The Obama Administration has decided that it needs a larger stick to prod mortgage lenders and servicers to help homeowners who are struggling with unaffordable mortgages avoid foreclosure. That stick is in the form of a series of measures announced by the Treasury Department, designed to increase the pace and volume of loan modifications under the Administration’s Home Affordable Mortgage Program (HAMP).
Treasury Secretary Timothy Geithner summoned HAMP participants to Washington in July to express the Administration’s dissatisfaction with their performance, instructing them too complete 400,000 trial modifications by November 1. Servicers met that goal, but the conversion of the three-month trial modifications that HAMP requires to the permanent modifications that borrowers need continues to lag.
Of the 650,000 trial modifications that have been completed to date, 375,000 could convert to permanent status by year-end, according to Administration projections. Industry analysts say that estimate, which is far short of the 4 million borrowers the Administration has said HAMP will help, is also wildly optimistic. Preliminary data indicate that only 1,711 modifications – 1.26 percent of the total recorded thus far – became permanent after their three-month trial period ended.
Phyllis Caldwell, newly appointed head of the Treasury Department’s Homeownership Preservation Office, said that while the Administration is pleased with the increase in trial modifications completed since July, “we now must refocus our efforts on the conversion phase….”
Assistant Treasury Secretary Michael Barr was more pointed, telling reporters in a conference call, “Servicers to date have not done a good enough job of bringing people a permanent modification solution.”
To improve those results, the Administration is going to require the largest servicers:
- To submit schedules for processing the loans on which they have received borrower documentation;
- To provide daily reports on their progress in processing loan requests; and
- To indicate how they intend to notify borrowers of the decisions on their applications.
- Treasury “SWAT” teams (the Washington Post has suggested “mod squads” as a catchier term) will monitor modification progress and investigate delays. Servicers that “fail to meet their obligations” under HAMP will face “monetary penalties” and other “sanctions.”
Administration officials have declined to specify what those sanctions might entail, but it appears that the Treasury Department will continue to rely heavily on public shame to improve the modification results. The new steps Treasury officials outlined include a plan to publish more detailed monthly reports noting both the number of preliminary modifications servicers have completed and the number of trial modifications that could convert to permanent status by year-end, if borrowers meet the program requirements.
The larger HAMP stick the Administration is wielding addresses borrower complaints about a cumbersome and complicated application process, during which, borrowers say, lenders often lose the documentation they submit and fail to explain rejections of modification requests.
The Administration is also addressing lender complaints that borrowers are not submitting the documentation required to process their requests. Of the borrowers whose trial modifications could be converted to permanent status at year-end, lenders say, 37 percent have submitted only partial documentation and another 20 percent have submitted no paperwork at all. To improve those numbers, the Treasury Department has extended the trial period from three to five months, streamlined the HAMP application process, and established a telephone hot-line to offer more direct access to housing counselors who can help borrowers navigate the application process.
As consumer advocates and servicers debate who is responsible for the poor modification totals, an increasing number of analysts are concluding that the fault lies neither with lenders or borrowers, but with the HAMP program itself.
The program’s structure assumes that homeowners are struggling because of poorly underwritten mortgages that are adjusting to payment levels they can’t afford. While that was, in fact, the primary problem when HAMP was launched earlier this year, the recession has altered the economic landscape, William Longbroke, director of First Financial Northwest, who helped design HAMP, told American Banker. “The program really needs to be redesigned to deal with the problems created by unemployment and loss of income, rather than poor underwriting and unaffordable interest rates,” Longbroke said.
Mark Zandi, chief economist for Moody’s Economy.com, agrees. Although he gives the Administration credit for trying to tweak HAMP to improve its results, Zandi told American Banker, “There are no more partial fixes to the plan.” The Administration, he said, is “getting to the point where they need a new plan.”
The Federal Reserve Board (Fed) has adopted new rules requiring substantial changes in the way financial institutions disclose and price the overdraft protection services they provide consumers. But the rulemaking is unlikely to end the debate over these programs, nor is it likely to forestall legislative action in this area.
Under the Fed rules, customers must affirmatively “opt-in” to obtain overdraft protection for ATM and one-time debit charges, ending the common industry practice of providing the protection automatically. Additionally, the rules require institutions to fully disclose their overdraft services, the fees charged for overdrafts and the right of customers to choose whether they want those services and to cancel the protection at any time. The requirements will apply to new accounts opened after July 1, 2010; for existing customers, institutions will have an additional 45 days, until August 15, 2010, to provide the required disclosures and obtain opt-in response from those who want the overdraft protection.
The overdraft rules represent “an important step forward in consumer protection,” Fed Chairman Ben Bernanke said in a statement announcing the action. The disclosures and opt-in requirement “will enable both new and existing account holders to make informed about whether to sign up for an overdraft service,” he said.
The rules apply to ATM and one-time debit charges, but not to checks and recurring debit card transactions structured to make regular payments. Fed officials said they excluded those transactions because their research has demonstrated that consumers want automatic overdraft protection for “important” bills, such as checks written for their mortgage, rent and utility payments, but don’t like being surprised by large fees for small overdrafts.
In this respect, among others, the Fed’s rules differ from legislation pending in the House and Senate. Both the House measure, sponsored by Rep. Nancy Maloney (D-NY), and the Senate bill, sponsored by Banking Committee Chairman Christopher Dodd (D-CT), limit the amount and number of overdraft fees banks can charge consumers and prohibit them from manipulating the order in which transactions are processed in order to maximize the overdraft fees. Maloney’s bill also requires point-of-transaction notice to consumers if an ATM or debit transaction would trigger an overdraft, giving them the option of aborting the transaction or incurring the overdraft charge.
Community banks have objected to both the Fed rules and the legislative proposals, warning that both initiatives will lead many banks to eliminate overdraft protection programs in order to avoid compliance costs and liability concerns. The American Bankers Association is also opposing the House and Senate Bills but has accepted the Fed rules as a less detrimental alternative to them. “The new rules address the primary concerns that have been raised by consumers and policy makers and will help bring consistence and clarity to overdraft programs,” Ed Yingling, the ABA’s chief executive officer, said.
Credit union trade groups have joined the banking industry in urging legislators to back off and allow time to gauge the impact of the Fed’s new regulations — a position that drew some support from Rep. Ruben Hinojosa (D-TX), who withdrew his sponsorship of Maloney’s overdraft bill. A spokesman for the Congressman told The Hill that, after seeing the Fed’s final rule, Hinojosa “started leaning more toward the [Fed’s approach]. He does believe there is a problem that needs to be fixed,” the spokesman added.
Consumer advocacy group continue to insist that the Fed’s regulation does not do enough to address the problem, falling far short of providing the comprehensive protections consumers need. Maloney and Dodd agree.
“The Fed rule still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts,” Maloney said in a press statement. Echoing that response, Dodd told the New York Times, “We still need to stop excessive fees, repeated charges, lax notification, and processing manipulation that have become standard in the so-called “overdraft protection programs.”
In an effort to head off Congressional action, several of the nation’s largest banks have taken voluntary steps to address consumer concerns. Recent surveys indicate that financial institutions generally have backed off of previously aggressive overdraft fees. Moebs Services, Inc. reported that overdraft fees have been increasing at an annual rate of 2.1 percent industry-wide – the slowest rate of increase in the past 17 years; for the largest banks, fees actually declined at an annualized rate of 1.3 percent.
But consumer advocates generally agree with Chi Chi Wu, a spokesman for the National Consumer Law Center, that these voluntary moves are “too little too late,” coming, she said, “after years in which banks have made billions off of overdraft abuses.”
Industry executives respond that their overdraft protection programs provide a service consumers want and appreciate. The House and Senate bills “don’t reflect the very well-documented consumer preference for having overdrafts paid for particularly important things, like mortgages and utility bills,” Nessa Feddis, senior federal counsel for the ABA, insisted in a recent interview with MSNBC. Feddis also challenged critics who say bank overdraft fees are unreasonable or abusive. Consumers have the ability to avoid the fees, she noted, simply by monitoring their accounts so they don’t overdraw them. “It is not enough to put an account n auto pilot and assume the bank is going to be a private accountant,” Feddis asserted. Overdrafts “are easy to avoid,” she said, “and most people do avoid them.”
CREDIT CARD CONTORTIONS
While the overdraft debate (see related item) has recently occupied center stage, consumer advocates and banking industry lobbyists continue to advance competing views of legislation targeting abusive credit card practices. Some provisions of that measure, the Credit CARD Act, have already taken effect, but most become effective in February of next year. With that prospect in mind, credit card issuers have moved aggressively to increase interest rates, reduce credit limits, and take other steps that will be barred or restricted by the new law.
Infuriated by those moves, the House recently approved a measure, now pending in the Senate, that would make the CARD Act provisions effective immediately. Another House measure, introduced recently, would cap credit card interest rates going forward by 16 percent and impose a $15 ceiling on annual fees. Co-sponsored by Representatives Louise Slaughter (D-NY), John Tierney (D-MA) and Michael Capuano (D-MA), this bill would provide a little leeway for lenders, allowing temporary increases in the rate cap “in extraordinary circumstances and upon regulatory finding that modification maintains the goal of protecting consumers from exploitive lending practices.”
In the Senate, Banking Committee Chairman Christopher Dodd (D-CT) has proposed a bill that would freeze card rates until the CARD Act becomes fully effective. “This will provide us a window of about 12 weeks…during this holiday season, to put a stop to these outrageous rules and fees [credit card issuers are charging],” Dodd said in support of his legislation. But his initiative stalled before Thanksgiving, when Republicans on the Banking Committee refused Dodd’s request for unanimous consent to advance his bill.
Credit card action is continuing in the House as well, despite the approval of legislation accelerating the effective date.
Underscoring the concerns of Dodd and other critics, who have slammed the credit card industry for trying to boost income at the expense of consumers, a recent Fed survey confirmed that issuers have been increasing rates and reducing credit lines for card customers with good credit scores. A study by Foresight Analytics found that banks have reduced credit limits by 26 percent in the past year, shrinking available credit from $4.6 billion to $3.4 trillion in the process, while increasing the average interest rate on card balances from 11.94 percent to 13.71 percent.
Industry executives defend those practices as a reasonable and necessary response to legislative restrictions and economic conditions that are increasing their risks and eroding their profit margins.
“We sell credit, we don’t sell sweaters,” Kenneth Clayton, senior vice president for credit card policy at the ABA, told the New York Times. “The only way to manage your return is through the price of the product or [its] availability,” he added.
The Times, uncharacteristically, is siding with bankers over consumers in this debate. A recent editorial criticized legislators who backed the credit card legislation for failing to anticipate that its restrictions would trigger precisely the industry reaction against which lawmakers are now railing. “How could Mr. Dodd and his fellow lawmakers not realize that banks would preemptively raise rates?” the editorial asked.
While Dodd’s proposal to freeze card rates temporarily is well-intended, the Times said, it is also misguided. “If banks find themselves unable to raise rates, many will limit their risks by severely restricting consumer credit.” And those restrictions, on top of an already tight credit market, the editorial warned, “could devastate our nascent recovery.”
PRUDENT MEANS PRUDENT
Which part of prudent underwriting did you not understand? That’s the unstated but implied message the Federal Reserve conveys in recent guidance to lenders explaining regulatory restrictions on high-priced balloon mortgages. The guidance responds to frequently asked questions about revisions in the Truth-in-Lending-Act rules mandated by amendments to the Home Ownership and Equity Protection Act enacted by Congress in 2008. Enacted partly in response to subprime lending abuses, the legislation and implementing rules prohibit lenders from approving high-priced mortgages “based on the value of the consumer’s collateral, without regard to the consumer’s repayment ability” at the time the loan is originated. One of the questions addressed in the guidance asks show creditors originating a short-term balloon loan can verify at origination that the consumer will be able to qualify for refinancing when the loan eventually comes due.
The guidance assures lenders that the rules do not require them to verify at origination that consumers will have assets or income “sufficient to pay the balloon payment when it comes due.” But while creditors can’t predict future income of borrowers, the guidance says, they do have “an affirmative duty to engage in prudent underwriting. Thus,” the guidance explains, “the creditor should consider factors such as the loan-to-value ratio and the borrower’s debt-to-income ratio or residual income — all at the time of consummation.” Further clarifying what the regulators mean by “prudent,” the guidance explains, “A borrower with a high debt-to-income ratio, and/or with little or no equity in the property, will be less likely to be able to refinance the loan before the balloon payment becomes due than a borrower with lower debt-to-income and loan-to value ratios.”
SIGNS OF THE TIMES
Like previous recessions, this one is creating a boomerang effect, bringing young adults, who had been living on their own, back to their parents’ nest. In a recent survey conducted by the Pew Research Center, 10 percent of the respondents between 18 and 35 said the poor economy had forced them to move back in with their parents. Echoing that response, 13 percent of parents with grown children said one of their adult sons or daughters had moved in with them in the past year. That percentage increased to 19 percent for parents between the ages of 45 and 54, but declined sharply above that age range.
Approximately 7 in 10 grown children living with their parents are younger than 30, half are working full- or part-time, and 25 percent are unemployed, the survey found.
“Bommerangers” are a common byproduct of economic downturns, the survey report notes, but this recession apparently “has produced a bumper crop.”