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If financial institutions should have learned anything from the financial crisis, it is that lax underwriting is dangerous.  But recent reports suggest that some lenders are in the process of repeating history rather than learning from it, as the pressure to increase earnings leads them to offer loans to marginal borrowers much like those whose defaults drove banks and the country to the financial brink three years ago.

“Even as lenders struggle to pull themselves out of the credit crisis, signs of a new and potentially dangerous infatuation with risky borrowers are emerging,” the Wall Street Journal reported recently.  “From credit cards to auto loans to mortgages, the hunger for new business as the crisis ebbs is causing some financial institutions to weaken lending standards and woo borrowers who might not be able to pay,” the Journal article warned.

Although lenders remain cautions, and even tight-fisted, on mortgage loans, they are becoming more aggressive in the consumer loan arena, encouraged by recent borrower performance, which has been improving steadily.  Among other indicators of this trend, the Journal notes, credit card issuers sent 84.8 million solicitations to subprime borrowers in the first 6 months of this year, up from 43.7 million a year ago.  One of the recipients of a Capital One solicitation, the Journal noted, was a consumer Capital One had sued successfully for payment of a previous card balance on which she had defaulted.  

Lenders insist they learned their lessons and are using prudent underwriting standards to ensure borrowers can repay their loans.  But some industry analysts share the skepticism of the formerly bankruptcy borrower who said she has received six credit card offers since emerging from bankruptcy, even though she still owes more than $70,000 on student loans.  “All the offers say, ‘you qualify,’” she told the Journal.   “No, I don’t.”     � 

LOOK WHO’S WALKING

We’ve been hearing a lot about borrowers who are walking away from their mortgage loans.  Turns out many of them are wearing designer shoes.  More than 1 in 7 borrowers with mortgages of more than $1 million are “seriously delinquent” on those loans, a recent study by CoreLogic found. That compares with only 1 in 12 borrowers with mortgages of less than $1 million.  The investment home picture is similar – the delinquency rate on properties on which the original mortgage was more than $1 million is 23 percent, compared with 10 percent for less expensive properties.

These statistics suggest that more affluent households are more likely than less affluent borrowers to strategically dump loans they could afford to repay, the New York Times, which commissioned the study, reported.

“The rich are different, they are more ruthless,” Sam Khater, senior economist for CoreLogic, told the Times. 

They are also less fearful of the consequences of default, Khater noted, and, as a result, less susceptible both to warnings about the impact on their credit rating and to arguments about the negative consequences their default will have on the property values of their neighbors.  They are also more likely to view repayment of their loan as a strategic choice rather than a moral obligation.

Illustrating that point, the rapper Chamillionaire expressed publicly a sentiment that analysts say many affluent borrowers embrace privately.  Explaining his decision to default on the mortgage on his $2 million home, the Times reported, Chamillionaire told a television interviewer, “I just didn’t feel like it was a good investment.”    

REVERSE MORTGAGE WARNING

The National Credit Union Administration (NCUA) has warned credit unions about an increase in reverse mortgage-related scams targeting seniors. These scams, highlighted in guidance published by the Financial Enforcement Network (FinCEN), involve loans originated under the Federal Housing Administration’s (FHA’s) popular HECM program. 

“In the current economic environment, the ability of long-term homeowners to access existing home equity quickly through reverse mortgages may make them vulnerable to predators committing financial fraud,” the NCUA alert to credit unions notes.  These predators include both family members and loan officers, who persuade seniors to obtain reverse mortgages and then use the loans to effectively steal home equity.  The FinCEN guidance details several common schemes:

Cross-selling.   As a part of this scheme, loan officers or other individuals convince the senior to use HECM loan proceeds to finance the purchase of expensive and unnecessary insurance, annuities, or other financial products.

Cash-out theft.  This scam involves the outright theft of loan proceeds by individuals the senior knows and trusts.  One example:  A senior hands the HECM check to a loan officer or other trusted individual for deposit to the senior’s account. Instead, the trusted party co-endorses the check and deposits it to his or her business or personal bank account. The senior is instructed to request cash withdrawals directly from the loan officer or another trusted individual. After the senior obtains several withdrawals, he or she is told all the HECM loan proceeds have been received. The loan officer or other trusted party pockets the remaining funds.

Straw owner—property-flipping.  In one common scheme, a “straw buyer” transfers ownership of a typically low-value or problem property to an unsuspecting senior, without going through a formal mortgage-related sale.  The fraudsters then instruct the straw senior to complete paperwork for a HECM loan against the property, using an overstated appraisal, or assume the identity of the senior to do so themselves.

Straw owner—fake down payments.   Aware of the property-flipping scheme, many lenders will no longer accept HECM applications from seniors who do not have a “seasoned” title.  To get around that roadblock, some fraudsters will “sell” low-value properties to seniors. Using bogus gifts or fraudulent paperwork, they create the appearance the senior has made a large down payment to purchase the property. The senior is then instructed to take out a HECM loan on the existing home, based on an overstated appraisal, to complete the purchase of the low-value property. 

Distressed non-senior mortgagors. Distressed mortgagors under the age of 62 will sometimes ask senior parents, other family members, or friends to obtain a HECM loan for them. In some cases, distressed mortgagors will submit fraudulent paperwork to take out the loan and receive the HECM loan proceeds directly. Fraudsters also may assume the identity of a senior victim and take out a HECM loan without the senior’s knowledge.

The NCUA guidance notes that credit unions may encounter these and other reverse mortgage schemes when funds related to the scam are deposited or withdrawn from member accounts.  Credit union employees may also become aware of the scams through their interactions with elder members who are being victimized.

The FinCEN guidance instructs lenders to file Suspicious Activity Reports detailing potential reverse mortgage fraud and to include “HECM” in the narrative portion of the report to flag these scams for analysts.  The guidance also suggests that financial institutions encourage their customers to report reverse mortgage scams to the Department of Housing and Urban Development and to caution borrowers “to avoid any business or person that seeks to charge up-front fees for HECM, FHA, and any services related to the U.S. federal government’s new loan modification and refinancing programs.”  � 

A HEAVY BURDEN

While some borrowers seem to be blithely shedding their loan obligations (see related item), a recent poll suggests that debt burdens weigh heavily, nonetheless. 

About 46 percent of consumers responding to a recent Associated Press-GfK poll said they feel stressed, and in many cases, “extremely stressed” about their debts.  That pretty much mirrors the results of a survey taken a year ago, even though, by all accounts, the economy is stronger and personal balance sheets are in better shape today. Household debt fell by 1.7 percent last year, to about $13.5 trillion, according to the Federal Reserve, the first annual decline since the Fed began tracking this data in 1945.

A debt-stress index based on the AP-GfK poll was 29.2, unchanged from a year ago.  But the statistics reflect something of an income-related split, a USA Today article noted.  Both affluent households with incomes above $50,000 and those with incomes below that level have slashed their credit card debt.  But while wealthier households feel less stressed as a result, the stress level for less affluent households hasn’t changed much.

Ken Goldstein, an economist at the Conference Board, blames human nature for that dichotomy.  “You have the optimists and the pessimists,” he told USA Today.  “You get half the world looking up at the stars and the other half with their head down looking at the mud.”  Apparently, the more affluent half has the better view.  � 

MORE FORECLOSURE RECORDS

Foreclosure rates are declining, but still setting records on the way down.  Lenders seized 269,962 homes in the second quarter, a pace that will produce more than 1 million foreclosures by the end of this year, according to RealtyTrac, Inc. 

The second quarter foreclosure rate was 5 percent below the first quarter but 38 percent above the second quarter of last year, as foreclosure filings topped the 300,000 mark in June for the 16^th consecutive month.

Some analysts warn that these far from encouraging statistics actually understate the problem, because they don’t reflect the number of underwater loans on which lenders are seeking to avoid foreclosure, through modifications or short sales.

“New defaults seem to have stabilized, but there’s still a lot of volatility overall,” Nicholas Retsinas, director of Harvard University’s Joint Center for Housing Studies, told Bloomberg News. 

A separate RealtyTrac report notes that nearly 233,000 homes sold in the first quarter – about one-third of total sales – had received a default or foreclosure notice or had already been seized by lenders.  And those homes sold, on average, at a 27 percent discount from market prices. 

That’s the bad news.  The somewhat less bad news -- analysts don’t think that discount will get much worse.