The subprime induced financial crisis seems likely to achieve what political pressure, an accounting scandal and withering criticism could not – stronger regulatory oversight of the giant government services enterprises (GSEs), Fannie Mae and Freddie Mac.
The Senate banking Committee has approved a bi-partisan measure (no small feat, given the political environment in Congress) that combines assistance for borrowers facing foreclosure with a revamped regulatory structure, including new financial restrictions on Fannie and Freddie. Committee Chairman Christopher Dodd (D-CT), the bill’s chief architect, linked housing assistance and GSE reform in order to win the support of Republicans – especially Richard Shelby (R-AL), the committee’s ranking Republican – who have opposed a taxpayer “bail-out” of borrowers or lenders, but have long sought legislation tightening the regulatory reins on the GSEs.
While the Senate bill expands the powers of the GSE regulator, it also reflects the pressure on Fannie and Freddie to help ease the credit crunch that is restricting the availability of mortgage financing for would-be homebuyers. So in addition to allowing the new GSE regulator to establish capital standards for the two secondary market lynchpins, the legislation would also make permanent a temporary increase in the maximum loans they can purchase, setting the conforming loan limit at $550,000. That is below the temporary cap ($729,250) Congress approved as part of the housing stimulus package approved earlier this year, but well above the former limit of $417,000.
The higher loan limit has not provided the anticipated boost to the jumbo loan market, however. According to Asset Securitization Report, since the higher cap was approved, Fannie Mae has securitized only two pools of jumbo loans totaling $2.6 million and Freddie Mac has completed only six totaling $15 million. Although narrower now than a few weeks ago, the large spread between conventional and jumbo rates – as much as 1.5 percentage points a few weeks ago – has put new loans beyond reach for many borrowers seeking to purchase homes or refinance existing loans in high-cost housing markets. Terming those results “disappointing,” Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, held a hearing recently to find out why.
Industry executives said the temporary nature of the increase in the Fannie/Freddie loan cap (slated to end this year absent further Congressional action) has been a major problem. “That is not enough time to develop an efficient market,” Heather Peters, deputy secretary for business regulation and housing in California, told legislators. “The market cannot develop without certainty.”
Frank made it clear during the hearing that he will support making the loan cap increase permanent, although he wants to leave it at the current level ($729,250), rather than rolling it back to $550,000 as Dodd’s Senate measure proposes. “We’re going to come out of this…with a strong argument against the yo-yo effect and, in fact, a strong argument for leaving [the caps] where they are,” Frank told CongressDaily recently.
Meanwhile, Fannie and Freddie have been taking steps to demonstrate that they are doing all they can to lubricate the constricted credit markets. Toward that end, Freddie Mac recently announced that it would purchase between $10 billion and $15 billion in jumbo loans – up to the current $729,750 limit – from major lenders, while Fannie Mae said it planned to pay the same amount for jumbos as it currently pays for conventional loans. Industry executives said those moves have already begun to “break the logjam” in the jumbo market, by setting a price for those loans.
Separately, Fannie Mae also announced recently that it was reversing a policy announced in December requiring higher down payments in “declining” housing markets. Responding to criticism from consumer advocates and housing industry trade groups (including traditional allies such as the National Association of Realtors and the National Association of Home Builders), the company said it will resume purchases of loans with down payments of from 3 percent to 5 percent in all markets. Critics had complained that the tighter underwriting policies discriminated against large metropolitan areas, hardest hit by mounting foreclosures, and would weaken an already struggling housing market.
“The impact of the policy becomes a self-fulfilling prophecy that creates declining markets that did not exist before and intensifies the decline for markets that are declining and delays their recovery," NAR President Richard Gaylord said in a letter to Fannie Mae Chief Executive Officer Daniel Mudd.
In addition to scuttling the declining markets policy, Fannie Mae has also agreed to refinance non-delinquent mortgages for up to 120 percent of the property’s current value on loans the company owns, to help borrowers avoid foreclosure.
The Federal Reserve (Fed) and the Federal Trade Commission (FTC) have jointly proposed new regulations that would require creditors to notify consumers when they receive credit on less favorable terms than other consumers. The rules, implementing a provision of the Fair and Accurate Credit Transaction Act of 2003, would apply to most creditors engaged in risk-based pricing and to credit decisions based in whole or in part on consumer credit reports. Under the proposal, creditors would have to provide the risk-based pricing notice after the terms of the credit offered or approved have been set, but before the consumer has become obligated to complete the transaction. As an alternative to providing the notices, the rules would allow creditors to give all consumers their credit score and an explanation of the basis for the credit decision.
The Credit Union National Association (CUNA) has expressed concern about the FACT Act requirements in the past, noting particularly questions about which consumers must receive the risk-based pricing notices and how credit unions will react to them. Jeffrey Bloch, CUNA’s senior assistant general counsel, said the association will review the proposed rules carefully to determine “to what extent” the association’s concerns have been addressed.
A PERFECT STORM
It could be shaping up as a perfect storm for financial institutions. A deteriorating economy, continued fallout from the subprime mess, and a consensus among legislators that regulatory shortcomings contributed to it are pushing federal bank regulators — the Federal Reserve (Fed) in particular — to consider tougher rules than they have tended to support in recent years. The new proposal addressing unfair and deceptive credit card practices is a case in point.
Issued jointly by the Fed, the National Credit Union Administration (NCUA) and the Office of Thrift Supervision (OTS), the proposed regulations go far beyond the improved consumer disclosures the Fed has argued in the past would be sufficient to protect consumers from abuses in credit card lending and other areas.
The credit card rules fall under that FTC Act umbrella, which means, among other things, that they would apply to federally chartered credit unions but not to state-chartered institutions, which are not covered by the federal law. Issued for a 90-day comment period, the proposed rules restrict or bar a number of common billing practices and require clearer disclosures of credit approval terms. The most significant provisions would:
- Prohibit issuers from increasing the interest rate on existing balances unless a promotional rate has expired or the card holder’s payment is more than 30 days late. This would effectively bar “universal default” rules, under which issuers increase rates if borrowers are delinquent on other accounts, even if they are current on their card payments.
- Prohibit the “two-cycle” billing method, in which the issuer applies the interest charge to the entire previous balance unless it is paid in full, in effect, charging borrowers interest again on the payment they are making.
- Prohibit the imposition of a fee for exceeding the card’s credit limit if the overage results solely from a hold the issuer has placed on the available credit. The rule would allow a fee only if the charge would have exceeded the card limit without the hold.
- Prohibit the imposition of fees for issuing credit if those fees absorb “the majority of the available credit” approved. Issuers can require consumers to provide a security deposit for opening an account, but they cannot charge that deposit against the account or credit card balance.
- Require issuers to apply payments in excess of the minimum payment to higher-rate balances first.
- Require issuers to notify consumers if an ATM withdrawal or point-of-sale transaction would overdraw the account and allow consumers to halt the transaction before incurring an overdraft charge.
- Require lenders advertising multiple APRs or credit limits in connection with firm offers of credit to disclose in those solicitations the factors determining eligibility for the lowest APR and the highest credit limits available.
Although focusing on credit card practices, the rules also address overdraft protection programs, requiring lenders to give consumers the right to “opt out” of those programs and barring overdraft fees if the overdrafts result from lender-imposed holds on deposited funds.
The Credit Union National Association (CUNA) and the National Association of Federal Credit Unions (NAFCU) have both asked their members for input on the comment letters the trade groups will submit.
CUNA hasn’t said much publicly about the rules but NAFCU President Fred Becker made it clear that he has several concerns, among them, that “all credit issuers are being tainted with a broad brush” – a brush that, Becker insists, does not apply to credit unions, because they are not engaged in the abusive practices the proposed rules target. “We want to make sure consumers are protected,” Becker said of the proposed rules, ‘but we also want to ensure that credit unions will still be able to offer credit to their members.”
Bankers were even less enthusiastic about the proposal and more pointed in their criticism. Edward Yingling, president and CEO of the American Bankers Association (ABA) described the proposed rules as “an unprecedented regulatory intrusion into marketplace pricing and product offerings,” that, he warned, “will result in less competition, higher consumer prices, fewer consumer choices, and reduced consumer access to credit cards.”
Although Congressional leaders had some kind words for the proposal, they also made it clear that they don’t view it as a substitute for more restrictive legislative proposals they are considering. Rep. Barney Frank (D-MA), who has criticized the Fed for failing to focus sufficiently on consumer protection, said the proposal represents “a very important step forward,” but legislation will “still be appropriate,” he told American Banker, because “what’s done by regulation can be undone by regulation.”
Here’s a bit of good news, for a change, about retirement accounts. The Employee Benefit Research Institute and the Investment Company Institute (ICI) report that average balances in 401(k) accounts increased at an annual rate of 8.7 percent between 1999 and 2006; the median account balance increased at a rate of more than 15 percent, according to this study.
The study is particularly telling because it spans several years, Jack VanDerhei, an economist at Temple University and one of the authors, emphasized. “Year-to-year comparisons can vary sharply,” he noted, reflecting the positive results of a good year in the stock market (as was the case in 2006), or the negative impact of a bad year, which 2007 may well turn out to be.
“The data show that most workers who have continued to save and invest in their 401(k) retirement plans over the past several years have done well,” VanDerhei said, “despite ups and downs in the stock market.”
The EBRI/ICI study analyzed the accounts of 3 million “consistent participants” holding 401(k) accounts at the same employer throughout the study period. The average account balance for all participants was $61,346; the median account balance was $18,986. “But such year-to-year snapshots can be misleading,” the study notes, “because the sample of 401(k) participants changes as older, high-balance workers leave the…system and younger workers enter and create new accounts.
Results are also skewed by the disparate impact of contributions on the accounts of older and younger workers. Average account balances among participants in their 20s rose more than 41 percent during the study period, but that is because “this group tends to start with small accounts, so new contributions have a large impact on their balances,” the study’s authors explain. The balances of workers in their 60s, by contrast, rose by only 3.7 percent annually, because they tend to have larger accounts on which contributions have a smaller net impact. Older workers are also more likely to withdraw funds from their accounts, the study notes. Among other key findings:
Most 401(k) assets are in stocks, with about two-thirds invested in equity funds and one-third in bond and money market funds and stable value assets. “These proportions have changed little over the past 10 years,” the study notes.
The share of 401(k) accounts invested in company stock has declined steadily since 1999. That trend continued last year, as the ratio declined by another 2 percentage points to 11 percent.
New employees are increasingly favoring lifecycle/lifestyle funds. At year-end, among recently hired participants in their 20s, 24 percent of account balances were invested in balanced funds, compared with 19 percent in 2005 and only 7 percent in 1998.
Workers don’t borrow much from their 401 (k) accounts. Only 18 percent of all participants eligible to borrow money from their accounts had done so through year-end, and the loan amounts tend to be small, averaging 12 percent of the remaining account balance.
NAR’S VICTORY STANCE
The National Association of Realtors (NAR) has resolved a bitterly-fought anti-trust battle with the Department of Justice by agreeing to give on-line real estate brokers access to the property listings controlled by the Realtor-operated Multiple Listing Service (MLS). The NAR’s press release announcing the settlement describes it as a “win-win for the real estate industry and the consumers we serve….The final order expressly provides that NAR does not admit any liability or wrongdoing and NAR will make no payments in connection with the settlement,” the association’s statement emphasizes.
But the NAR lost its central argument – that brokers operating through “virtual” on-line offices had no right to post Realtors’ listings on their Web sites. Casting the agreement in a very different light, the DOJ announcement says it requires the NAR “to repeal its anticompetitive policies and require affiliated multiple listing services to repeal their rules that were based on these policies. NAR will enact a new policy that guarantees that Internet-based brokerage companies will not be treated differently than traditional brokers,” the DOJ explains.
The DOJ filed suit against the NAR three years ago, charging that its MLS policies allowing brokers to withhold listings from on-line agencies, “prevented consumers from receiving the full benefits of competition, discouraged discounting, and threatened to lock in outmoded business models.” The policies the DOJ challenged were aimed primarily at companies offering discounted brokerage services on-line. In addition to barring “opt out” rules that allowed brokers to withhold their MLS listings, the settlement will eliminate a rule preventing on-line brokers who introduce prospective buyers to listings on-line from claiming a portion of the resulting sales commission.
Omitting details of the settlement, the NAR press release emphasizes the association’s commitment to a competitive market and its focus on helping consumers. The agreement illustrates that the real estate industry “is dynamic, entrepreneurial and fiercely competitive, NAR President Richard Gaylord said, adding, “Competition is alive and well in the real estate industry. In fact, the competitive nature of our industry is even more apparent in times of market turmoil like those we are currently experiencing.”
The terms of the agreement will “preserve and strengthen the MLS as a means for broker-to-broker cooperation intended to serve real estate professionals who are actively engaged in listing or selling property in that MLS,” Laurie Janik, the NAR’s chief counsel, added. “This will ensure that MLSs are used for what they were originally intended to do — to help real estate professionals find buyers for people who want to sell their homes,” she said.