Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

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The betting is heavy but the odds are mixed on whether Edward DeMarco, the head of the Federal Housing Finance Agency (FHFA) will bow to pressure and allow Fannie Mae and Freddie Mac to reduce the principal balance on some mortgages in order to help borrowers avoid foreclosure.

DeMarco has consistently opposed principal reductions, citing the cost to taxpayers and “moral hazard” – the possibility that borrowers who can handle their loan payments will “default strategically” in order to reduce their loan obligations.

Analysts who heard DeMarco speak recently at the Brookings Institution drew different conclusions about whether the increased incentives the Treasury Department is offering for principal reductions under the Home Affordable Mortgage Program (HAMP) have led the FHFA director to alter his view.

Bank of America analysts wrote in a note to investors that they saw a “zero to minimal chance” that principal reductions are in the offing for Fannie and Freddie. But analysts at Keefe Bruyette concluded otherwise:  "We think a change in policy to allow more principal reductions is coming but expect it will be announced later in the month."

New York Times article reporting on the speech suggested that DeMarco’s remarks had “opened the door” to principal forgiveness, but then went on to note that his comments “left doubt about whether he would change his long-held stance” opposing that policy. 

Those who found evidence that DeMarco is bending on the issue focused on his acknowledgment that the Treasury incentives (increased from between 6 and 21 cents for every dollar of principal reduced to between 18 and 63 cents) would save Fannie and Freddie approximately $1.7 million.  “No wonder the FHFA might now be keener on the idea,” an analysis by Capital Economics suggested.

But those who saw little reason to expect DeMarco to embrace principal reductions concentrated on the bulk of his speech, in which he detailed all the reasons he still doesn’t like idea.  For one thing, he noted, the projected savings may be more ephemeral than real, since they assume that all of the nearly 700,000 eligible borrowers would participate, and discount the “moral hazard” that DeMarco sees as a major problem.  If 90,000 borrowers default strategically, he said, the savings from the Treasury incentives would be erased.

Although borrowers for whom principal is forgiven re-default less frequently than those who receive principal forbearance (where the payment reduction is temporary), DeMarco acknowledged, the impact on investors also has to be considered, and their losses are higher when principal is reduced. 

DeMarco also questioned assertions that because Fannie and Freddie are by far the major players in the mortgage market today, their failure to reduce principal for borrowers is impeding the housing market’s recovery.  The borrowers who would be eligible for relief represent only “a fraction” of the approximately 11 million homeowners estimated to be “underwater” today, DeMarco said, so the impact on the market will be negligible.  

“This is not about some huge difference-making program that will rescue the housing market,” DeMarco said. “It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers.”

That sounds like someone who is sticking to his guns, not surrendering them. But with pressure on Fannie and Freddie continuing to mount, DeMarco’s opposition to principal reductions may not matter, Issac Boltansky, an analyst at Compass Point, told DS News.   “If he refuses to adopt principal reduction as a means of foreclosure prevention,” Boltansky said, “we believe the likelihood of him being relieved of his position is extremely high."  □

UNFLATTERING ATTENTION

Force-placed insurance, which has resided for years in a dark corner of the mortgage industry, is now in the spotlight, and the attention hasn’t been flattering.  New York state insurance regulators announced recently that they are broadening the investigation they launched earlier this year, asking several insurance companies to justify premiums on force-placed home insurance policies, which mortgage lenders buy on behalf of borrowers whose coverage has lapsed.  The New York investigation reportedly has found evidence that these policies cost as much as 10 times the price of the lapsed policies but have claims rates that are a fraction of industry averages.

New York regulators aren’t the only ones asking questions about industry practices.  The California insurance commissioner recently ordered the 10 largest companies providing force-placed insurance in that state to lower their rates.  And Fannie Mae recently announced that it intended to establish a relationship with an insurance company to control the issuance and pricing of force-placed policies on loans Fannie has purchased. Fannie is also issuing new guidelines detailing the circumstances under which lenders can force-place insurance and specifying the charges they can require borrowers to reimburse.

Law suits challenging force-placed insurance are proliferating.  In a case that industry executives are following closely, and with concern, a federal judge has cleared the way for a class action suit against Wells Fargo.  The borrower initiating the action claims that the bank charge him $10,000 for seven months of coverage that he was able to purchase for only $2,500 per year.American Banker, whose reporting spurred the New York investigation, has kept up the pressure. A recent article focusing on the work of a Florida attorney, details “evidence of abuses and self-dealing [suggesting] that there may be far larger problems in how servicers are handling distressed loans than the sloppy document recording that has been the recent focus of industry woes.”

The article notes in particular potential “conflicts of interest” involving questionable and possibly illegal commissions insurers pay to the lenders purchasing force-placed policies from them. 

"There's no arm's-length transaction here, and that creates all sorts of incentives for the servicer to force-place excessive insurance and overcharge consumers for policies that provide minimal benefit," Diane Thompson, of counsel for the National Consumer Law Center, told the publication. "Servicers and insurers have turned this into a gravy train."“With little regulatory oversight or even private investor awareness, force-placed insurance has helped make drawn-out foreclosures lucrative for servicers — far more so,” in some cases, the article adds,  than avoiding the foreclosure.  “As the intermediary between borrower and investor,” the article suggests, “servicers appear to be benefiting themselves at the expense of both.” 

NO CONFIDENCE

Young people, who represent the nation’s future, aren’t very confident about it.  A recent survey of teenagers between the ages of 14 and 18 found that only 56 percent of them expect to do as well or better financially than their parents.  That’s down from nearly 90 percent responding to the survey, conducted by Junior Achievement and The Allstate Foundation, last year. 

The 2012 Junior Achievement Teens and Personal Finance survey also uncovered a dramatic shift in the age at which teens think they will be financially independent from their parents or guardians. Only 18 percent of the teens who responded indicated they'd be independent by age 20, compared with 44 percent a year ago; the number of teens who said they won’t be independent until they are much older (25 to 27) doubled to 23 per cent compared with 12 percent in 2011.   

Among other survey results: 

  • Teens agree that managing their money is important, but few are doing it. Nearly one-third of the respondents said they weren’t budgeting their money, compared with only 10 percent who admitted that in the 2011 survey. 
  • Teens are not getting as much financial information in school as they have in the past.  Nearly 60 percent said they were learning about money management in school last year; this year, only 24 percent said they were getting that training.  Most agreed that it would be best to get that information before they graduated from high school.  .
  • Parents are an important role model in financial management as in other behaviors. Nearly 60 percent of the teen respondents said  their parents have reduced their savings during the recession (up from 21 percent last year), and the kids are following suit – only 56 percent said they plan to save some of the money they earn this year, down from 89 percent last year. 

NEVER MIND

Just two weeks after announcing a new, more restrictive lending policy, the Federal Housing Administration has decided to delay it.  The policy would have denied FHA loans to borrowers who had more than $1,000 in disputed debts unless they either repaid the sum or could demonstrate at least three months of consistent payments to reduce it. 

The policy, announced in late March, was designed to reduce default risks and bolster the agency’s reserves, pressured by delinquency rates that have increased as the FHA’s loan volume has soared.  Agency officials described the policy as “prudent and reasonable,” but they modified it almost immediately, as lenders and builders reported an immediate and devastating impact on loan originations and new home sales.  

In the face of that backlash, agency officials announced an exemption for borrowers who could demonstrate that their collection dispute was related to “life events,” such as medical bills, a job loss or divorce.  But they backpedaled further and faster the next day, saying they would delay implementation of the policy until July 1, to give lenders time to adjust to the new rule.  In the meantime, agency officials said, “the FHA “intends to seek additional input on this section and work to clarify guidance, as appropriate." 

Industry executives think that’s a nifty idea.  They will note among other concerns that collection problems are common among first-time buyers, who rely disproportionately on FHA loans.   

"I know first-time home buyers and I know the starter home market, and that is just the way it is," Jeremy Radack, a Texas real estate attorney, told Builder on Line.  The FHA’s desire to reduce its risks and its losses is understandable, Radack said, but this policy, he believes, is a misguided effort to do so.  

"Unless there’s some secret study that I have never seen, there is absolutely no relation as to how much collections you have and how you pay back your mortgage," he said. Credit scores, he added, are a much more accurate indicator of default risk. 

DISCRIMINATORY MAINTENANCE

Fair Lending and Fair Housing are intersecting in an investigation with potentially unsettling consequences for some major financial institutions.  The Department of Housing and Urban Development (HUD) is investigating allegations that Wells Fargo violated anti-discrimination laws by failing to maintain foreclosed homes in minority neighborhoods as effectively as homes in more affluent communities.

The complaint is the first of several a coalition of housing advocacy groups says it plans to file based on a study of more than 1000 properties in 8 cities.  Wells Fargo is one of six lenders targeted in the study, which was funded by a grant from HUD.  

The review found that properties in white neighborhoods were consistently maintained more carefully and marketed more aggressively than properties in areas with large black and Hispanic populations according to Morgan Williams, director of enforcement and investigations at the National Fair Housing Alliance (NHFA), the lead group in the coalition.  Williams said the advocacy groups were “dismayed” by the findings.  

Neglect of foreclosed properties contributes to blight in affected neighborhoods, Shanna Smith, president of the NHFA, said in a conference call with reporters.  And that blight “is all the responsibility of the banks [that] own and have an obligation to market and maintain these properties," she said.

Wells Fargo officials denied allegations that the bank’s handling of foreclosed properties is discriminatory.  “Wells Fargo conducts all lending-related activities in a fair and consistent manner without regard to race,” Vickee Adams, a bank spokeswoman, told reporters.  “That includes the marketing and maintenance standards for all foreclosed properties for which we are responsible.”

HUD officials have declined to comment publicly on the discrimination charges against Wells Fargo, other than to confirm that an investigation is under way.

The complaint against the bank does not suggest that it discriminated intentionally against minority neighborhoods, only that its practices had a discriminatory impact on them.

"The intent to discriminate is often … demonstrated in the law through substantial significant disparities, and we certainly have those here," Peter Romer-Friedman, an attorney representing the NHFA said.   "We have no doubt that either HUD or a federal court could easily conclude that the type of conduct that was observed by our investigation here is well within the framework of what Congress intended to prohibit."