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?

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Poor underwriting left lenders and investors with untold millions of dollars in failed loans; now poor documentation is making it difficult for them to foreclose. That problem, long simmering in the background, exploded into view late last month when Ally Financial (a reincarnated GMAC Mortgage, in which the U.S. government now owns a majority share) announced that it was suspending foreclosure sales and temporarily halting the evictions of delinquent borrowers in 23 states, pending a review of the company’s foreclosure procedures.

Ally officials haven’t provided many details, but press reports have pinpointed the affidavit of a former GMAC employee, who admitted that he had routinely approved thousands of foreclosures without verifying the accuracy of the paperwork.

GMAC’s experience “underlies a much bigger problem” confronting the entire mortgage industry, Christopher Whalen managing director for Institutional Risk Analytics, told the Wall Street Journal. “Banks don’t know who owns the loans” on which they are trying to foreclose.

A Washington Post article following the story described a foreclosure system “in chaos…riddled with faked documents, forged signatures and lenders who take shortcuts reviewing borrowers’ files.”

The problem, industry analysts agree, is the sheer volume of paperwork generated during the housing boom, when mortgages were routinely sliced and diced, packaged in complex securities, then sold and re-sold to investors in the secondary market. The resulting paper trail became longer and the documentation became less precise. As delinquencies mounted, lenders ignored deficient documentation, or papered over it, in order to expedite foreclosures. Overwhelmed judges overlooked the widespread documentation problems as well, for a while. But then some began to balk.

Judge Jeffrey Arlen Spinner, an acting Supreme Court Justice in New York, attracted national publicity for repeatedly blocking foreclosures and lambasting bank attorneys for flawed documentation and abusive behavior. In one case, Spinner canceled a $300,0000 mortgage, citing a bank’s “unconscionable, vexatious and opprobrious” conduct during mandatory loan modification negotiations; in another case, he ordered a lender to pay an owner $155,000 for entering the owner’s house without permission and changing the locks.

Another New York City judge also attracted attention recently for rejecting foreclosure petitions because the documentation was flawed. “There are procedures to be followed in order to get a foreclosure, and you either get it right or not,” he told the Washington Post. “Either you’re pregnant or not,” he added. “There’s no in-between.”

Other judges in other jurisdictions are similarly digging in their heels, refusing to overlook deficiencies they have been ignoring. “The backlash is intensifying against banks and mortgage servicers that try to foreclose on homes without all their ducks in a row,” American Banker reported recently.

Industry analysts predict the paperwork problems will slow an already snails-paced foreclosure process, increasing the “shadow inventory” of properties that aren’t on the market yet but will be eventually, threatening further downward pressure on home prices. Publicity about foreclosures rejected because of documentation flaws may also encourage more delinquent borrowers to fight foreclosure actions, and could lead some of the more than 2 million owners who have lost their homes to challenge those actions, as well.

Analysts aren’t sure how this part of the foreclosure mess will play out, but most agree that it will only deepen the ditch in which the housing market remains well and truly stuck.

ANOTHER TRY FOR THE UNBANKED

Government policy makers are renewing their efforts to persuade “unbanked” consumers to trade their high-cost financial products and services for lower-cost mainstream alternatives. The Obama Administration’s proposed budget seeks $50 million for a “Bank on USA” initiative providing grants supporting local initiatives designed to ‘bank the unbanked and provide appropriate financial products and services to unbanked and underbanked low- and moderate-income people.”

Separately, the Federal Deposit Insurance Corporation (FDIC) is asking banks to participate in a pilot program to test the efficacy of streamlined, low-cost, largely electronic checking and savings accounts for lower-income customers.

Banks participating in the pilot could design their own products, within limits, but savings and transaction accounts offered under the pilot would have to include the following features:

  • Require minimal ($1) balance requirements and “reasonable” rates and fees “proportional to their cost.”
  • Be "checkless" allowing withdrawals only through automated teller machines, point-of-sale terminals, automated clearing house preauthorizations, and other automated means.
  • Have no overdraft or insufficient funds fees. Include “autosave” features for savings accounts, such as preauthorized periodic electronic transfers from other accounts.
  • The FDIC hopes to wean the estimated 9 million households who are unbanked or underserved by financial institutions from the non-bank services, such as check-cashing operations and payday lenders, they use.

“It’s important that people get into the financial mainstream so they have a place to store their money…and to make sure they’re paying fair fees for banking services rather than exorbitant fees that are being charged through the alternative financial services providers,” Ellen Lazar, a senior advisor for consumer policy for FDIC, told the Wall Street Journal.

In addition to attracting new customers, banks participating in the pilot program would garner “community goodwill” and demonstrate their commitment to serving lower-income customers, the FDIC press release announcing the program said. Participation in the program may also count favorably in the bank’s Community Reinvestment Act (CRA) evaluation, the FDIC indicated.

Banks have not been particularly enthusiastic about past government-sponsored efforts targeting the unbanked, and it is not clear that their response to this one will be much different. The American Bankers Association (ABA) has already criticized the FDIC initiative as “inflexible,” and predicted that it will “not be economically viable” for banks.

OVERDRAFT CHALLENGE

As financial institutions implement, and assess the results of, the newly enacted law restricting overdraft fees, a flurry of law suits is testing one aspect of overdrafts the legislation does not address: The common practice of processing larger transactions first, regardless of the order in which they occur. In one recent case, a California judge rejected that approach, ruling that its sole purpose was to boost overdraft charges and ordering the bank (Wells Fargo &Co.) to repay about $203 million in service fees collected from overdrawn consumers.

The bank has appealed, but in the meantime, consumers in other jurisdictions are filing similar suits, some of them seeking class action status. More decisions rejecting the high-to-low processing could lead industry regulators to ban that practice, a recent study by Keefe, Bruyette & Woods, warns.

The legal challenges “could raise the whole issue of high-to-low service charges and [the] benefit or negative impact on consumers,” Jefferson Haralson, one of the study’s authors, told American Banker. Banks say customers would rather have larger obligations – rent, mortgge payments and auto loans – covered first; critics echo the view of the judge in the Wells Fargo case, that processing the largest transactions benefits the banks, not the consumers.

Although aware of the various court battles, financial institutions, for the most part, are focusing more on how the new overdraft rules – requiring customers to “opt in” before banks can provide overdraft protection – will affect the substantial income they derive from overdraft fees. So far, the impact hasn’t been as dire as many had predicted. A recent study found that overdraft revenue declined during the first half of this year, but has recovered since. The study, by Moebs $ervices, estimates that the industry will earn $35.4 billion in fee revenue this year, down from $37.1 billion in 2009 but about equal with the 2008 results. The report also estimates that overdraft revenue will increase to $8.0 billion next year, “the highest ever for the industry.”

“Even with the price of overdraft protection going up,” the report concludes, “it appears from the opt-in numbers that the American consumer is saying they want and need overdrafts.”

LOSING GROUND

Middle- and low-income workers didn’t make much economic progress over the past decade, but they lost ground big time in the past three years as wage growth, which had been less than robust at best, stalled for many and reversed direction for some.

Median weekly earnings for full time workers 25 and older increased by only 0.5 percent for the year ending in the second quarter, compared with growth rates of 1.3 percent in 2009, 3.4 percent in 208, and 4.3 percent in 2007, according to statistics compiled by the Economic Policy Institute (EPI).

The EPI report found that men have been hit particularly hard during the current downturn, as their wages have declined by 1.3 percent; for women, wages have continued to increase, but at a slower rate, falling from a growth rate of 5.2 percent in 2008 to 3.7 percent in 2009.

If the statistics are adjusted for inflation, the wage growth rate becomes flat to negative for all workers, and “that’s what we will see going forward, as we continue with persistent high unemployment,” Heidi Shierholz, a labor economist at EIP, told MarketWatch.com. “We will continue to see real [inflation-adjusted] wages just hovering around zero or negative.”

The EPI report also identified a growing disconnect between productivity and income, with wages declining as productivity rose. That is not a new trend, however; the EPI says it became evident in the mid-1970s. “Essentially, it’s an inequality story,” Shierholz said. “You can talk about productivity being a measure of the growth of the riches of the country. If it’s not going to the typical worker…it’s going to the top.”

POVERTY RATES RISING

Considering recent wage trends (see related item), the census Bureau’s 2009 report on poverty rates shouldn’t come as much of a surprise. The nation’s poverty rate reached its highest level in 51 years last year, as 43.6 million people fell below the poverty line, defined currently as income of less than $21,954 for a family of 4. This marked the third consecutive annual increase in the number of people living in poverty, according to the report.

The poverty rate increased to 14.3 percent last year compared with 13.2 percent in 2008 and would have been higher, analysts say, if not for the extended unemployment benefits and $250 bonus Congress approved for Social Security recipients, which helped offset the decline in income for households headed by people 45 and younger.

“The good news is, there’s less bad news than we thought,” Sheldon Danziger, a spokesman for the Population Studies Center at the University of Michigan, told USA Today.

Other key findings of the Census report:

  • The child poverty rate exceeded 20 percent for the first time since 1996, reflecting a large jump (from 10.6 percent to 11.9 percent) in the number of poor white children.
  • The number of people without medical insurance increased by 4.4 million to 50.7 million. Most of the increase (from 15.4 percent to 16.7 percent of the population) was attributed to unemployed workers who lost their insurance when they lost their jobs.
  • Households in the West and Northeast had the highest median household incomes last year, which remained essentially flat compared with the prior year, while incomes for households in the Midwest and West declined.
  • Mississippi has the highest percentage of poor people (23.1 percent), according to the Census survey; New Hampshire (7.8 percent) had the lowest.