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.

New group aims to enlist millions to push the interests of homeowners and tenants

By Kenneth R. Harney Friday, July 26, 8:45 AM

Do 75 million homeowners need their own advocate before Congress and federal agencies on issues such as the mortgage interest tax deduction, retention of low-down-payment loans and the start of tougher financing rules in January?

Who knows? But a group of mortgage and real estate industry veterans, joined by leaders of national community development, fair housing and consumer groups, are set to launch an unusual effort: a national nonprofit organization modeled after AARP, the lobby for people ages 50 and older, solely to speak for the home-owning public.

It’s called America’s Homeowner Alliance, and it is scheduled to be formally announced within the next two weeks. The mission, according to its sponsors, is to “protect and promote sustainable home ownership for all segments” of the population – from moderate-income renters saving money for a down payment to long-established owners.

Members will be asked to pay annual dues of $20 – by comparison, AARP’s dues are $16 – and will receive access to an extensive program of rewards and discounts from more than 1,000 participating companies offering home-related products and services. These firms include Home Depot, Lowe’s, Best Buy, Sears, Verizon, major appliance manufacturers, and furniture and housewares stores, encompassing what sponsors say will be more than a million products. Members will earn points on every purchase and be able to redeem them for merchandise, travel and other benefits.

The new group, which will be headquartered in St. Louis, is the brainchild of Phil Bracken, former executive vice president for Wells Fargo Home Mortgage and now chief policy officer of government relations for Radian Guaranty, a private mortgage insurer. His specialty as a lender has been financing and promoting affordable homeownership, especially for entry-level buyers, and he has chaired or co-chaired groups such as the Consumer/Lender Roundtable. Bracken will serve as chairman of the alliance. Its president and chief executive will be Tino Diaz, who heads a management consulting firm in Florida and is a former chairman and president of the National Association of Hispanic Real Estate Professionals.

The group’s directors and advisory board represent a mix of industry and consumer-group leaders, including several from Asian, Hispanic and African American real estate organizations, plus the Consumer Federation of America.

In an interview, Bracken said the alliance is needed “because no one currently represents homeowners’ interests,” even though trade groups representing realty brokers, lenders and builders take positions on legislative and regulatory issues that often coincide with those interests.

Lisa Rice, a vice president of the National Fair Housing Alliance and a member of Bracken’s advisory board, said that despite those supportive positions taken by trade groups, the fact remains, “Realtors represent Realtors; builders represent builders. There is no group that is only looking out for and taking care of homeowners.”

Bracken said he expects to mount a multichannel marketing outreach campaign using social media and the efforts of the alliance’s participating organizations starting in September. He hopes to have 250,000 members within 12 months. By the end of the second year, the goal is 500,000 members, and after five years, 5 million members.

“This is a long-term effort,” he said, noting that it has taken AARP decades to grow into the powerhouse it is today. Like AARP, which focuses on a diverse and large pool of people, the alliance is targeted at a base of millions of consumers – current property owners and millions of renters who would like to become homeowners – who often have common interests.

How will the alliance handle bread-and-butter real estate issues such as the mortgage-interest deduction, which is a target this year for tax reformers who complain that homeowner write-offs add too much to the federal deficit and chiefly benefit upper-middle-income and wealthy property owners? Bracken says the group will strongly favor retention of the deductions, a position that coincides with that of the Realtors and home builders.

But at least one of Bracken’s board members, John Taylor, president and chief executive of the National Community Reinvestment Coalition, hints at the sort of internal policy splits that seem inevitable for the alliance with its diverse makeup. Taylor said in an interview that if Congress wanted to cut out deductions for second homes to help reduce the federal deficit, he would be in favor – and would urge the alliance to work with tax reformers on that issue.

The alliance’s Web site, which will go live once the group is formally launched, is www.myaha.com.

A reverse mortgage nightmare

Jul 19, 2013 Kenneth R. Harney

WASHINGTON — Call it the estate-devouring, nightmare home loan you hope to never encounter: A reverse mortgage with a base interest rate of 9.95 percent, plus a 50 percent share for the lender of increases in value of the house following closing, plus another 2 percent “maturity fee” to sweeten the payout even more. On top of that, there’s a $33,000 mandatory purchase of an annuity by the homeowner that is added to the principal balance and incurs compounding interest while lessening the lender’s future payments to the homeowner.

Is this for real? Do mortgages with terms like this actually exist in this country today? They do. Talk to Sarah Havemeyer of Southampton, N.Y., who’s been fighting a California bank in court for two years over her late mother’s reverse mortgage that dates back to 1997. Although the bank, OneWest, has not yet provided a total of what it believes is owed on the reverse mortgage, according to Havemeyer, she estimates it could be in the neighborhood of $1.5 million to $1.6 million. By comparison, the amount that Havemeyer’s mother actually received from the reverse mortgage between 1997 and her death in 2010 was just $272,911.51. A reverse mortgage places a lien against a senior’s home in exchange for periodic or lump sum payments. The full amount borrowed does not come due until the borrower dies, moves out or sells the home.

OneWest, for its part, isn’t talking. The bank declined to discuss either Havemeyer’s litigation or any details of the reverse mortgage terms. The law firm representing OneWest’s subsidiary that claims ownership of the reverse mortgage note — Financial Freedom Acquisition LLC — did not respond to a request for comment.

Financial Freedom has filed for foreclosure, seeking payment of the $272,911.51, plus “interest at the rate stated” in the mortgage along with legal and other fees. The filing did not indicate that a huge chunk of the “interest” due flows from its 50-50 share in the appreciation of the house from $556,000 in 1997 to its approximate current value around $1.8 million.

Havemeyer, who is serving as executrix of her mother’s estate, is challenging the foreclosure, claiming that Financial Freedom has not been able to present documentation that it actually owns the mortgage, and the terms of the loan are “unconscionable and usurious” and violate state law.

Were it not for the unusual terms of the mortgage, Havemeyer’s dispute with the bank and its subsidiary might be seen as just another real estate squabble in the high-gloss Hamptons on New York’s Long Island. But the terms make this case jump out as special.

Start with the triple whammy of 50-50 appreciation sharing, plus the mandatory annuity added to the loan balance, plus the 2 percent extra fee tacked on at the end. Although the vast majority of reverse mortgages have never employed such payment terms, thousands that were marketed in the 1990s did.

In the late 1990s, a series of California lawsuits claimed that terms such as these amounted to “financial abuse of the elderly” and allowed lenders to “[reap] unfair profits at the expense of the elderly,” many of whom ended up owing far more than they borrowed. A consolidated class-action suit was later settled by the defendants — Transamerica Corp. Transamerica HomeFirst, Inc., Metropolitan Life Insurance Co. and Financial Freedom Senior Funding Corp — for $8 million. None of the companies admitted wrongdoing. Through a long chain of events spanning the mortgage crash, OneWest Bank acquired reverse mortgage assets that dated back to Transamerica and Financial Freedom Senior Funding, including the loan now in dispute.

A widow and 78 when she originally obtained her loan from Transamerica Home First, Sarah C. Hoge, Havemeyer’s mother, did not seek guidance from family members. Havemeyer’s lawyer in the foreclosure case, Michael Walsh, says “I can’t imagine that Mrs. Hoge really did understand what she was getting into.” But she signed up, and ultimately did not opt out of the class-action settlement in California, which provided her a payment of $8,480.

How Havemeyer’s case ultimately turns out is anybody’s guess. But the bottom line is this: Reverse mortgages, even today’s friendlier versions that offer upfront counseling, can be hazardous to elderly borrowers’ financial health and potentially costly for their heirs. Nearly one in 10 federally-backed reverse mortgages is in default, risking foreclosure for owners. Family members need to be involved from Day One. And stay involved.