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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Twice in the past six years, the Department of Housing and Urban Development (HUD) has floated a plan to overhaul the Real Estate Settlement Practices Act (RESPA),  a statute that nearly everyone views as dysfunctional at best and counter-productive at worst, only to see the proposed reforms shot down by industry opposition. 

Given that history, the consensus expectation was that HUD this time would offer a narrowly drawn proposal designed to avoid controversy and win broad support.  But the plan the agency has outlined turns out to be more expansive in some respects than its predecessors, and initial industry reaction suggests that the road to approval will be anything but smooth.

“Complicated, confusing and controversial” is how attorney Philip Schulman, a RESPA specialist, described the revamped reform plan.  “It’s déjà vu all over again,” he told National Mortgage News.

Some aspects of that “déjà vu” are decidedly different, however.  The subprime meltdown has heightened concern about predatory lending, creating a political environment that is far less resistant to financial a regulation and more receptive to HUD’s argument that mortgage-related disclosures need to be clearer and more helpful to consumers.

 “There was opposition last time and there will be opposition this time,” HUD Assistant Secretary Brian Montgomery predicted.  But given the continuing fallout from the subprime mess and ongoing concerns about rising foreclosure rates, Montgomery told reporters, “the timing is very good to push through what we think is a very bold change.” 

Unlike the reform plans rejected in the past, the current proposal does not include the “guarantee d payment” option that would have allowed lenders to bundle closing services from varied providers (without violating RESPA’s anti-kickback provision) in exchange for guaranteeing the loan rate quoted on the “Good Faith Estimate” (GFE).  But the new plan revamps the final settlement statement as well as the GFE, mandates the use of a standardized GFE form, and introduces a controversial “closing script” designed to ensure that borrowers understand the terms of their loan and are aware of any discrepancies between the estimated and final loan costs.  The new proposal also requires the disclosure of “yield spread premiums” paid to brokers for originating higher-rate loans – a requirement that mortgage brokers opposed before and are no more likely to embrace now. 

With these changes, the GFE “will finally mean what it says.  What you see [will be] what you get,” HUD’s Montgomery told reporters at a press conference announcing the proposal. 

HUD also anticipates that by encouraging borrowers to shop for mortgages and making it easier for them to compare loan costs and terms, the proposed reforms will reduce loan origination costs by an average of $668 per borrower, generating aggregate savings of $8.35 billion annually.  Most of those savings ($5.88 billion) will come from the revenues of loan originators -- $3.53 billion from mortgage brokers and $2.35 billion from depository institutions – a fair result, HUD’s impact statement argues, because they have been overcharging uninformed consumers through the combination of high origination fees and yield spread premiums.” 

The analysis also estimates that the RESPA revisions will produce $550 million in up-front compliance costs for originators and settlement services providers, and ongoing compliance costs of $1.2 billion annually, amounting to an additional $100 per loan.

As in the past, industry executives have responded to the proposal initially by emphasizing their support for RESPA reform and their belief that clear consumer disclosures are important, while expressing “concerns” about the specific changes HUD is proposing.  Whether these “concerns” will solidify into the wall of opposition that defeated past RESPA proposals remains to be seen, but in what probably is not a promising indicator, seven industry trade groups have asked HUD to extend the comment period from 60 to 120 days.  Noting that the 300 page proposal covers “myriad subjects beyond disclosures,” the groups note in a joint letter that “it will take commenters more than 60 days to study the [plan] carefully and to prepare thoughtful comments on the implications of its many provisions.”   

That hardly sounds like smooth sailing ahead.  The more likely interpretation, according to industry observers who have followed past RESPA reform battles:   “Here we go again.”     

IDENTITY PROBLEMS

Here’s another reminder, if you needed one, that identity theft is still a major concern and data breaches an ongoing problem.  The Identity Theft Resource Center reports that the personal and financial information of more than 8 million consumers was disclosed improperly in the first three months of this year, as a result of security breaches at businesses universities and government agencies.  More than half of those breaches stemmed from intrusions at a large supermarket chain (Hanaford) reported last month.  Advance Auto Parts, Compass bank, Iron Mountain, and Davidson Companies accounted for a combined total of 1.9 million exposed records.  Businesses were responsible for more than 35 percent of the breaches, followed by schools (25 percent), government agencies, including the military (18 percent), and medical and health care (14 percent). Financial institutions had the best record, at least relatively, accounting for only 7 percent of the reported breaches. 

The statistics indicate two trends, ITRC officials say:  The incidents of data theft or attempted theft are increasing, and, partly because of new laws and concern about media reporting, the entities involved are reporting the breaches.  “We’ve been tracking this data since 2001,” an ITRC press release noted, “and one thing we can absolutely say is that this is NOT a new problem.”  

CREDIT CARD RIGHTS 

Giving legislative expression to their criticism of credit card industry practices, Congressional Democrats have proposed a “Credit Card Holders Bill of Rights.”  Drafted by Rep. Carolyn Maloney (D-NY), chairman of the House Subcommittee on Financial Institutions and Consumer Credit, the measure calls for changes that go far beyond the expanded disclosure requirements the Federal Reserve is developing.  Among other provisions, Maloney’s bill would require card issuers to give consumers 45 days advance notice of any increase in rates (up from 15 under current rules) and would prohibit the now common practice of charging interest on amounts that have been repaid.  The legislation would also limit the right of lenders to alter contract terms, require them to mail statements at least 25 days before the payment due date and restrict the imposition of late-payment fees. 

“A credit card agreement is supposed to be a contract,” Maloney said in a statement, but that contract has become increasingly one-sided as consumers “have lost the ability to say no to unfair interest rate hikes and fees.” The legislation she is proposing “fosters fair competition and the values of a free market,” Maloney insisted, while also responding to “major industry abuses.”

Despite her emphasis on its free market mind-set, the legislation encountered immediate and stiff industry opposition, led by the American Bankers Association (ABA).  “We are concerned that the changes outlined in this legislation would unintentionally force higher costs and reduce access to the very people it intends to help,” Ed Yingling, the association’s CEO, complained to reporters. The proposed restrictions on lenders would reduce the availability of credit to consumers, “counter acting the economic stimulus efforts under way to help reverse the current downturn,” he warned. 

COMPETING PRESSURES

Trying simultaneously to address past problems while avoiding future ones, Fannie Mae has announced that it is tightening underwriting standards, while giving delinquent borrowers struggling with existing loans more time to find alternatives to foreclosure.  The seemingly contrary policies reflect the competing pressures on Fannie and Freddie Mac, from legislators, who want them to play a larger role in resolving the subprime crisis, and from their shareholders, who are not pleased by the large foreclosure-related losses both have reported this year. 

In two separate announcements, Fannie Mae informed loan servicers recently that they will be able to give delinquent borrowers six months instead of four to resolve their problems, before initiating foreclosure actions against them.   In the second announcement, Fannie Mae officials said they were establishing a minimum credit score of 580 for loans the company will purchase going forward, while considering lower scores in some “special” circumstances.  The new guidelines will also increase from four to five years the “recovery period” required for borrowers seeking loans following a bankruptcy, although, again, the guidelines will allow a shorter period for borrowers who can show “documented extenuating circumstances”   contributing to their bankruptcies. 

“Given the current state of the mortgage and housing markets, it is critical for our company to conservatively manage our business and risks through prudent pricing and underwriting, while providing sustainable liquidity to our lender customers and stability to the markets as part of our core mission," Fannie Mae Spokesman Brian Faith said in a press statement. "We have taken these steps to ensure that borrowers receive loans that give them the best chance to sustain homeownership,” he added.

Both Fannie Mae and Freddie Mac have also announced recent increases in their underwriting fees, as they seek to offset the losses that have battered the stock prices of both companies.  According to the Wall Street Journal, the new fees will  add .0125 points to the interest rate for borrowers with solid credit scores putting  20 percent down; for weaker borrowers with lower down payments, the increase could be as much as half-a-point.

Separately, the Office of Federal Housing Enterprise Oversight (OFHEO), the primary regulator for Fannie Mae and Freddie Mac, has decided to ease their capital requirements so the two companies can increase liquidity in the credit-strained secondary mortgage market.  Analysts estimate that the policy change will allow the two companies to purchase an additional $200 billion in mortgages this year.