OPTING OUT OR THROWING OUT? 

Concerns about the demise of overdraft protection programs, and the loss of fee income for banks resulting from it, may be overstated.  After surveying more than 1,300 consumers nationwide, ACTON Market Intelligence found that 58 percent of them will, in fact, opt out of overdraft protection when given the opportunity to do so.  But the vast majority of bank customers who use the overdraft service will opt in, the survey found, and they will pay a higher fee, if necessary, in order to  continue the service. 

Equally significant, the survey found that many of the consumers who do “opt out” will do so by default rather than by design, by failing to read and return the opt-in permission form.  (Under new Federal Reserve regulations, financial institutions  will have to obtain affirmative permission from existing consumers in order to provide overdraft protection services to them.)  When asked what they would do with the forms, 30 percent of current overdraft users said they would handle the forms the same way they handle most of the information they receive from their banks – by throwing it away. 

The number of overdraft customers who are  “opted out” by failing to respond will far exceed the number who opt out affirmatively, because they don’t want to pay overdraft protection fees, Brian Beach, CEO of ACTON, said in a press statement describing the survey results.  “Our research confirms that if a bank or credit union sends out only the opt-in form, without previous info-marketing in place, almost a third of their overdraft customers will likely not respond and will be opted out,” Beach noted.  “Since especially heavy overdraft users are predisposed to opt-in,” he added, “getting them to respond is key.”

The ACTON study identified another potential problem many financial institutions have not recognized:  Heavy overdraft protection users, who fail to opt in and subsequently have a debit charge denied at the point of sale, will respond by opting in for overdraft protection – at another institution.

“The psychology of overdraft users is such that they are extremely averse to having their debit card transaction denied at retail,” Beach said.  “If they begin to be denied, they will not just re-opt-in with their current bank or credit union.  Most likely they will cut and run.  And it will not necessarily be the better overdraft program of another bank that attracts them – it is the stigma and experience of being denied that they want to escape by moving to another [institution].]”  ACTON estimates that up to 5 percent of all debit card users could vote with their feet in that way.

Industry executives worrying about the consumers who will opt-out of overdraft programs are focusing on the wrong issue, Beach said.   It is the “non-responses” of heavy overdraft users who want the protection that ought to concern them, accounting for about 30 percent of the overdraft fee losses institutions will incur, ACTTON estimates.  “And then the other shoe drops,” Beach warns, “when unprotected customers react and banks lose 5 percent of all their debit card accounts as a result.”    �

BRACING FOR CHANGE

Restrictions on derivatives, protection for consumers and the role and independence of the Federal Reserve have captured the headlines and dominated the financial reform debate.  But the sweeping reform bill, which recently won Senate approval, contains a number of provisions that, though less visible, will require major changes in the way lenders underwrite residential mortgages and how loan originators are compensated. 

Both the Senate and House versions of the reform legislation target practices that are blamed for the subprime mortgage crisis and the collateral financial and economic damage it has caused.  Key mortgage-related provisions would: 

• Ban the yield spread premiums that created an incentive for mortgage brokers and loan officers to originate high-rate loans, even when borrowers could qualify for lower-cost alternatives.

• Ban prepayment penalties on many loans (including adjustable rate, subprime and high-cost mortgages) and limit the prepayment penalties allowed on conventional mortgages. The bill would also ban incentive payments for loans including prepayment penalties. 

• Require lenders to document the income of borrowers (eliminating so-called “liar loans”) and verify their ability to repay the mortgages offered to them.

• Require Wall Street firms to retain a 5 percent interest in the loans they syndicate and sell to investors.  The House version of the bill requires lenders to retain the 5 percent interest in the loans they originate until the loans are fully repaid.  Industry executives prefer the Senate language, which exempts some loans from the risk-retention requirement. 

The Mortgage Bankers Association is among the industry trade groups that have vowed to lobby “aggressively” for the Senate version of the bill.  “That is number one on our list,” John Courson, the MBA’s chief executive, told the Washington Post.  “We do not see the purpose for restrictions on loans that have not posed problems for the marketplace or the consumer.”

Mortgage brokers, for their part, have warned that a “safe harbor” provision in the Senate bill, essentially capping points and fees lenders can charge at 3 percent of the mortgage amount, would “take mortgage brokers completely out of the competitive landscape.” 

A Conference Committee will soon begin meeting to reconcile differences between the House and Senate bills, with an eye toward securing final passage and the President’s signature before the July 4^th Congressional recess. � 

BOOTS AREN’T MADE FOR WALKING

After a flood of articles warning that consumers are increasingly viewing the payment of their mortgage debts more as business calculations than as moral obligations, a new study presents a different view.  The study, by Brent White,   an associate professor of law at the University of Arizona, found that most homeowners who “strategically default” on loans they can afford to pay do so because they are angry or fearful, not because they have calculated that defaulting is in their financial interests.  Most borrowers continue to make their mortgage payments even when the loans are severely underwater, the study found, indicating, White concludes, that “the stigma against default apparently remains robust.

A separate study by RealtyTrac and Trulia.com, reached the same conclusion.  More than half (59 percent) of the nearly 2,600 consumers responding to this survey said they would continue making payments on an underwater loan, regardless of how large the disparity between the loan amount and the value of their home. Only 1 percent of the respondents who said they would default also said that would be their first choice; 69 percent said they would try to persuade their lender to modify their loan before considering walking away from it. 

Although these studies suggest that the forces pushing against strategic defaults may be somewhat stronger than lenders had feared, they also identify cause for continuing concern about future foreclosures and the success of government efforts to stem that tide.  Noting the large number of borrowers in the Realty Trac/Trulia study who said they would try to modify loans they were struggling to repay, Peter Flint, CEO of Trulia, pointed out, “For every borrower who avoided foreclosure last year through HAMP (the Obama Administration’s signature foreclosure prevention program), “another 10 families lost their homes. It now seems clear that the government programs will not reach the overwhelming majority of homeowners in trouble,” Flint told Inman News. That problem, combined with the declining interest in purchasing foreclosed properties (which the Realty Trac/Trulia survey also identified) suggests that “it may take even longer than anticipated to see true health return to the real estate market,” Flint said.

White, the author of the strategic default study, thinks the government loan modification programs, which have been plagued by lengthy delays, inconsistent procedures and confusion, may actually be counter-productive.  Although they are supposed to give owners hope of hanging on to their homes, White told the Wall Street Journal, the programs seem “designed to wear homeowners down,” and so may fuel the “anger and hopelessness” that  are likely to encourage strategic defaults. 

The program rules – targeting aid to borrowers who have defaulted or are at risk of doing so – also may trigger strategic defaults by borrowers who have kept up with their payments  “but now feel unfairly let out while the ‘less deserving’ get help,” White suggested.  � 

GOING UP

Reflecting the tighter underwriting standards lenders are applying, the average FICO score on single-family loans purchased by Fannie Mae and Freddie Mac last year increased to 750, up from 715 on loans purchased in 2006 and 2007.  Loans originated during that problem period   -- 2006-2008 – account for most of the losses the two government services enterprises have absorbed as they struggle to regain their financial balance under government conservatorship. 

The Federal Housing Finance Agency (FHFA), which regulates the GSEs, highlighted the higher credit scores in its most recent report to Congress.  While reducing portfolio risks for Fannie and Freddie, the improved scores have also slashed their income from loan guarantee fees, the report notes.  The FHFA report also warns that credit losses attributable to loans originated in the 2006-2008 period “will remain substantial” and notes that future financial results “will be greatly affected by the success or failure of [the Administration’s] loss mitigation initiatives” under the Home Affordable Mortgage Program. Testifying recently at a Congressional hearing, Acting FHFA Director Edward DeMarco said the GSEs will continue to impose “loan level price adjustments” on the non-vanilla mortgages they purchase.   �  

The National Automated Clearing House Association (NACHA) processed 18.76 billion electronic transactions last year, with strong growth in direct deposit, consumer internet and  business-to-business  transactions as well as in back office check conversion activity, according to NACHA’s annual report. 

Despite the increase in transaction volume, unauthorized debits declined by 9.6 percent compared with the previous year.  NACHA officials attributed the risk mitigation success to new rules and strengthened enforcement efforts initiated last year.  “These results demonstrate the effectiveness of targeted rulemaking and risk-management practices,” Janet Estep, president and CEO of NACHA, said in a press statement.

 Among other details, NACHA reported:

·         A 4.9 percent increase in direct deposit payments, which totaled $4.45 billion last year, despite the nearly 10 percent unemployment rate.

·         A 4.15 percent increase in “native electronic payments, reflecting “an increased preference for non-check, fully-electronic payment options,” NACHA said. Volume in this category totaled 12.19 billion transactions.

·         A 3.2 percent increase in business-to-business transactions, totaling more than 2 billion payments.  The largest growth was in corporate trade exchange transactions, carrying business remittance information with the payments – up 9.19 percent compared with 2008.

·         An 8.75 percent increase (to 2.4 billion payments) in consumer Internet transactions, combined with a 13 percent decline in the number of unauthorized WEB debits.

·         A doubling of Back Office Check Conversion volume, resulting in 160.5 million transactions.