Credit unions have reported a jump in membership over the past two years, and they might want to consider writing a note to the nation’s largest banks, thanking them for that gift.
The National Credit Union Administration reported that Credit unions added 1.3 million new customers in 2011, bringing total membership to a record 91.8 million by the end of the year.
Those gains came during a year in which 10 percent of customers at large and mid-sized banks switched their accounts to smaller institutions, one-third of them citing anger over bank fees in a survey conducted by J.D. Power and Associates.
Credit unions added nearly 400,000 of their new customers in the fourth quarter alone, following “Bank Transfer Day”—a widely publicized national campaign encouraging consumers to express their anger about the new fees banks were imposing by voting with their feet. Negative publicity about the fees added momentum to the campaign. That publicity reached something of a fever pitch after Bank of America announced plans to charge a monthly fee for debit card use —a plan the bank was forced to rescind in the wake of a bruising public relations backlash.
Although fees were a major issue for defecting bank customers, they were rarely the sole concern; more often they were “the straw that broke the camel’s back,” Michael Beird, director of banking services practice at J.D Power told reporters. More than half of the consumers said they defected primarily because of fees also said they were unhappy with the service they were getting from their bank, he noted. “Service experiences that fall below customer expectations are a powerful influencer that primes customers for switching once a subsequent event gives them a final reason to defect,” he said.
One interesting survey finding that did not receive much media attention: nearly half of the consumers who closed accounts at large institutions wound up going to another large bank, drawn partly by incentives by branch locations. The convenience factor is still very large," Beird told American Banker, ranking equally with fees and service, for many customers in their s
Still, the survey reflects a clear shift from larger banks to smaller ones. In raw numbers, the outflow is relatively small – more a trickle than a flood – but it has been growing.
Between 10 percent and 11 percent of the customers at large, mid-sized and regional banks left those institutions last year, compared with a defection rate of between 7 percent and 10 percent in the 2010 survey. By contrast, only 0.9 percent of customers left smaller banks and credit unions last year, down from 8.8 percent in 2010, according to the J.D. Power report. And 10.3 percent of the customers who changed banks last year ended up at a smaller institution, up from 8.1 percent in 2010.
PRESSURE PRINCIPAL
Pressure on Fannie Mae and Freddie Mac to reduce the principal balance on some underwater loans in order to help borrowers avoid foreclosure continues to mount. The latest push comes from the settlement state attorneys general negotiated with major lenders and loan servicers to resolve allegations of widespread foreclosure abuses. The agreement includes a provision requiring lenders to reduce the principal for some eligible homeowners, reflecting the growing acceptance of principal reductions as an effective – and according to many analysts, the most effective – loan modification tool.
Edward DeMarco, head of the Federal Housing Finance Agency, which oversees Fannie and Freddie, disagrees, and has thus far refused to allow the GSEs, which are not covered by the Attorney Generals’ agreement, to reduce the principal on loans they have purchased. His position has put him in an increasingly public battle with California Attorney General Kamala Harris, who recently demanded that Fannie and Freddie suspend foreclosure actions in California until the FHFA undertakes the review it has promised of its debt reduction policy.
“I know [the AGs’ agreement] will confirm what many economists have already concluded: principal reduction plans are the most helpful form of loss mitigation for homeowners and the most cost-effective for investors when compared to foreclosures,” Harris wrote in her letter to DeMarco.
She has previously insisted that DeMarco resign, because his opposition to principal reductions is contrary to the interests of homeowners; DeMarco argues that his primary obligation is not to help homeowners but to ensure the viability of Fannie and Freddie and limit taxpayer losses from the GSES, which have been operating under government conservatorship for the past four year and received billions of dollars already in government assistance. Her letter demands “a thorough, transparent analysis of whether principal reduction is in the best interest of struggling homeowners as well as taxpayers.”
DeMarco has said he is willing to review his opposition, and may find he has no choice but to bend. The Treasury Department recently increased the incentives offered to servicers and investors who reduce principal on loan modifications under two government assistance programs and has offered those incentives to Fannie Mae and Freddie Mac for the first time.
Congress is also considering legislation designed to make principal reductions more appealing to lenders. A measure sponsored by Sen. Menendez (D-NJ) would establish an equity sharing arrangement for lenders who reduce a borrower’s mortgage balance. The bill establishes a two-year pilot program under the FHFA and the Federal Housing Administration to test the program, which would give lenders a fixed share of the appreciated value when a home is sold (capped at 50 percent), based on the amount of debt forgiven.
"When you owe more than your house is worth through no fault of your own, relief can be hard to come by," Menendez said in a press release announcing his proposal. "My bill aims to break this cycle by giving homeowners the relief they arelooking for by working with banks to find acceptable solutions for everyone."
ANOTHER EMINENT BATTLE
The House of Representatives has approved legislation that would prohibit local and state governments from using their eminent domain authority to take private property for private commercial development.
The legislation seeks to reverse a controversial 2005 Supreme Court Decision (Kelo v. City of New London) holding that a commercial development satisfied the “public purpose” required to justify an eminent domain taking, because it would generate tax revenue for the municipality involved. The courts had typically defined public purpose more narrowly, requiring a direct public benefit – for example, taking land needed to construct or expand a public highway.
Critics said at the time that the Supreme Court’s definition would make the eminent domain power virtually unlimited, and render homeowners defenseless against it, as virtually any commercial development would generate more revenue than a single-family home ― an argument the bill’s supporters emphasized during the floor debate.
"The government now has license to transfer property from those with fewer resources to those with more. The founders cannot have intended this perverse result," said Rep. Maxine Waters (D-CA), who co-sponsored the bipartisan bill with Rep. James Sensenbrenner (R-WS).
Sensenbrenner noted the rare display of bipartisanship in the House and the even rarer collaboration of two members who stand at opposite ends of the liberal-conservative divide.
"This is a Sensenbrenner-Waters bill," Sensenbrenner said – probably the only one lawmakers will ever see, he suggested, and “that is probably one of the best reasons to vote in favor of it."
The Private Property Rights Protection Act, H.R. 1443, would prevent states from using eminent domain over property to be used for economic development, establish a private right of action for property owners and withhold for two years federal development funds from a state or local government that violates the rule. The legislation would also prohibit the federal government from using eminent domain to advance private commercial development.
The House has passed similar legislation in the past – including a 2009 measure that won a 376-38 vote. But the Senate failed to consider that measure and the Democratic leadership has not indicated whether it plans to advance this one.
Several states have acted to limit eminent domain powers in the wake of the Supreme Court ruling, making federal legislation unnecessary, according to Rep. John Conyers (D-MI), one of the few lawmakers to oppose the House bill. "Congress should not now come charging in after seven years of work and presume to sit as a national zoning board, advocating to our national government the right to decide which states have gotten the balance right, and deciding which project are or are not appropriate," he said.
SELLING SHORT
Housing industry executives and many economists have been arguing for some time that mortgage lenders should permit and even encourage short sales rather than foreclosing on delinquent borrowers. It appears that lenders are beginning to agree that allowing under water owners to sell their homes for less than they owe on the outstanding mortgage works out better for everyone involved, including the lenders.
RealtyTrac reported that short sales increased by 15 percent in the fourth quarter of 2011 compared with the same period the previous year. The year-over year increase was almost 20 percent in some states, actually exceeding foreclosure sales in several markets hardest hit by the foreclosure crisis. In California, for example, short sales represented nearly 24 percent of all distressed property sales in January – the largest percentage in the three years the California Association of Realtors has been tracking that data.
While the number of short sales has been increasing, the time required for lenders to approve and complete them – an ongoing complaint from borrowers and real estate brokers -- has not been improving. Nearly 72 percent of the brokers responding to an Equi-Trax survey last year said it takes from 4 to 9 months to complete a short sale. While the study found that 18 percent of short sales were completed in less than 3 months, 10 percent required 10 months or longer — too long to help many borrowers on the financial edge avoid foreclosure.
Lawmakers have proposed federal legislation targeting that problem. The bipartisan measure, co-sponsored by Senators Lisa Murkowski (R-Alaska), Scott Brown (R-Massachusetts), and Sherrod Brown (D-Ohio), would require borrowers to respond in writing within 75 days of receiving a short sale request, accepting the offer, rejecting it, making a counter offer, or indicating when a decision will be made. The law allows only 1 21-day extension of that deadline, and awards borrowers $1,000 plus “reasonable’ attorneys’ fees if a servicer fails to comply.
“There are neighborhoods across the country full of empty homes and underwater owners that have legitimate offers, but unresponsive banks,” Murkowski said in introducing the measure. “What we have here is a failure to communicate,” she added. “Why don’t we make it easier for Americans trying to participate in the housing market, regardless of whether the answer is ‘yes,’ ‘no’ or ‘maybe?’”
Lenders have resisted short sales in the past, largely because they assumed they would recover more from a foreclosure sale. But a recent study by Massachusetts-based McGeough Lamacchia Realty found that in fact, lenders net more – nearly 24 percent more on average — from short sales.
“This means the banks are losing an average of $43,000 for every foreclosure sale compared to what they would have made in a short sale,” a blog post on the company’s website noted.
The firm suggested that Fannie and Freddie in particular could do more to encourage short sales, by offering cash incentives similar to those they provide for loan modifications under theHome Affordable Foreclosure Alternatives program. Clearly, the firm noted in its blog post, “more needs to be done to encourage short sales.”
GROWING BURDEN
Housing prices are still falling nationwide and home ownership affordable ratios are improving, but the housing cost burden on low- and middle-income Americans continues to rise. Housing costs absorb more than half of household income for nearly one in four families (23.8 percent), the Center for Housing Policy reports – that’s up from about one-in-five families just three years ago
The problem: While housing costs have fallen, household incomes have declined by twice as much, with moderate income homeowners especially hard-hit by the economic downturn.
“The data show that homeowners have been hit hard by the housing crisis in more ways than just lost equity,” Jeffrey Lubell, executive director of the Center, said. “Many working homeowners have been laid off or had their hours cut.”
Housing costs for most moderate-income workers also reflect pre-crash home prices, Lubell noted, not their current level.
“Most of today’s homeowners bought their homes at a time when housing prices were much higher than they are today,” he explained. “As a result, their housing costs have not declined nearly as much as you would expect from looking at the broader market declines in home sale prices.”
Renters, meanwhile, have suffered a reverse double-whammy – their incomes have fallen while rents have increased, as demand for rental housing has climbed.
Between 2008 and 2010, the share of working households with a severe housing cost burden increased significantly in 24 states, while decreasing significantly in only one (Maine), the study found.
The five states with the highest cost burdens were: California (34 percent), Florida (33 percent), New Jersey (32 percent), Hawaii (30 percent), and Nevada (29 percent). Rhode Island ranked seventh on this list. Connecticut and Massachusetts were closer to the national average, at 25 percent and 24 percent, respectively.
