HOW MUCH HELP FOR HOUSING?

Initial reaction to the sweeping housing assistance package approved by Congress indicates that the provisions aimed at supporting Fannie Mae and Freddie Mac are having the desired effect of calming investor nerves and easing some of the immediate pressure on the giant mortgage market lynchpins.  But some analysts are questioning how much help the housing assistance provisions will provide to struggling homeowners or to the housing market generally. 

The centerpiece of the plan authorizes the Federal Housing Administration (FHA) to refinance up to $300 million in mortgages for borrowers facing foreclosure, conditioned on the willingness of lenders and/or investors to write down at least 15 percent of the value of the loan.   The problem with this approach, critics say, is that it requires lenders and investors to take a haircut many have been unwilling thus far to accept.  Slashing the principal balance “is probably low on lenders’ list of options” for working out problem loans, one analyst told the Wall Street Journal.

Although mortgage industry executives have promised to take advantage of the FHA refinance program, consumer advocates are skeptical.  The record of Hope Now, the voluntary work-out program initiated by the Bush Administration, provides little basis for optimism about the FHA program, according to Aly Cohen, a staff attorney at the National Consumer Law Center, who observed in a Washington Post interview, “How effective can the FHA refinancing program be in light of how slow and effective mortgage servicers have been so far?” 

A Moody’s study published in March found that fewer than 10 percent of the subprime mortgages with pending payment re-sets had been modified, and 40 percent of the loans modified in the first half of 2007 were 90 days or more delinquent.  A  Hope Now report, released in July, was more favorable, indicating that participating lenders had permanently modified 76,000 at-risk mortgages in June and approved repayment plans for another 105,000 borrowers, giving them more time to catch up but not restructuring their loans.  But the coalition report also noted that more than 82,000 borrowers lost their homes to foreclosure in June, up 12 percent from May, increasing the glut of unsold homes that is putting downward pressure on home prices nationally. 

The most optimistic estimates suggest that the FHA program will help 400,000 struggling borrowers at most, “if we’re lucky,” Jared Bernstein, an economist with the Stanford Group, told reporters.  But with some analysts predicting that another 5.5 million borrowers will default by the end of next year, Bernstein said, “I’m afraid that’s a drop in the bucket.”

Mark Vitner, an economist with Wachovia, agreed. The housing assistance package “is not going to speed up or lessen the impact of the housing market correction,” he told MSNBC.  “It’s too late for that.  There is nothing that can be done,” Vitner said, except to endure a continuing housing market correction that still has more distance to travel and more pain to inflict before it ends.  � 

REVERSES IN RHODE ISLAND

Attempting to protect consumers with one hand while mollifying lenders with the other, Rhode Island lawmakers have approved legislation that requires more extensive disclosures of the costs related to reverse mortgages, but allows lenders offering the loans to charge prepayment penalties under some circumstances.  Although state regulators and consumer advocates opposed the prepayment penalties, they accepted the compromise, because an industry trade group successfully blocked a similar measure last year and it appeared the new law would face the same fate. 

“Nobody wanted the prepayment penalties,” Michael Marques, director of the state Department of Business Regulation, told the Providence Journal.  “But if the bill didn’t pass this year,” he said, “the only ones who [would] benefit would be the people who are trying to take advantage of the elderly.” 

The statute will require reverse mortgage lenders to disclose more fully (and up front) the origination fees and other costs, and require borrows to obtain counseling   from a HUD-approved counseling agency, covering, among other issues:

·      The financial and tax implications of the loan.

·      The potential impact on the borrower’s eligibility for state   and federal assistance programs.

·      The impact on estate planning.

The law also mandates a three-day waiting period before reverse mortgages are closed, prohibits lenders from “tying” the loan to the required purchase of an annuity, and requires reverse mortgage loan officers to be licensed or registered in the state as mortgage loan originators.          

In exchange for those restrictions, the law allows reverse mortgage lenders to impose a prepayment penalty on loans on which they have waived up-front fees.  The penalty must be calculated as a percentage of the “available credit,” prorated by the percentage of months remaining on the loan term, and may not exceed   the “usual fees” imposed on the loans. 

Rhode Island is the only state that allows prepayment penalties on reverse mortgages, according to Stephen Jennings, associate director of advocacy for the AARP, which opposed that provision in the bill.  But the organization d=supported the legislation nonetheless, Jennings told the Providence Journal, “because we think the other things in it are important [to borrowers].”   

‘A’ FOR EFFORT

Financial institutions get ‘A’ for effort but only a ‘C’ (or worse) for execution of their programs aimed at delivering bank products and services to “under-banked” consumers.”  That conclusion is based on a recent survey of community banks, in which nearly half (47 percent) of the 340 institutions responding said they are making concerted efforts to reach “recent immigrants, ethnic communities and other groups who might be outside of the financial mainstream.”  But far fewer than half said they are offering key products specifically targeting this group, such as pre-paid phone cards, remittances and non-customer check cashing services.   

Among the survey’s major findings:

• More than three-quarters of the institutions trying actively to reach emerging market consumers report some success in initiating account relationships.
• More than 85 percent of the banks that do not currently have outreach programs in place said they would consider creating those programs in the future. 
• Half the banks reporting that they are reaching out to under-banked consumers say they are using specific marketing initiatives and targeted products and services in their efforts. 
• Financial literacy programs and multi-lingual staff members are the features cited most often by banks in describing their outreach programs.  
• The majority of community banks responding to the survey (56 percent) said they offer services in a language other than English.  
• A large majority (two thirds) of the banks that have outreach programs said “a better understanding of the financial needs of underserved consumers" would make those efforts more successful.
• Banks that have not developed programs for under-banked consumers cited "local demographics" and "profit and risk concerns” as the primary obstacles to doing so.

"An overwhelming 85 percent of community banks participating in the survey said reaching out to consumers in emerging markets will play a role in the future business of their community bank," said Karen Tyson, senior vice president and director of communications for ICBA, said in a press release. "Community banks are once again demonstrating that they are in tune with the needs of their communities by providing services to, and building relationships with, consumers who may not be currently served by a federally insured depository institution," she added.

On the negative side, only 20 percent of the respondents said their current outreach programs are “profitable” or “very profitable,” and less than half (39 percent) described them as “somewhat profitable.”

MORE RESPA QUESTIONS

The proposal to revamp the Real Estate Settlement Practices Act (RESPA) is running into another buzz saw of opposition, similar to the attacks that derailed the Department of Housing and Urban Development’s (HUD’s) efforts to overhaul the regulations two years ago.  And a recent study — by a HUD researcher — isn’t going to help.  The study, by researcher Mark Shroder, questions the efficacy of disclosures – the focus of RESPA -- as a means of reducing costs, suggesting that consumers might be better off if federal regulators left it to the states to regulate loan origination and closing fees.  

A major problem with RESPA disclosures, the study concludes, is that the regulatory structure assumes “the only problem in the market is consumer ignorance, which can be addressed by federal action.”  In fact, Shroder suggests, “consumer ignorance might not be the only problem in the market, and non-federal action might be preferable.”   Providing consumers with more and better information about their loan choices won’t necessarily “make the market fair,” Shroder says, because other factors affect differences in lending fees.  For example, he explains, “Lending and title fees paid for new home sales are notably lower than fees for existing houses, presumably because builders and developers can capture some economies of scale.”  To the extent that RESPA restrictions prohibit lenders from capturing similar economies, the rules represent “a previously unrecognized distortion in the housing market, lowering the prices of new [mostly suburban] homes” compared with existing dwellings, Shroder says. 

Although his study questions some of the assumptions underlying RESPA and efforts to overhaul it, Shroder’s study does not provide the support mortgage brokers might have hoped for their arguments against clearer disclosure of YSPs.  Shroder found, in fact, that the payment of YSPs by borrowers “does not appear to reduce their transaction fees, and in a fair market, there probably would be a fee reduction.”

Mortgage brokers generally, and YSPs specifically also did not fare well in another HUD study published earlier this year, by the agency’s chief economist, Susan Woodward.  HUD officials have cited this study’s conclusion – that confusing and inadequate disclosures allow lenders to take advantage of consumers —as supporting the agency’s current RESPA reform plan. 

The study also provides ammunition for critics who say the disclosure requirements should target brokers and their YSPs. Among its conclusions:  broker-arranged loan typically carry higher fees than loans obtained without the involvement of these middlemen, and most of the benefits of the higher rates borrowers pay to reduce their up-front costs go to lenders rather than to the borrowers.  Every $100 borrowers pay in higher loan rates, the study found, reduces their up-front fees by only $7.00.

It isn’t just the YSPs themselves, but the complexity they and other up-front costs – such as discount points – add to the loan origination process, that potentially disadvantage consumers and increase their borrowing costs,  according to Woodward, who explains: “The complexity introduced by loan terms that involve a combination of cash and interest rates, with variations in yields spread premiums, points, and even seller contributions, makes it more difficult for consumers to figure out the total costs and contributes to higher prices and higher fees for lenders and brokers.” 

The key question posed by both Woodward and Shroder in their studies is whether improved disclosures would help the mortgage borrowers most likely to pay higher costs -- minorities and those with lower incomes and less education.  Woodward’s conclusion:  “Better information can be part of the solution” to those disparities.  That supports HUD’s contention that improved disclosures are needed, but Woodward also provides some ammunition to critics of the RESPA reform plan, who argue that the disclosures HUD is proposing have not been adequately vetted.    

“The engineers who design jet aircraft do not design the displays and controls,” she notes. “They rely on psychologists to identify the mistakes pilots make so controls are designed to minimize these errors. Why should our financial disclosures be different?  There should be no more disclosures,” Woodward argues,” without research to determine whether borrowers notice, understand, and make correct inferences from the disclosures.  This implies no more financial disclosure rules without a serious effort at disclosure design.”  

REVISITING RACE AND GENDER REPORTING

An old debate over the collection of race and gender data for non-mortgage loans has resurfaced and, if a recent congressional hearing is any indicator, the issue may gain traction with lawmakers next year.

The hearing, before the House Financial Services Committee, resurrected familiar arguments about the need for and desirability (or not) of either allowing or requiring lenders to collect information about the race and gender of small business loan applicants.

The Home Mortgage Disclosure Act (HMDA) requires lenders to collect and report information detailed race and gender information for mortgage loans, but Regulation B under the Truth-in-Lending act prohibits race and gender inquiries for other loans.  The Community Reinvestment Act requires some lenders to report small business, small farm, and community development lending totals, but those reports do not include race and gender information.  The Federal Reserve (Fed) considered a proposal five years ago to revise the rule and allow voluntary collection of the prohibited data, but agency officials ultimately rejected the plan, concluding that the data collected would be incomplete (because many lenders would not participate) and inconclusive, because the collection methods and standards used by participating lenders would not be uniform. 

Industry executives and regulators testifying at the recent hearing repeated those objections and restated their concerns about the cost burden a reporting requirement would impose on lenders.  But Rep. Barney Frank (D-MA), chairman of the Financial Services Committee, who called the hearing, was not persuaded by those arguments.  “I’ve heard this movie before and it has a happy ending,” Frank said, noting that lenders raised the same objections to HMDA, which, most agree, has helped to identify and combat discrimination in mortgage lending.  Eliminating the Reg B prohibition on collecting race and gender information for non-mortgage loans “will be very high on the committee’s agenda for 2009,” Frank said.

Testifying for the Fed, Saundra Braunstein, director of the agency’s Division of Consumer and Community Affairs, opted to punt on what has been a contentious issue in the past, saying Congress should evaluate the “significant policy choices and cost-benefit considerations” and determine whether to impose a broader data collection requirement, and if so, whether the requirement should apply “to all non-mortgage loans or some subset of them.”  

But Braunstein made it clear that the Fed is no more enthusiastic about lifting the Reg B restriction now than it was when the agency considered and rejected the data reporting proposal.  Because of the complexity of small business lending and extent to which lending policies vary, lenders would have to collect “many different t types of data,” Braunstein said, and regulators, in evaluating the data, would have to consider “the multiple factors” lenders weigh in originating small business loans.  Given these difficulties, Braunstein said, “it is questionable whether any data collection reporting and public disclosure requirement can be designed to conclusively show the existence of discrimination.” 

Industry executives also cited the difficulty and cost of collecting meaningful data and questioned the need for it.  “There is scant statistical evidence to demonstrate that race or gender plays a role in access to or the cost of non-mortgage credit,” Bill Himpler, representing the American Financial Services Association, testified. “

Consumer advocates argued in favor of data collection, as they have in the past, but they approached the issue from a different direction.  The information is needed not to prevent lenders from discriminating in the origination of small business loans, Robert Gnaizda, general counsel of The Greenlining Institute, said, but rather to help lenders expand their lending to minority and women-owned businesses.