On housing, a chill is in the air

Aug 23, 2013 Kenneth R. Harney

WASHINGTON — Do you feel that hint of a chill starting to swirl through the housing market? The cooling is slight but it’s for real. Home prices are not rising as fast in most metropolitan areas as they did earlier this year and much of 2012. Multiple bid competitions — fierce in many places this spring and late last year — aren’t as intense. Inventories of homes for sale have increased this summer, reversing near droughts of listings that helped fuel higher prices.

Add in rising mortgage rates, and you’ve got a distinct, measurable momentum shift in the pace of the housing recovery. The recovery is still well under way — it’s just not as effervescent as it once was.

Consider some of the key numbers:

CFPB’s Cordray on Senate Confirmation, QM and Future Challenges

by Rachel Witkowski AUG 19, 2013 6:15pm ET

WASHINGTON – Consumer Financial Protection Bureau Director Richard Cordray has spent the past year and a half deflecting questions about the impact his controversial recess appointment is having on the agency, saying he and others were just focused on their work.

But in a sit-down interview with American Banker on Monday, Cordray acknowledged that his Senate confirmation, which cleared with a bipartisan majority, has boosted morale at the agency and provided personnel with additional confidence.

While bankers might fear that means a more aggressive CFPB, Cordray is quick to suggest otherwise, arguing he’s balancing safety and soundness concerns with additional consumer protection. He also talked about what he sees as the agency’s top accomplishments during its first two years of operation as well as the biggest challenges ahead.

Following is an edited transcript of the interview.

Since you’ve been at the CFPB, what would you say are the greatest accomplishments to date? CORDRAY: There are a number of accomplishments, actually. First are the changes that we are effecting in the mortgage market, which is the largest consumer finance market and was the one that was most responsible for the credit freeze and the financial meltdown. For the agency to put new protections in place around that and yet, to be sensitive and responsive to access to credit issues, I think was quite a good piece of work by us. And it’s obviously drawn a lot of positive commentary.

I think that our consumer complaint function has been influential with the industry. There were a lot of concerns the industry had about that to start with. But we’ve been working on it, it’s been a very efficient and sensible process, and it is resolving a lot of issues. And we just actually received our 200,000th consumer complaint, which for us represents a continued growing trajectory of people now knowing that they can come to the CFPB to get help and to complain about a bigger array of products over time. That’s meaningful.

The enforcement actions we’ve taken to make it clear that when we see deceptive marketing and other practices at these large institutions we won’t hesitate to act, I think, is important. And so is our work on a growing range of issues, such as financial education, financial literacy, and financial empowerment — both for consumers generally and with respect to our specialty populations such as service members, students, older Americans, and those of low-to-moderate income. It’s really a great set of work that we’re doing. There are many challenges, there’s much to do, but I’m pleased at our progress thus far.

And I think that partly was what was reflected in what was a strongly bipartisan vote on confirmation a few weeks ago. And I told everybody here I think this reflects their work. It’s good to know that I’m going to be here beyond the end of this year and have some time ahead for us to follow through on a lot of things we had under way.

I know you’ve said the battle in the Senate didn’t impact how the agency was before or where it will go in the future but does your confirmation have some influence on your way of thinking? I think two things. First, I do think that the key for us was before that occurred, everybody here was dedicated to keeping their eye on the ball and recognizing that we all came here because of the mission: to protect and empower consumers in a financial marketplace. It’s a marketplace that is much more complex now than it was a generation ago and people need this agency to do its work well. But I do think going forward, it creates a further sense of certainty. It’s been a morale boost here. And again, the fact the vote was so strongly bipartisan was a great reflection on everybody here. I think they recognize that as such, so it redoubles their enthusiasm to continue doing good work.

Does that boost in certainty and morale help with staffing up the agency and the recent turnover of senior officials? How close are you to being at that point where it’s a solid entity? We continue to grow steadily. First of all, this is a great place to work and it’s a very attractive place to work because of our mission. And most everybody who comes here, they’re attracted by the mission. We continue to get hundreds of resumes for our positions and tremendous talent. I think that some of the stories about departures were overblown. I mean, it was natural for us to see some departures two to three years in. Some of our people who have management consulting backgrounds are used to doing short stints in places and then going to another place. So some people were on time to move on with their lives. But we get great candidates applying for positions. We’re now a little over 1,300 employees, so we’ve grown steadily over each of the last three years. And our processes that are in place are very solid. Our recruiting is solid. And it’s just very interesting to see the kind of people that we’re bringing in.

How far off do you think you are from being completely staffed? I would guess 12-18 months at the pace we’re going. And part of it is each year we get a better sense of how much were doing with the people we have. It’s different when you have 500 than when you have 900. It’s different when you have 900 than when you have 1,300. And we get a better sense, as we become more familiar with it, of how much work we need to be doing and how much work we’re able to do.

The CFPB’s mission is clear: to protect consumers. But bankers fear the CFPB is so focused on their mission that they’re going to forget the survival and safety and soundness of an institution. How does that make you feel? I understand the concern. First of all, this is all in the statute. I also sit on the FDIC board so I do see and spend some time seeing things from the standpoint of regulating institutions in a different way. I serve on the FSOC, which is with all the regulators and we’ve been meeting quite regularly to discuss issues about the overall strength of the financial system. I will also say that the oversight that I get from Capitol Hill puts us in mind of those issues as well.

One of the things we learned as we worked on the mortgage rules is that those rules are going to provide real, significant protections for the mortgage market and for consumers who will not be subject to some of the reckless and irresponsible products and marketing that we saw in the mortgage market six to seven years ago. But at the same time, we were very mindful and learned a lot about the challenges in this market of access to credit. If consumers can’t get the loans it doesn’t matter what kind of protections they have because they won’t have anything to protect. That’s something we’ve learned and it led to a balance. That’s the balance that is reflected in the QM rule that I think has been widely praised and we’re pleased about that. But it’s also a balanced perspective that we’re taking to other issues in addressing them in the future.

Still, some lenders are worried about making the January deadline. And there’s this growing concern that those lenders will either only do QM loans or jump out of mortgages entirely, perhaps creating a short-term credit crunch until they can fully implement the rules. What is your response? I would say a couple of things. Number one, we’ve really been hard at work with the industry on implementing these rules during this current year. And we’re well along on that. We have a very bird’s eye perspective on how they’re coming along. They’ve made tremendous progress and we’ve found ways to address concerns they’ve raised about what the rule actually means instead of just leaving it to them and saying “It’s your problem now.” We’ve been working with them to do some clarifications and tweaks to address operational issues and I think that goes a long way in helping lenders.

We recognize that ultimately for consumers we want these rules to be in place, to be implemented, to be effective. And that’s when they’ll deliver value for consumers. But I would also say to lenders . that if you have been lending historically according to strong underwriting criteria that are based on sound criteria, you should continue to make those loans. They’re good loans. And you’ll just be leaving money on the table if you stop making loans because you have some anxiety around the new mortgage rules. They’re not meant to stop you from doing sound mortgages where you underwrite carefully. And that’s what most banks, particularly community banks and credit unions, do. They should continue to have confidence in their models many of which, they know have performed extremely well, even during the worst mortgage crisis we’ve known in 80 years. So that was a pretty good test and for them to stop making those loans would seem to me to be pretty short sighted.

Going forward, what would you say are the biggest challenges for the agency? We continue to work on mortgages. There’s more to do there including our ‘know before you owe’ project which we’ll finalize later this year. I gave a speech earlier this year on what we called the ‘Four D’s.’ The first, deceptive and misleading marketing of products, we’ve already been addressing through our enforcement actions but it’s an ongoing issue. There’s still a fair amount of work to do for everybody to get the message that they have to market transparently, candidly and clearly with customers.

Second, debt traps. We issued a white paper on payday loans and deposit-advance products, which are a concern to us. People who end up trapped in high-cost debt where they spend most of their life living off of 390% interest, for example, that’s a real concern. That sets people back and multiplies their troubles.

Third, discrimination is something we’ve talked about from the beginning. It’s the law. Everybody knows it’s the law. They need to be careful to comply with that. It’s not fair to any consumer to go into the market and be treated differently than other consumers though it is often not transparent or visible to them but hurting them nonetheless.

And finally, is these markets where we found the structure of the market causes many consumers to run up against dead ends. This includes debt collection; loan servicing, particularly mortgage servicing and potentially student loan servicing; and credit reporting – all instances where the relationship is between two businesses and the customer is almost collateral damage in it. We’re trying to shift those markets to take more account of the consumer and recognize consumers have rights, those rights need to be respected, and you need to put the work in to be in compliance with the law.

I think that message is starting to be heard and understood. But it’s going to be some hard work for probably several years to make sure that’s happening.

Kill Fannie and Freddie? Maybe not so fast

Aug 16, 2013 Kenneth R. Harney

WASHINGTON — You may have seen two sets of news reports last week that didn’t quite add up: First, President Obama called for the liquidation of Fannie Mae and Freddie Mac, the country’s largest providers of funds for home mortgages. Then a couple of days later, Fannie Mae announced its sixth straight quarterly profit and said it was sending $10.2 billion in dividends to the Treasury. Freddie Mac also reported a hefty profit — $5 billion over the previous three months — and said it is providing $4.4 billion in dividends to the government.

Both companies also summarized what they’ve been doing for home buyers and owners following their takeover by the federal government in September 2008. Given the president’s call for them to disappear, it’s worth taking a quick look.

Since January 2009, Fannie says it has provided funding for 3.1 million home purchases and 11.4 million refinancings of existing home loans. It has also helped 1.3 million borrowers who were behind on their payments and heading for foreclosure with loan modifications, workouts and other forms of assistance. It has already paid back $95 billion of the $116 billion in taxpayer funds the government loaned it, and could pay the rest sometime next year. It expects to be profitable for the “foreseeable future” as the result of the high credit quality of the new loans it’s making and because of declining losses on its existing mortgages.

Meanwhile Freddie Mac has financed 1.8 million home purchases, 7.2 million refinancings and 872,000 loan modifications or workouts. As of next month it will have paid back $41 billion of the $71 billion in assistance extended by the government. Its 2.8 percent rate of serious delinquencies is far below the mortgage industry average of 6.4 percent. Both companies also provide significant financial support for rental apartment construction.

Wait a minute. Didn’t both companies go off the rails in the years immediately preceding the housing bust, investing in subprime and other loans that contributed to the severity of the housing bust?

No question. But here’s the point: The president and congressional critics want to dismantle Fannie and Freddie, but what’s to replace them? That’s a thorny political thicket. Not only is there no consensus on how to do it but little discussion of the potential costs for home buyers and owners. What would capital punishment for Fannie and Freddie mean to consumers?

Start with higher mortgage interest rates. Without the federal guarantees supplied by Fannie and Freddie, the costs of mortgages are virtually certain to rise. Economists at Moody’s Analytics estimate that dumping the companies and switching to a plan advocated by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., “would increase the interest rate for the average mortgage borrower” by one-half to three-quarters of a percentage point.

The Corker-Warner plan would usher in a mortgage marketplace heavily dominated by big banks and their Wall Street partners. There would be no direct federal guarantee on mortgage securities, which Fannie and Freddie currently provide. The primary risks would be assumed by lenders and investors. There would instead be a federal backstop insurance arrangement where investors could be covered in the event of catastrophic losses caused by an economic meltdown. The plan would be modeled after the Federal Deposit Insurance Corp., with participating lenders paying for insurance coverage.

On the House side, a competing bill sponsored by the chairman of the Financial Services Committee, Rep. Jeb Hensarling, R-Texas, would provide no federal backing whatsoever for the vast majority of new mortgages — the Federal Housing Administration would survive but with heavy new restrictions. With not even a backup guarantee of federal insurance in the event of another mortgage crisis, banks would require higher interest rates from borrowers to protect themselves, and might also be hesitant to commit money for long terms at fixed rates, putting the widespread availability of 30-year mortgages in doubt. They’d most likely prefer shorter term, adjustable rate loans, which shift more of the interest rate risk onto the borrower.

The takeaway on all this: Fannie and Freddie have had their problems, but they’re now pulling in big bucks for the Treasury and still funding the bulk of American home loans under tight federal oversight. What replaces them matters — especially the retention of some form of federal guarantee to keep rates affordable. Dumping them precipitously in favor of a totally privatized mortgage market might sound attractive, but it would mean you’d almost certainly pay more when you need a home loan.

Home-mortgage interest deduction at stake

Kenneth R. Harney Aug 9, 2013

WASHINGTON — Since Congress has taken off on its annual summer recess, you might assume that nothing is happening on Capitol Hill that could affect the taxes you pay on your home. Quite the reverse.

Staff members of the House and Senate tax-writing committees are busy putting together legislative drafts that may determine the fate of real estate’s most prized tax benefits — first and second home-mortgage interest deductions, property tax write-offs, capital gains exclusions and others.

Both committees’ chairmen have promised major tax reform proposals this fall. They’ve been evaluating deductions, credits and loopholes in terms of revenue costs and economic benefits, including the $70 billion-plus yearly expense of the mortgage interest write-off. The process that’s under way represents the most serious effort to simplify and reorganize federal tax law since the Tax Reform Act of 1986.

On the Senate side, Finance Committee Chairman Max Baucus, D-Mont., asked colleagues in both parties to submit recommendations on which tax preferences should be preserved, starting from a “blank slate” where all current benefits are eliminated. To provide senators political cover and deniability, the committee put all recommendations under a 50-year top-secret classification, and restricted access to them to just 10 staff members.

On the House side, Ways and Means Committee Chairman Dave Camp, R-Mich., instructed staff to move ahead with drafts during the recess, allowing the committee to consider a final tax reform bill in October. That would tee up the legislation for a possible full House floor vote.

So what’s really on the chopping block? Is there a possibility that as part of a comprehensive tax reform bill, preferences for homeownership could be reduced or phased out?

Here’s a quick overview: The House bill under construction seeks to reduce individual and corporate marginal tax rates across the board. Camp has said he wants to clear out deductions, exclusions and other long-time tax code subsidies enough to lower individual taxes to a top marginal rate of 25 percent, down from the current 39.6 percent. He also wants to eliminate the alternative minimum tax (AMT) and slash corporate tax rates.

The problem, though, is that lowering tax rates to these levels would cost trillions of dollars in lost revenues over the coming decade and would only be partially paid for by eliminating or cutting the vast majority of current tax preferences, including for homeowners. Lowering the top marginal rate for individuals to 28 percent — instead of the proposed 25 percent — would help, some analysts say, but still might not close the lost-revenue gap.

Another complication: Major tax benefits that have been in existence for decades, such as the mortgage interest and property tax deductions, are so welded into the system that eliminating them, or sharply reducing them, would send shock waves throughout the national economy. The Tax Foundation, a Washington-based think tank that describes itself as nonpartisan, released a study at the end of July projecting that an elimination of the mortgage interest write-off would cut the gross domestic product (GDP) by $254 billion based on incomes in 2012, and would result in the loss of 659,000 jobs. In a separate study, the Tax Foundation projected that elimination of homeowner property tax deductions would lower GDP by $94 billion and trigger the loss of 216,000 jobs.

Findings such as these lead housing proponents to believe that neither the House nor the Senate bill can afford to make drastic reductions to long-standing homeowner tax benefits. Jerry Howard, CEO of the National Association of Home Builders, said in an interview that the Tax Foundation’s study “helps drive home the points we’ve been making [on Capitol Hill] about the value and importance of housing incentives” to the entire economy.

Other industry analysts aren’t so sure. Not only did the Ways and Means Committee hear a panel of prominent economists slam the housing write-offs as inefficient and heavily tilted to benefit higher-income taxpayers, they note, but Camp’s own make-or-break income tax cut targets could take precedence over retaining current deductions. On top of that, Democrats in the Senate want to raise revenues through tax reform, not cut them.

If that’s the case, something’s got to give. And that might require lower write-offs for housing — unpalatable politically as they may be a year before congressional elections. Whether tax reform legislation that does that could actually pass either house, however — in a year where Republicans and Democrats can’t even pass a budget to fund the government — is much in doubt.

U.S. agency charges mortgage firm with paying bonuses tied to illegal upselling

By Kenneth R. Harney, Friday, August 2, 9:29 AM

It’s called upselling — steering home mortgage applicants into higher-cost terms that increase the lender’s profits — and it was rampant during the housing boom years. It worked like this: Rather than putting borrowers into loans at the lowest rates and fees for which they were qualified, loan officers convinced them to sign up for more-expensive ones. Loan officers who successfully squeezed more juice, or profit, out of their applicants got extra pay for doing so.

The Federal Reserve Board banned abusive practices such as this in 2011. But a lawsuit filed last week by the Consumer Financial Protection Bureau suggests that hidden, backroom upselling ploys might still be alive and well.

The CFPB alleged that a large mortgage company with 45 branches spread among 22 states paid loan officers more than $4 million in bonuses “based on the interest rates of the loans they originated — the higher the interest rates of the loans closed by a loan officer . . . the higher the loan officer’s quarterly bonus.”

The suit, filed in U.S. District Court in Salt Lake City, charged Castle & Cooke Mortgage and two of its top executives with violations of the Fed’s rule barring compensation to loan officers that is tied to interest rate or other loan terms. Despite the federal ban, the suit alleges, Castle & Cooke “developed and implemented a scheme” to pay bonuses based on the higher interest rates obtained by loan officers in company branches. Under the plan, according to the CFPB, a Castle & Cooke loan officer could “increase the amount of his or her quarterly bonus” by putting consumers into loans that yielded the company higher profits. The firm kept no written records on the bonus scheme, the suit alleged, which also constitutes a violation of federal loan officer compensation rules.

Asked for comment, Jeff Bell, a company spokesman, said Castle & Cooke “has been cooperating with the CFPB in its investigation for more than a year, and anticipates an amicable resolution in this complex regulatory matter.” He denied that the firm’s bonus system rewards loan officers based on the mortgage terms they obtain from applicants. The CFPB’s case is based on the findings of an investigation conducted by the Utah Department of Commerce’s Real Estate Division.

Federal officials allege that the mortgage company rewarded loan officers who participated in the upselling plan with quarterly bonuses that ranged from $6,100 to $8,700. To collect the extra money, loan officers had to upsell borrowers above a benchmark interest rate established for their branch offices. Loan officers who did not deliver clients at higher than benchmark rates received no extra compensation. Last year, according to the CFPB, Castle & Cooke funded approximately $1.3 billion in new mortgage loans. The agency is seeking restitution of the money allegedly overcharged to consumers by virtue of the undisclosed bonus system.

Putting aside the specifics of the allegations, what does this case mean to mortgage shoppers?

Most mortgage industry experts agree that as a result of intensive federal regulatory scrutiny, upselling schemes are less commonplace today than during the early years of the past decade. Back then, some lenders circulated rate schedules for loan officers — especially in the subprime arena — with sliding scales showing the extra money they could earn by putting unsuspecting applicants into higher-priced deals. For example, clients might be qualified for a 30-year fixed rate of 7 percent, but if the loan officer could convince them that the best available rate was 71 / 2 or 8 percent, the loan officer would earn more.

Bill Kidwell, head of a mortgage advisory firm in Denver, says that most companies “know that you can’t base compensation on interest rates” anymore as the result of rule changes and the arrival on the scene of an aggressively pro-consumer regulator in the form of the CFPB.

But Kidwell argues that mortgage companies, like other businesses, need to be able to compensate employees based on their financial performance for the firm and that current federal rules “lack clarity” on how to accomplish that.

Bottom line for consumers: Your best bet to avoid overpaying is simply to know more. Shop the marketplace intensively for rates and loan fees, keyed to your specific credit scores, down payment, capacity to repay, bank reserves and other factors that determine your perceived risk. If you have a firm understanding of what you qualify for and deserve, it’s going to be a lot tougher for anybody to upsell you.