Homeowners struggling to avoid foreclosure, but still current on their loans, may be eligible for relief under a revised short sale program announced recently by the Federal Housing Finance Agency (FHFA).
The new guidelines allow servicers to approve short sales for borrowers whose loans are held by Fannie Mae and Freddie Mac if the borrowers meet specified “hardship” criteria, including the death or disability of the borrower or co-borrower, divorce, legal separation, illness or disability, or a job transfer more than 50 miles away.
“These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” FHFA Acting Director Edward DeMarco said in a press statement.
In addition to extending eligibility for short sales, which had been offered only to borrowers who were seriously delinquent, the FHFA has made several other changes designed to make the short sale process easier and more attractive for borrowers and lenders. Among the key changes:
- The most troubled borrowers — those who are 90 days or more delinquent or who have credit scores lower than 620 — will no longer have to document their hardship, and the short sale process may be expedited for them.
- Fannie and Freddie will waive their right to pursue deficiency judgments following short sales. Borrowers with sufficient income or assets can make cash contributions or sign promissory notes instead.
- The new rules cap at $6,000 the amount the GSEs will pay second lien holders. The goal is to discourage investors from delaying short sales in an effort to secure a larger settlement, but critics say $6,000 probably won’t provide much of an incentive for them to get out of the way.
- Members of the armed services who are required to relocate will become automatically eligible for short sales even if they are current on their loans, and they won’t be required to contribute funds to offset the remaining deficiency.
The recently announced changes are part of a broader “Servicing Alignment Initiative” announced earlier this year, designed to streamline and coordinate the GSEs’ short sale and other foreclosure assistance programs. New guidelines announced in June require servicers of GSE-held loans to review and respond to short sale request within 30 days and make a final decision within 60 days after receiving the complete loan package.
Lenders, who had been resisting short sales, have been relying increasingly on them as a less costly alternative to the foreclosure process. Short sales represented nearly 9 percent of home sales in May of this year, according to a CoreLogic report, up from 7.6 percent the year before and up from 6.5 percent in 2010. Of the nearly $10.5 billion in relief offered homeowners thus far under a national agreement settling allegations of foreclosure abuse, more than $8.5 billion has come in the form of debt participating lenders have written off in short sales.
Loan delinquency rates have been declining for much of this year, with one notable exception: Student loan delinquencies are rising, along with the total of student debt outstanding.
While delinquency rates on first mortgages declined by 15 percent in July compared with the year-ago level, 60-day delinquencies on student loans increased by nearly the same amount as student loan debt rose to nearly $60 billion.
More than 22 million households – about 19 percent of all households, had student loan debts in 2010 – double the percentage in 1989, according to a study by the Pew Research Center. And that growing burden is falling most heavily on the poorest and youngest: 40 percent of households headed by someone younger than 35 had outstanding student loans – the largest share of any age group, according to Pew.
Those trends are disturbing not only because of what they suggest about the financial health of young adults, but also because of the implications for home buying demand in the near-and longer-term. Housing analysts say student loan debt has emerged as one of the major barriers preventing 20-somethings (and many 30-somethings) from entering the housing market.
A study by Younginvincibles.org found that student loans are boosting the debt-to-income ratio of average borrowers to .49 – much too high to qualify for a conventional mortgage and outside the qualifying standards for FHA-insured loans as well. A decade ago, the debt-to-income ratio for average student loan borrowers was nearly 14 percent lower, according to this analysis.
QUID PRO QUO
Wondering why officials in St. Paul, MN suddenly dropped a law suit challenging a key fair lending enforcement strategy?Republican lawmakers say the decision resulted from an “inappropriate” deal the Department of Justice cut, agreeing to stay out of unrelated litigation involving the city, if the city would drop its Supreme Court appeal, which analysts predicted, would “blow a big hole” in the disparate impact theory the DOJ has been using increasingly in fair lending actions against banks.
First the underlying case – Magner v. Gallagher. It was a fair housing action, brought by a group of landlords, contending that the city’s aggressive enforcement of housing code standards was having a “disparate impact” on minority tenants, who were disproportionately affected by rent increases. The Eighth Circuit Court sided with the landlords; the city appealed to the Supreme Court. Financial institutions, consumer advocates (and, apparently, the DOJ) recognized that a decision rejecting the disparate impact argument in this case would also undermine fair lending enforcement actions alleging the discriminatory impact of bank policies even where there was no evidence of discriminatory intent.
To avoid that outcome, Republican lawmakers claim, Asst. Attorney General Thomas Perez, who heads the DOJ’s Civil Rights Division, offered to drop a plan to join an unrelated law suit accusing Saint Paul officials of violating the Fair Claims Act, if the city would drop its Supreme Court appeal.
Unlike common settlement agreements, this one “obstructed rather than furthered the ends of justice,” Rep. Patrick McHenry (R-NC) and three of his Republican colleagues said in a letter to Attorney General Eric Holder. The agreement was possible, they said, because, “Mr. Perez knew the disparate impact theory he was using was poised to be overturned by the Supreme Court…."So he bargained away a valid case of fraud against American taxpayers in order to shield a questionable legal theory from Supreme Court scrutiny in order to keep on using it," the letter continued.
A DOJ spokesman rejected the complaint, telling American Banker, "The resolution reached in these cases was in the best interests of the United States and consistent with the Department's practice in reaching global settlements…."The decision was appropriate and made following an examination of the relevant facts, law and policy considerations at issue,” the spokesman added, noting, “The Department has broad discretion under the False Claims Act to achieve global resolutions that consider policy and other pending litigation factors."
We’re talking about overdraft fees – much maligned by consumer advocates and targeted in legislation requiring lenders to disclose the fees more clearly, stop adding overdraft protection automatically, and give consumers the option of rejecting the protection if they choose.
Despite all those restrictions, and predictions that the legislation would slash bank revenues dramatically, consumers paid $31.5 billion in overdraft penalties last year, up from $30.8 billion in 2010, a recent study by Moebs Services found.
Although overdraft penalties had been falling steadily – a reaction to reduced consumer spending as well as the legislative restrictions – they have begun to rise again, according to Moebs, which found a 10 percent increase in the past nine months alone.
The trend has drawn the attention of the Consumer Financial Protection Bureau, which has said it is investigating how banks are pricing and levying overdraft penalties. Cost is an obvious concern: According to Moeb, an average overdraft penalty runs about $30 – almost double the $17 a payday lender would charge for a similar loan.
But the real issue, according to Moebs, is not the size of the penalty, but who pays it. Overdraft penalties generate approximately three-quarters of the $41 billion in fees charged for bank accounts and 90 percent of those fees come from a tiny number (18 million) of the150 million accounts in place. The bottom line, according to an article in Forbes: “As with many other financial products, the vast majority of the costs of banks accounts are hoisted off on a relatively small population, and generally it's a population that is the least able to pay.”
The National Association of Realtors reports that pending sales declined in September -- not because of a lack of demand, the NAR contends, but because of a lack of supply in many otherwise recovering housing markets. A fall-off in foreclosure sales explains part of that imbalance, but a bigger factor may be the large number of prospective sellers who are seeing prices starting to move up, and are holding back in the hope that they will rise even more.
Nearly 40 percent of the 1,800 “active home sellers” responding to a recent Redfin survey said they intended to wait more than a year before selling their homes and another 36 percent said they will wait between 3 and 12 months. Most (80 percent) said they are convinced their homes will sell for more in another year or two.
Respondents also agreed that conditions favor buyers rather than sellers. More than 25 percent said this is a bad time to sell compared with 60 percent who said this is a good time to buy. Only 3 percent said this is a bad time to purchase a home and only 13 percent said it’s a good time to sell.
“The would-be sellers we surveyed have made it clear that inventory is not going to meaningfully increase any time in 2012, which will limit sales volume gains-and the lift that real estate delivers to the economy this year,” Glenn Kelman, Redfin’s CEO, said in a press statement. “We believe the main problem is not, as conventional wisdom would have it, that people can’t sell because they’re underwater on their mortgage,” he added. “The problem with sales volume is that most home-owners just don’t want to sell.”