ramped up better, faster, more consistently, and done a better job bringing stabilization to the mortgage markets and the economy. They need to reach the borrowers.” he insisted. “For some, that means better training. For some that means ramping up capacity. For some, that means treating people better in their call centers. But the bottom line for us,” Barr said, “is we expect [HAMP participants] to do more.”

In their defense, industry executives note the difficulty of gearing up quickly for a labor-intensive program that requires trained personnel, staffing levels and processing systems most did not have in place and have had to create on the fly, while coping with a huge volume of modification requests. While acknowledging the need to do better and emphasizing the progress they are making, HAMP participants say the program’s design is partly responsible for the slow modification pace. To address that problem, industry executives are pressuring the Treasury Department to ease up on some of HAMP’s income verification standards so they can streamline the review and approval process.

Not everyone thinks that’s a good idea. “The goal is to get as many people in the program as quickly as possible,” Tom Booke, senior vice president at First American Corporation, agreed. But the challenge, he told American Banker, is accomplishing that goal without introducing the verification shortcuts and underwriting deficiencies that got many lenders in trouble to begin with. “If you are going to reduce so many other requirements associated with getting a workout and base it entirely on a statement of income, you want to go deeper and make sure the income is accurate,” he argued.

Inadequate underwriting, Brooke and others warn, will ensure that the borrowers rescued by modifications today will default again in the future. Modifying loans rapidly is less important, these industry executives argue, than modifying them appropriately.

FRAUD IN REVERSE

High costs, inadequate planning, and unrecognized risks aren’t the only problems surrounding reverse mortgages; you can now add outright fraud to that list. Driven by the economic downturn and an expansion of HUD’s FHA-insured reverse mortgage program, originations of those loans have increased steadily over the past year, and incidents of fraud have increased as well. The Wall Street Journal reported recently that HUD has opened investigations in 29 cases of suspected fraud involving reverse mortgages so far this year compared with only two the year before. A HUD official told a Congressional committee a few weeks ago that pending reverse mortgage investigations “involve hundreds of properties,” according to the WSJ report.

Law enforcement officials are concerned not just because of the upward trend in reverse mortgage fraud, but also because the crimes are not committed only by family members or close acquaintances of the victims, as has been the case in the past; increasingly, third parties – mainly real estate industry professionals – are behind reverse mortgage scams.

The Journal article highlighted the plight of a retired auto mechanic who used a reverse mortgage to pay off the first mortgage on his home – or so he thought. It turned out that the title company handling the transaction pocketed the money instead of paying off the loan. The company reportedly used the same scheme to steal more than $5 million from 50 reverse mortgage borrowers. In other cases reported by the Journal, speculators have purchased distressed properties at discounted prices and sold them, using inflated appraisals, to senior citizens. The seniors, who were offered the homes with no down payment requirement, then obtained reverse mortgages, funneling some or all of the loan proceeds to the speculators.

Although FHA officials dismiss reports of widespread reverse mortgage fraud as “unsubstantiated,” HUD investigators say the increase is real and worrisome. Of particular concern is the temporary increase Congress approved this year in maximum reverse mortgage allowed under the FHA program. Testifying at a Congressional hearing, Anthony Medici, a special agent in HUD’s Office of Inspector General, said the new limit — $625,000 vs. $417,000 — makes reverse mortgages “more lucrative for misdeeds.”

CONFLICTING LIENS

While lenders and loan servicers are blaming bureaucratic paperwork, in part, for the unimpressive modification results to date (see related item) financial industry regulators have targeted second liens in their effort to eliminate modification impediments.

The Federal Financial Institutions Examination Council issued guidance recently directing lenders to avoid potential conflicts of interest that arise when they are servicing first and second liens on the same loan. In those situations, the guidance says, servicers must base their modification decision on the benefits for the first lien holders only; the interests of the second lien holders “cannot be a consideration.”

Servicers should modify a loan if modification “would produce a greater anticipated recovery to the first lien-owners/investors than not modifying the loan,” the guidance says, cautioning, “Failure to modify may be a breach of the servicers’ obligation” to investors. Servicers responsible for a second lien, similarly, have to put the interests of those investors first, notwithstanding the impact modification will have on the first lien, the guidance notes.

Separately, the Federal Deposit Insurance Corporation (FDIC) has addressed complaints that some lenders are blocking modification by refusing to acknowledge losses on over-valued second liens.

“Failure to timely recognize estimated credit losses could delay appropriate loss mitigation activity, such as restructuring junior liens to more affordable payments or reducing principal on such loans to facilitate refinancing,” the FDIC’s August 3rd letter says.

Steve Fritts, associate director of supervision and consumer protection for the agency, acknowledged that the letter is related to efforts to boost loan modifications. “That is definitely part of it,” he told American Banker. “Certainly our goal is to try to get mortgages, whether firsts or seconds, lined up with the economic reality, and to the extent that we can keep homeowners in their homes, that is going to be the best outcome for the lender.”

The FDIC letter to lenders also responds, at least indirectly, to Congressional pressure on industry regulators and the Obama Administration to improve foreclosure prevention efforts. Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee, and Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, complained specifically about over-valued second liens in a July 10th letter to bank regulators. “It has become clear that one of the most significant impediments to the success of Hope for Homeowners (a Congressionally-designed foreclosure prevention program) is the unwillingness of subordinate lien holders to extinguish their liens as required for participation in this program, even in return for offers of reasonable compensation. This is true,” the legislators wrote, “despite the fact that these subordinated liens may have minimal economic value.”

This behavior is a concern not only because it impedes modifications, the letter says, but because it produces skewed reserve requirements for lenders. “Inadequate reserving would also overstate the capital position of these instructions,” Dodd and Frank warned, “at a time when an accurate picture of capital adequacy of the banking system is crucial.”

ARBITRATION PRESSURE

An out-of-court settlement between the Minnesota attorney general and a national arbitration company has roiled the arbitration industry and appears to be turning a standard banking industry practice on its head. At issue: The mandatory arbitration provisions requiring consumers to mediate rather than litigate disputes involving credit cards, deposit accounts, and automobile loans, among other bank services and products.

The agreement came in a suit Minnesota Attorney General Lori Swanson filed against the National Arbitration Forum (NAF), accusing the company of misleading consumers by failing to disclose its ties to debt collectors (specifically, its ownership interest in a hedge fund that owns a debt collection agency), while holding itself out as a neutral mediator of disputes between those entities and consumers. NAF the nation’s second-largest arbitration company, agreed almost immediately to stop accepting new consumer debt cases. The American Arbitration Association, another major player in the mediation arena, followed suit, announcing that it, too, was at least temporarily suspending its consumer mediation activity.

These announcements triggered something of a domino effect, as Bank of America announced that it would no longer include mandatory arbitration provisions in contracts for consumer credit cards, deposit accounts, automobile, boat and recreational vehicle loans, and several other large banks announced that they were reevaluating their policies.

Congress is currently considering legislation that would ban mandatory arbitration requirements in credit card contracts. Separately, the legislation the Obama Administration has proposed establishing a consumer financial protection agency directs that new entity “to determine to what extent and in what contexts [arbitration requirements] provide for adjudication and effective redress” for consumers.

Some courts also have not looked kindly on consumer arbitration requirements. In one recent case, a California Appeals Court refused to enforce a mandatory arbitration clause dealing with the fees for early termination of a cell phone contract, finding the language in this Cingular Wireless agreement to be “unconscionable and unenforceable.” The Supreme Court refused to hear Cingular’s appeal.

Indications that legal as well as popular opinion may be turning against mandatory arbitration please consumer groups but bring warnings from industry executives, who say the elimination of arbitration requirements would be as much of a loss for consumers as for businesses, depriving them of an expedient and cost-effective alternative to litigation. Consumer advocates counter that consumers, in fact, are not well-served by a mediation process that almost always favors financial institutions.

Somewhere between those extremes you will find Andrew Sandler, co-chairman of the law firm Buckley Sandler. Although he represents banks and credit card issuers, Sandler acknowledges that the arbitration process is flawed. “Clearly, there has been significant dissatisfaction with the way it has been working among those who represent and are concerned with consumer interests,” he told American Banker. But the solution, Sandler suggested, is to improve the system, not to eliminate it. “There is a pressing need to develop an arbitration-based dispute resolution mechanism that has credibility with all parties.” 

RESPA GUIDANCE

Real estate and financial industry trade groups haven’t given up on delaying (or deep-sixing) the Department of Housing and Urban Development’s (HUD’s) revised RESPA rules, scheduled to take effect January 1 of next year, notwithstanding an adverse court decision and HUD’s apparent determination to proceed despite the continued opposition.

The court setback came in a suit filed by the National Association of Mortgage Brokers, contending that the new rules were “arbitrary and capricious” and should be withdrawn, because HUD had not followed the administrative procedures for promulgating new rules. The court ruled otherwise and refused to order HUD to start the rule-drafting process from the beginning, as the NAMB had requested.

NAMB and other industry trade groups have asked HUD to withdraw its new rules and participate in a joint rulemaking process with the Federal Reserve Board, to make sure that RESPA’s disclosure requirements are consistent with the revised Truth-in-Lending-Act disclosure rules the Fed is proposing. The trade groups have also endorsed a provision in the Mortgage Reform and Anti-Predatory Lending Act, approved by the House but not yet by the Senate, that would mandate that joint rulemaking exercise.

But absent a direct order from Congress or a court to do otherwise, it appears that HUD intends to implement the new RESPA framework, as planned, next year. With implementation clearly in mind, the agency recently published a list of frequently asked questions, compiled from questions the agency has received since publishing the new RESPA rules. Among the major points:

  • The only fee loan originators can collect before issuing a GFE is an amount equal to the cost of obtaining a credit report. Originators cannot charge fees for additional origination services until after the applicant receives the GFE and indicates an intention to proceed with the loan.
  • A GFE expires if the borrowers does not express an intention to continue with the application within 10 days after receiving the disclosure form “or such longer time period specified by the loan originator.”
  • Originators who allow borrowers to shop for third-party settlement services must provide a list of service providers simultaneously with the GFE but on a separate piece of paper.

Borrowers are not required to select their providers from that list, but if they do, the provider’s fees are covered by the “tolerance” limiting the amount by which the closing costs may exceed the estimate. If borrowers select a provider not on the originator’s list, that provider’s fees are subject to the GFE tolerance.

“There is an exception to the strict limits on altering the GFE terms for loans on new construction. When the settlement is likely to occur more than 60 calendar days after the GFE is provided, originators may include in that form “a clear and conspicuous disclosure” stating that they may issue a revised GFE any time until 60 calendar days before the losing.

Originators are allowed to estimate average charges for third party settlement services that are not based on the property value or the loan amount. The rules specifically preclude the use of averages for estimates of transfer taxes, interest charges, escrow reserves and insurance of all kinds. However, this provision of ERSPA does not preempt state law. If a state bars average charges in the GFE calculation, the provider can’t use them.

Separate guidance HUD has published for consumers emphasizes that the RESPA rules do not allow them to sue if the closing costs exceed the allowed tolerance. The guidance for lenders explains that HUD “recommends” that lenders cure a tolerance violation discovered at the closing, the rules do not require them to do so. Lenders have 30 calendar days after the closing to cure the violation, and the settlement agent has the same time to issue a revised settlement statement to all parties.