POINT AND COUNTERPOINT

Massachusetts Attorney General Martha Coakley has filed suit against five major mortgage servicers because of their allegedly shoddy foreclosure practices, and one of them – GMAC Mortgage —has retaliated by announcing it will no longer purchase mortgages originated in the state. 

“GMAC Mortgage has taken this action because recent developments have led mortgage lending in Massachusetts to no longer be viable,” a company press statement explained. 

Coakley responded by suggesting that GMAC “has acknowledged it has a problem” complying with the foreclosure procedures mandated by state law.

Her suit accuses GMAC, Bank of America, Wells Fargo, JP Morgan Chase and Citi of unlawful and deceptive conduct in the foreclosure process, including unlawful foreclosures, false documentation, and robo-signing…and deceptive practices related to loan modifications.”  The suit also accuses the banks of using the electronic loan registration system operated by MERS, which is also named in the suit, to avoid registration fees in the loan closing process and to conceal the identities of loan purchasers from borrowers. 

Coakley has described the suit as “the nation’s first comprehensive lawsuit against the five major national banks regarding the foreclosure crisis.”

Spokesmen for Bank of America, Chase, and Wells Fargo all expressed “disappointment” at the state’s action, saying it will undermine ongoing efforts by state attorneys general in conjunction with the federal government to negotiate a uniform, nationwide settlement to resolve allegations of widespread foreclosure abuses. 

“We continue to believe that collaborative resolution rather than continued litigation will most quickly heal the housing market and help drive economic recovery,” Lawrence Grayson, a spokesman for Bank of America, told the New York Times. 

“Regrettably, the action announced in Massachusetts today will do little to help Massachusetts homeowners or the recovery of the housing economy in the Commonwealth,” a Wells Fargo spokesman agreed.

But Coakley said she filed the suit precisely because negotiations have been going on for more than a year, “and I believe the banks have failed to offer meaningful and enforceable relief to homeowners.  They’ve had more than a year to show they’ve understood their role and the need to show accountability for this economic mess, and they’ve failed to do so.”

Attorneys General in other states, including New York, California, Delaware and Nevada, have also balked at proposed settlement terms that preclude the broader investigation they feel is justified into the role played by syndicators, as well as loan servicers, in the foreclosure mess.  Dissident AGs also have complained that the proposed settlement amount – between $20 and $25 billion -- is too small, and the liability release for lenders too expansive.  

Responding to the Massachusetts suit, Iowa Attorney General Thomas Miller, who head the AGs’ coordinating committee, said he remains optimistic that a broad-based settlement will be reached.  He noted that Coakley has indicated she will review the settlement terms and “we’re optimistic that we’ll settle on terms that will be in the interests of Massachusetts.”   

GUMMING UP THE WORKS

A strong housing market operates with the precision of finely-tuned machine.  Existing homeowners sell their homes so they can move up to a larger or newer or better-located dwelling, which they purchase from another owner, who also wants to move.  First-time buyers occupy the first step on the housing market escalator; take them out of the queue, and the gears freeze.  This is a simplistic, but not inaccurate picture of what is happening in the housing market today.  The first-time buyers, who should be driving the recovery, are unable or unwilling to jump behind the wheel. 

The National Association of Realtors (NAR) reports that first-time buyers, who were responsible for half of all home purchases in a 2010 study, accounted for only 37 percent in the  NAR’s most recent survey, covering purchases between July  2010 and July  2011.  The decline is notable and serious, NAR President Ron Phipps said, because “this segment is critical to a housing recovery; they help existing homeowners sell and make a trade.”

The NAR and others blame tighter credit standards for impeding home buying activity.  The NAR analysis found that the median income of first-time buyers was $62,400 in 2011 compared with $59,900 in the 2010 survey; for trade-up buyers, median income was $96,600 compared with $87,000 in 2010.  First-time buyers in the 2011 survey paid nearly 2 percent more for the homes they bought, but their incomes were more than 4 percent higher, according to the NAR report. 

A separate analysis by Zillow.com found that the median down payment for a single-family home in 9 major U.S. cities was 22 percent compared with 4 percent in 2002, and the minimum credit score has increased from 720 in 2007 to 760 today, disqualifying about one-third of all U.S. households.  

“The bar has been raised to qualify for a loan,” Paul Bishop, vice president of research for the NAR, said in a press statement.  “Buying your first home has never been particularly easy, but with record-high housing affordability conditions and pent-up demand, we normally would expect a stronger performance.  This underscores how important it is to open the credit spigot for creditworthy buyers,” he added.  “Banks simply need to get back into the business of lending. Higher home sales would help create jobs through related economic activity.”

Other analysts suggest that tight credit standards aren’t the only obstacle deterring first-time buyers.  The unemployment rate for young adults between the ages of 25 and 34 – the most likely first-time buyer demographic – is currently 9.8 percent compared with 9 percent overall.  And with home prices still declining, albeit more slowly than in the past two years, an Associate Press report noted, “even many of those who could afford to buy [a home] no longer see it as a wise investment.”

The NAR survey found that nearly 80 percent of the recent homebuyers view home ownership as a good investment – better than stocks in the opinion of 45 percent of them, although, considering the recent stock market performance, that may be damning with faint praise. 

Most analysts agree that a stronger economic recovery will revitalize the housing market. “It's a guessing game as to when things will turn around," Mark Vitner, senior U.S. economist at Wells Fargo, told AP. "But until they do, you won't see young people buying homes."  

REGULATIONS KILL JOBS — REALLY?

Regulation ties the hands of business executives, discourages innovation, and impedes job creation.  That argument has become something of an article of faith for many legislators and lobbyists, repeated so often and questioned so rarely, it has acquired the aura of established fact. But some economists suggest that there are good reasons to question the underlying assumption – that too much regulation has caused many of our economic problems and easing regulations would solve them.

The “job-killer” epithet in particular doesn’t seem to bear close scrutiny. The Bureau of Labor Statistics found that of the new unemployment claims submitted in the first two quarters of this year, only 2,085 were attributed to government regulation; 55,759 were linked to weak demand for products or services. Echoing those findings, fewer than 20 percent of the small business owners responding to a National Federation of Independent Business survey cited government regulations as their most serious concern; 80 percent cited lack of demand. 

Environmental regulations are often cited as a poster child for over-regulation, but the Environmental Protection Agency (EPA) doesn’t seem to be guilty, or as guilty, as charged.  A study of EPA rules conducted about 10 years ago concluded that the economic impact was neutral, with affected industries adding about the same number of jobs they lost.  A more recent report by the Economic Policy Institute, points out that EPA-related compliance costs represent just 0.1 percent of the overall economy – a cost that businesses must absorb, but far from a “job-killer,” this study contends. 

 “There are certain business [executives] who say regulation is an issue, but they also said the same thing when the economy was growing robustly,” Gary Burtless, a labor economist at the (admittedly liberal-leaning) Brookings Institution, told CNNMoney.com. 

Regulatory compliance does increase operating costs, Douglas Holtz-Eakin, a former director of the Congressional Budget Office, agreed. “But in the end, if you’ve got money pouring in hand over fist, additional costs of any sort look insignificant.” 

Analyzing regulatory costs from a different perspective, researchers at the International Monetary Fund found that overly lax regulation was largely to blame for the housing crisis and the economic turmoil it created.  “We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle,” the authors of this study, conclude.  “More stringent regulation,” they suggest, could have averted some of the economic turmoil, and the large-scale job losses resulting from it.  

RETHINKING DISPARATE IMPACT

A case pending before the U.S. Supreme Court has the potential to limit the ability of plaintiffs to bring “disparate impact” claims under both the Fair Housing and Equal Credit Opportunity Acts.  Consumer advocacy groups and the Justice Department have won many court judgments against lenders or negotiated settlements with them to resolve allegations that policies had a discriminatory effect on protected classes, even if there was no intent to discriminate against them. 

The underlying case (Magner v. Gallagher) doesn’t involve a lender; it stems from a dispute between rental property owners and the city of St. Paul Minnesota over the city’s housing code enforcement actions.  The property owners claimed that the city’s insistence on sweeping improvements to correct code violations resulted in the forced sale of some properties and the condemnation of others.  The policy, thus, had a “disparate impact” on lower-income and minority residents by reducing the availability of housing affordable for them, the landlords contended.

A trial court dismissed the case but an Appeals Court agreed with the property owners. The Supreme Court will decide whether disparate impact claims can, in fact, be brought under the Fair Housing Act (a question the High Court has not addressed), and if so, what legal standards should be used to evaluate those claims. 

“If the Supreme Court holds that disparate impact claims cannot be pursued, it will take away one of the legal avenues that private and governmental litigants could use in such cases,” Ballard Spahr, a Philadelphia law firm, wrote in a note to clients.  “But, more broadly, if the Supreme Court holds that disparate impact claims are not actionable under the Fair Housing Act … and disagrees with HUD’s interpretation of the statute, it would carry serious implications for disparate impact claims under the Equal Credit Opportunity Act [as well]."

Many banking industry attorneys are predicting that the court will, in fact, use this case to reduce the scope of disparate impact claims, at a time when the Justice Department has been ramping up its enforcement of fair lending laws.    The court’s decision to hear the case is significant because it could clarify the standard banks must meet to comply with both the Fair Housing and Fair Lending statutes, Greg Taylor, vice president and senior counsel at the American Bankers Association, told American Banker.  “That’s the big one, certainly,” he said.

Consumer advocates share the general view that the case bodes well for banks.  “Whenever [the court] has a chance to whittle down, if not obliterate, disparate impact, they will,” an attorney who represents plaintiffs in fair lending cases, told American Banker.  “And that’s no secret,” he added. 

FHA FEARS

The Federal Housing Administration’s (FHA’s) importance in the housing market is growing, and so are concerns about the viability of its mortgage insurance fund.  After insisting for weeks that the fund was on solid ground, agency officials acknowledged recently that they are considering increasing premiums on FHA-insured loans along with other steps to bolster the insurance fund’s reserves.

That admission, by Shaun Donovan, Secretary of Housing and Urban Development (HUD), followed the publication of an independent audit report, warning that the FHA could require a taxpayer bailout.  According to the audit, the agency has paid out $37 billion in insurance claims over the past three years as the nation’s housing crisis has intensified. Those payouts reduced the agency’s reserves to 0.24 percent in fiscal year 2011.  Continued losses and/or continued declines in home prices could force the agency to seek additional funding from the Treasury, increase its premiums, or both, the audit noted. 

FHA officials said at the time that it would take “a very significant decline” in home prices to require a Treasury bailout.  They also noted the audit report’s finding that new loans and stabilizing home prices over the next three years will likely bolster the FHA’s reserves. 

Other analysts point out that further declines in home prices are also possible and some contend that the audit underestimates the number of FHA borrowers who are underwater and face a high risk of foreclosure.

Donovan emphasized the positive in his recent testimony to the House Financial Service Committee, noting, “While we all have been through the second-worst housing downturn in the history of the country, FHA, unlike many other institutions, retains a positive fund balance and the current book of business is strong.”

Even so, he acknowledged, the agency “needs to take additional steps to protect taxpayers, and we will continue to do that.” Those possible steps include an increase in FHA insurance premiums, which the agency increased earlier this year, from 0.5 percent to 1.5 percent of the loan amount.

“FHA is constantly evaluating the appropriate level of premiums given the potential risks to the mutual mortgage insurance fund, and any action regarding premiums will be considered in the context of balancing access to credit in today’s economic environment with the need for added revenue generation to protect the fund," Donovan said in his written testimony.

 Republican lawmakers were not reassured by Donovan’s assessment.  “FHA is likely a disaster in the making,” Rep. Jeb Hensarling (R-TX), said during the recent hearing.  “If we’re not careful, it may even become Fannie and Freddie, the sequel,” he warned.

Despite those concerns, Republicans joined Democrats in voting recently to restore higher loan limits for FHA loans, while leaving lower limits in place for Fannie Mae and Freddie Mac.  An emergency measure that temporarily boosted limits for all three expired in September.  The FHA’s maximum loan limit will now be $729,750 for the next two years; the cap for Fannie and Freddie will remain at $625,500.

“There’s no doubt this will drive more business  to FHA,” David Stevens, the agency’s former commissioner, now president and chief  executive of the Mortgage Bankers Association, told the Wall Street Journal.