Are We There Yet?

Are we there yet? Children ask that question endlessly on a long car trip. Federal Reserve officials are asking it about their drive to curb inflation.

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AARP is suing the Department of Housing and Urban Development (HUD), challenging an agency policy that requires the surviving spouse of a reverse mortgage borrower to repay the loan in order to continue living in the home.

Reverse mortgages are structured so that the loan does not have to be repaid until the borrower dies or moves.  HUD rules governing the popular Home Equity Conversion Mortgages (HECMs) insured by the Federal Housing Administration (FHA), included the guarantee that homeowners could not be displaced, specifying that homeowners “included the spouse” of the owner.

But HUD issued guidance “clarifying” that policy in 2008, stating that heirs and surviving spouses who are not named on the mortgage would be required to pay the mortgage balance in order to retain ownership of the home.  With home values severely depressed by the housing market downturn, surviving spouses are finding they can’t refinance because the mortgage balance exceeds the value of the home. 

This creates a perverse effect, according to AARP, because unrelated third parties could purchase the home at its depressed value, while surviving spouses have to pay the full amount of the reverse mortgage.  “Rather than protecting borrowers, HUD retroactively e the terms of the loans….” to eliminate a protection HUD’s rules had provided, said Steven Skalet, a partner in the law firm Mehri & Skalet, working with AARP to represent the three plaintiffs.  “This is shameful,” Skalet said in a press statement, adding, “We intend to make HUD honor the representations and promises they made to borrowers when they signed up for these government-insured loans.” 

This is just the latest in a string of problems plaguing reverse mortgages as the economic downturn has both increased the popularity of reverse mortgages and intensified the financial pressure on many elderly borrowers who have obtained the loans. 

Earlier this year, HUD announced a joint initiative with the National Reverse Mortgage Loan Association to assist borrowers who have become delinquent on their property taxes or home insurance payments.  HUD’s HECM rules require lenders to foreclose on borrowers who fail to meet those financial obligations.  Some industry analyst have estimated that as many as 20 percent of HECM loans may be delinquent. 

HUD’s guidelines direct lenders to notify borrowers who become delinquent (many had simply been making the payments and adding them to the loan balance), inform them of the foreclosure risk, and work with them to find solutions.  HUD is providing $3 million to help several consumer groups expand their HECM counseling programs.

"We understand that some senior citizens have not paid their taxes or insurance for some time and may be at risk of losing their home," FHA Commissioner David H. Stevens said in a press release announcing the new policy.  "Over time, however, these unpaid debts and lender advances have resulted in an untenable situation that could put the FHA Insurance Fund at risk and result in foreclosure proceedings against delinquent seniors," Stevens added.  “While the guidance ... is intended to help elderly homeowners avoid foreclosure, lenders may have no choice if these defaults are not cured."    


As lawmakers and regulators continue to debate the need for and effectiveness of federal foreclosure prevention programs, some bankruptcy courts are taking matters into their own hands, establishing “loss mitigation programs” as part of the bankruptcy process. 

A recent analysis by the National Consumer Law Center found that bankruptcy courts in Rhode Island, New York and Vermont are now requiring mortgage lenders to negotiate with borrowers seeking bankruptcy protection in an effort to forestall foreclosure.  

“Bankruptcy courts can play an important role in avoiding unnecessary foreclosures and facilitating mortgage modifications through implementation of LMPs,” John Rao, a researcher with the NLC, wrote in a recent issue of the ABI Journal.

The court-mandated programs include a variety of borrower protections, administrative checks and accountability provisions that critics say the Home Affordable Mortgage Program – the Obama Administration’s flagship foreclosure assistance program – lacks.

Specifically, Rao writes, the court programs set time limits for negotiations, require lenders to report on their status, and inform the court before terminating the discussions.  According to Rao, approximately 35 percent of the negotiations ordered by Rhode Island and New York bankruptcy judges between November, 2009 and December 31, 2010, resulted in successful modifications. 

“The number of modifications attained should not be the only goal of the LMPs,” Rao wrote. “Providing for a fair and transparent process, judicial efficiency and speedy outcomes are other measures of success.”

A Rhode Island bankruptcy judge recently affirmed the court’s authority to mandate loan modification discussions, rejecting the arguments of lenders who had challenged the program. 

U.S. Bankruptcy Court Judge Arthur N. Votolato emphasized that the court’s program does not mandate settlement terms – it simply requires lenders to negotiate with borrowers.  Court action was needed, he said, “[to respond] to the home mortgage and foreclosure crisis generally,” and because the court was being required to reschedule bankruptcy hearings repeatedly because of the delays borrowers encountered in trying to obtain loan modification agreements.  “This practice of parties repeatedly seeking more time simply because they had not yet connected was counterproductive, it was a huge waste of time for the parties and the Court, and was forcing needless litigation ...” Judge Votolato said in his order.  “We decided to break the log jam” [by creating a process that would] open communications between debtors and the lenders’ decision-makers.”

Rhode Island Congressman Sheldon Whitehouse praised the decision as “a win for Rhode Island homeowners.”  The bankruptcy mediation programs, he added, provide an effective alternative to the troubled HAMP [program, which has consistently fallen short of its projected goals.  

Whitehouse has filed legislation modeled on the Rhode Island program that would give bankruptcy judges the authority to require foreclosure mediation.  Unlike the “cramdown” measures Congress has rejected in the past, Whitehouse emphasized, his bill would not allow judges to restructure loan terms; it would simply empower bankruptcy judges to require “good-faith negotiations” between borrowers and lenders. 

“As the foreclosure crisis continues…across the nation, the administration’s Home Affordable Modification Program [HAMP], while well-intentioned, has not succeeded in producing anywhere near enough modifications to stem the tide of foreclosures,” Whitehouse said at hearing on his bill.   “Servicers too often act in their own fee-driven interests and not in the interests of the investors who actually hold the mortgages,” he added. “A court-supervised negotiation can ensure that servicers don’t reject reasonable settlements.”  


For more than 50 years, the dream of home ownership has been aggressively promoted and widely shared. But in the wake of an economic downturn triggered in part by the housing market collapse, policy makers are rethinking the assumption that ownership is good for all (or most) and are reconsidering some of the policies that have promoted it.  

Proposals to eliminate or scale-back Fannie Mae and Freddie Mac, whose dominance of the secondary market has increased the availability and affordability of home mortgages, have gotten the most attention, but other suggestions would also alter the home ownership landscape in fundamental ways.  Two ideas in particular are concerning consumer advocates and housing industry trade groups:  Reducing the mortgage interest deduction and increasing the down payment requirement. 

Industry trade groups are most concerned about eliminating the interest deduction – one of the ideas on a long list of suggestions for reducing the federal deficit.  "The mortgage interest deduction has been a cornerstone of the nation's housing policy for almost a century, and it is vital to homeownership and healthy housing markets," Bob Nielsen, chairman of the National Association of Home Builders, said in a recent press statement.  "Members of Congress need to know that there is widespread support for the mortgage interest deduction and that their constituents do not want it to be eliminated or restricted," he added, joining the National Association of Realtors (NAR) in speaking out against change in the existing policy.

Consumer advocates, meanwhile are targeting regulatory proposals that would increase down payment requirements – moving the norm closer to 10 percent to 20 percent, and virtually eliminating the extremely low- and no-down payment loans that were common during the housing boom. 

These regulatory proposals assume that low down payments contributed to the housing melt-down, and that increasing them is necessary to prevent another housing crisis in the future.  But the Center for Responsible Lending (CRL) contends that the problem was not the low down-payment loans themselves but the irresponsible way in which many were underwritten.

Restricting or eliminating low down payment loans is viewed mistakenly as “getting back to the way mortgages used to be made,” a CRL policy brief argues.  “In fact, low down payment home loans have been a significant and safe part of the mortgage finance system for decades, bearing little resemblance to subprime and other alternative mortgage products that crashed our economy.”  Increasing down payment requirements “would materially shrink the mortgage market with little increase in loan performance,” the policy brief concludes. Properly underwritten, “responsible” low-down payment loans, on the other hand, will support homeownership, which “remains a key driver of personal and national economic prosperity.”   


Large financial institutions are responding to new consumer protection regulations by looking for opportunities to increase existing fees or add new ones.  Among the casualties:  Free checking, previously a standard feature at virtually all banks, but now offered by only about half of the largest ones, according to Moebs Services.  

The economic research firm estimates that the number of “large Wall Street banks” offering free checking has declined by almost 13.6 percent over the last two years. And they are losing customers to credit unions and community banks as a result. 

“There is a fundamental consumer-shift going on in the banking sector,” said Mike Moebs, economist and CEO of Moebs Services., said in a press release.  He predicts that 13,000 consumers will move their accounts by the end of this year to avoid paying fees for a product that they expect to receive at no charge.   

Large institutions don’t have many good choices, according to Moebs, who notes that compliance costs have made it unprofitable for most of them to offer free checking broadly to “average” consumers.

“It costs about $300 on a fully absorbed cost basis to operate a checking account, and with fees falling below these costs, the average checking account at a Wall Street bank is unprofitable,” Moebs noted. “Because Main Street financial institutions can operate below the $300 cost level, they can turn a profit, and will continue to take market share away from the larger banks.”

At the end of 2009, large banks, with assets of $50 billion or more, claimed about 45 percent of the 130,000 consumer checking accounts in the U.S.  Last year, about 5 million of those accounts shifted to community banks and credit unions – the beginning of a trend that Moebs says will accelerate, giving smaller financial institutions 65 percent of the market by the end of this year.   

Some industry experts have predicted that free checking will disappear, but the Moebs data suggest that the accounts are just moving, not disappearing.  The number of credit unions offering the no-charge accounts increased by 9 percent last year, while the number of community banks increased by 1 percent.  “To paraphrase Mark Twain,” Moebs said, “the death of free checking has been greatly exaggerated.” 


Take the statistics indicating that worker productivity levels are increasing with a grain or two of salt; a recent study finds that employees are truly productive only half of every working day; the other half is spent on work-related but not terribly useful tasks, such as responding to e-mail  and managing incoming information and correspondence.

That is the unsettling, if not terribly surprising, conclusion of a recent study by Fonality, a business communications company.  The conclusion isn’t surprising, because the company’s recommended strategy for reducing unproductive time is to purchase the cloud-based communications management systems it sells.  Still, the statistics are interesting.  

The study estimates that employees spend about 36 percent of their time trying (not always successfully) to contact customers or colleagues, find information or schedule meetings; 14 percent of the day is devoted to managing information – forwarding e-mails, making follow-up calls, and disposing of spam. The study’s authors calculate that reducing “unproductive” time by 25 percent will add six weeks of productive time annually per employee, “which should be an immediate call to action for business owners,” a company spokesman suggested.