Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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There’s more than one way to hold lenders accountable for the questionable policies and procedures that contributed to the financial meltdown and the collateral damage that continues to plague the housing market. While state and federal regulators continue to hammer out the details of an agreement targeting the foreclosure-related abuses of loan servicers, the Federal Housing Finance Agency (FHFA) has filed suit against 17 banking giants, accusing them of fraud (among other things) in the sale of more than $190 billion in mortgage-backed securities to Fannie Mae and Freddie Mac.

Accusing the targeted institutions of “falsely represent[ing]” the quality of the underwriting on the underlying mortgages and “significantly overstat[ing]” the repayment potential of borrowers, the suit seeks a combined total of more than $120 billion, including more than $33 billion from JP Morgan and nearly $25 billion from Bank of America-Merrill Lynch, to reimburse Fannie and Freddie for their portfolio losses.

The defendant institutions are expected to argue that Fannie and Freddie were sophisticated investors, capable of analyzing the securities and understanding their risks.

Critics have warned that the suits will further impede an already sluggish economic recovery by inhibiting new lending, and could threaten the viability of some of the institutions targeted.

“While I believe that FHFA is acting responsibly in its role as conservator [for Fannie and Freddie], I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” Tim Rood, a former Fannie Mae executive, now a partner at the Collingwood Group, which offers consulting services to banks, told the New York Times.

Richard Bove, a banking analyst at Rochdale Securities, offered an even harsher critique, charging that the FHFA suit and other government actions are “destroying the infrastructure of the mortgage finance market in the United States.”

Addressing claims that the suit will impede the economic recovery, the FHFA said in a press statement, “While everyone is concerned with these important issues, “the long-term stability and resilience of the nation’s financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws.”

While most analysts are predicting the litigation will ultimately be resolved by an out-of-court settlement, many of the targeted institutions are facing suits by individual investors alleging claims similar to those of the FHFA, and may be reluctant to settle for that reason.

“If the representations and warrants from one failed mortgage-backed security are the same as another MBS with the same kinds of loans, the first settlement will likely set a precedent for the other,” Michael Stegman, director of policy and housing at the John D. and Catherine T. MacArthur Foundation, told the on-line news service, Marketwatch.


An agreement resolving allegations of widespread foreclosure abuses continues to elude the attorneys general spearheading that effort. Facing continuing resistance from some A.G.s, who are insisting on a broader investigation and tougher terms than are reportedly being proposed, Iowa Attorney General Tom Miller felt compelled to issue a press release denying reports that the proposed settlement would release financial institutions from liability for future securities-related claims.

“While a final multistate case release has not been negotiated and the release is a work in progress, attorneys general on the Negotiating Committee are not preparing to, nor will they agree to, release the banks from all civil liability,” Miller, who heads the AG negotiating committee, said in the press statement. “We are also not preparing to, nor can we agree to, release the banks from any criminal liability,” he added.

Miller was responding in part to media coverage following the ejection of New York Attorney General Eric Schneiderman from the executive committee, because of his public criticism of the settlement proposal. Schneiderman has refused to endorse an agreement that would preclude future investigations of securities-related abuses and the role of MERS (the electronic mortgage processing system) in the foreclosure problems that spurred the 50-state investigation.

The Financial Times reported recently that a proposed settlement includes language “broad enough that it could prevent state officials from bringing securitization claims in the future….State prosecutors have proposed effectively releasing the companies from legal liability for allegedly wrongful securitization practices.”

That report, picked up and widely circulated by other publications, including the New York Times, prompted Miller’s public disclaimer.

Meanwhile, as if the settlement discussions haven’t been complicated enough, recent media reports repeated allegations published several months ago that the nation’s largest mortgage servicers continue to play fast and loose with foreclosure documentation.

“Several dozen documents [we] reviewed show that as recently as August some of the largest U.S. banks, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc., and OneWest Financial Inc., were essentially backdating paperwork necessary to support their right to foreclose,” the American Banker reported last month. “Some of documents…included signatures by current bank employees claiming to represent lenders that no longer exist,” the trade paper noted.


The Obama Administration continues to seek a magic bullet – or dart, or anything – that will help ease the foreclosure crisis that continues to cripple the housing market and undermine the economic recovery. The Administration’s latest proposal would revamp an existing program that never gained much traction, designed to help more homeowners refinance their mortgages.

Many owners can’t take advantage of today’s near record-low mortgage rates because plummeting home values have left them without sufficient equity to qualify for a new loan. Refinancing could help many of these owners lower their payments enough to avoid foreclosure.

The Home Affordable Refinance Program (HARP), the Administration’s existing refinancing initiative, has fallen short of its goals, partly because design flaws have limited its reach, but also because lenders have been reluctant to assume the risk that they might have to buy back loans if high-risk borrowers ultimately default.

In his prime time address calling for a major job-creation initiative, President Obama mentioned the refinance effort briefly, noting that reducing mortgage payments would “put more than $2,000 a year in a family’s pocket and give a lift to an economy still burdened by the drop in housing prices.”

But an analysis by the Congressional Budget Office (CBO) questioned just how much good the refinancing plan would do. The study estimated that the plan would enable nearly 3 million borrowers to refinance their loans, but it would prevent only about 111,000 potential defaults. And while the program would produce savings of nearly $4 billion for Fannie Mae and Freddie Mac, by reducing their exposure from credit guarantees, CBO analysts estimated that it would cost investors holding bonds backed by existing loans about $4.5 billion.

"Because the estimated gains and losses are small relative to the size of the housing market, the mortgage market and the overall economy, the effects on those markets and the economy would be small as well," the CBO concluded.


Policy-makers looking for ways to bolster consumer confidence might want to consider anti-depressants; certainly the economy isn’t doing anything to improve the national mood. Nearly 80 percent of Americans surveyed in August said they think the economy is moving in the wrong direction, up from 70 percent responding in July to Fannie Mae’s monthly National Housing Survey. Nearly 30 percent of the August respondents said they expect home prices will continue to decline — the third consecutive month for this increasingly pessimistic view; and, although mortgge rates have fallen to 50-year lows, 45 percent of the respondents said they expect rates will increase over the next year.

“I believe the public was looking at the U.S. debt, deficit, and the ensuing political struggle with one eye, and looking at Europe and their sovereign debt issues with the other eye, and saying: ‘This is not what we want,’” Doug Duncan, Fannie Mae’s chief economist, said in a press statement.

The August survey mirrored earlier results showing a deteriorating national mood, finding consumers more worried about rising expenses and more concerned about losing their jobs in August than in the prior month. More than 25 percent of consumers said they are concerned about losing their jobs in the next 12 months, and consumers who are worried about their finances and their job prospects don’t tend to buy homes, Duncan noted.

"Consumers are more hesitant to take on additional financial commitments,” Duncan said, “and a setback to confidence means a setback to the recovery of the housing market."


The list of lenders originating reverse mortgages continues to shrink. SunTrust, the eight largest reverse mortgage originator in the country, is the most recent to abandon the market, concluding that "production volume for these types of loans is extremely small compared to our overall mortgage volume, and from a strategic perspective focusing our full resources on more traditional mortgage origination and servicing is the most effective and efficient use of our resources." Earlier this year, Wells Fargo, Bank of America and One West also decided to leave the reverse mortgage arena.

Separately, AARP has filed a class action suit against Wells Fargo and Fannie Mae, accusing them of failing to honor a provision in the reverse mortgage contract (and a requirement of government-insured Home Equity Conversion Mortgages) requiring that the heirs of reverse mortgage borrowers be allowed to purchase the property for its current appraised value.

The lead plaintiff in this suit, Robert Chandler, claims he never received notice of his purchase right and was told he would have to pay off the full mortgage balance after his mother died, if he wanted to acquire the property. The bank foreclosed and, unable to find a buyer willing to pay the current price, moved to evict Chandler.

His experience “is not an isolated case,” Jean Constantine-Davis, a senior attorney with the AARP Litigation Foundation, said in a press statement. "In the wake of HUD’s reversal of its rule on the rights of surviving spouses and heirs earlier this year, we have been contacted by many, many others facing the same problem. It is difficult to understand why reverse mortgage lenders continue to deny them their contractual and legal rights,” she added.

Constantine-Davis was referring to a suit AARP initiated earlier this year against the Department of Housing and Urban Development, alleging that the agency had failed to make explicit and enforce a policy entitling the surviving spouses of reverse mortgage borrowers to remain in a property. HUD has since clarified that policy, reversing its position that surviving spouses and heirs have no continuing property rights or special claims.