Underwater homeowners would benefit from debt-relief baill passed by Senate panel

By Kenneth R. Harney, Updated: Friday, August 10, 8:47 AM

Here’s some encouraging news for financially stressed homeowners across the country: The Senate Finance Committee approved a bipartisan bill before heading home for summer recess that would extend the Mortgage Forgiveness Debt Relief Act through 2013.

Why is this important? Several reasons: The law spares homeowners who receive principal reductions on their mortgages from being hit with hefty federal income taxes on the amounts forgiven. Without it, millions of owners who go through foreclosure or leave their homes following short sales would experience even more financial stress.

The law – which has also provided relief to thousands of people who have debt balances written off as part of loan-modification agreements and is crucial to the $25 billion federal-state robo-signing settlement with large banks – is set to expire at the end of December. Some Capitol Hill analysts predicted that, along with a host of other special-interest tax benefits, an extension might have trouble making it through the partisan gantlet in an election year.

But the Senate committee managed to pull together enough votes Aug. 2 to pass the debt-relief extension after heavy lobbying by the National Association of Realtors and the National Association of Home Builders. The bill, which now moves to the full Senate for possible action next month, also would extend tax write-offs for mortgage insurance premiums for 2012 and through 2013, and it would continue some energy-efficiency tax credits for remodelings and new-home construction.

The mortgage debt relief extension ultimately could affect millions of families who are underwater on their loans, delinquent on their payments and heading for foreclosure, short sales or deeds-in-lieu-of-foreclosure settlements. Under the federal tax code, all types of forgiven debt are treated as ordinary income, subject to regular tax rates. When an underwater homeowner who owes $300,000 has $100,000 of that forgiven as part of a modification or other arrangement with the bank, the unpaid $100,000 balance would normally be taxable.

But in 2007, Congress saw the fast-mounting distress in the housing market on the horizon and agreed to temporarily exempt certain mortgage balances that are forgiven by lenders. The limit is $2 million in debt cancellation for married individuals filing jointly, $1 million for single filers. This special exemption, however, came with a time restriction. The current deadline is Dec. 31. Without a formal extension by Congress, starting on Jan. 1 all mortgage balances written off by banks would be fully taxable – a nightmare scenario that has had financially stressed homeowners worried for months.

These apprehensions were raised even higher when some policy analysts predicted that a Congress as fractious and dysfunctional as the current one would never get its act together to pass any tax bills until the closing moments of the lame-duck session expected after the November election. Even then, with such issues as the mounting federal debt and draconian spending cuts scheduled for Jan. 1 taking precedence, smaller matters such as mortgage debt relief might well be lost in the dust storms, experts predicted.

A few Republican policy strategists, including Douglas Holtz-Eakin, former Congressional Budget Office director and economics adviser to Sen. John McCain’s presidential campaign, speculated that tea party freshmen in the House might oppose the debt-relief extension because they see it as another costly bailout funded by taxpayers. The estimated revenue cost to the Treasury for a two-year extension is $2.7 billion.

The mortgage insurance deduction is another key housing benefit that made it into the Senate committee’s 11th-hour extender bill. Mortgage insurance generally is required whenever home purchasers make small down payments, whether on conventional, private-market loans or through government programs. Under a provision in the tax code that expired this past December, certain borrowers could write off their mortgage insurance premiums on their federal income taxes, just as they do with mortgage interest. To qualify for a full deduction, borrowers could not have adjusted gross incomes greater than $100,000 ($50,000 for married taxpayers filing separate returns).

The Senate’s bill would extend the write-off retroactively to this past Jan. 1, and would continue it through December 2013. No buyer or owner who planned to write off premiums during 2012 would be penalized, in other words, despite the expiration last December.

The outlook for the extenders: Given the popularity of the housing deductions and credits, look for supporters to press the full Senate for early action in September in order to get these issues settled before Election Day. If there are serious objections in the Republican-controlled House, however, then all bets are off until the lame-duck session, when election losers as well as winners get to write federal tax policy.

Fraught Pot of Cash at CFPB Stirs Unease

By Kevin Wack AUG 3, 2012 5:39pm ET

WASHINGTON – A $25 million penalty collected by the Consumer Financial Protection Bureau last month is focusing attention on an aspect of the fledgling agency’s powers that was long overlooked but now carries large political significance.

Whenever the bureau collects penalties from firms that violate consumer protection laws, those funds go into what’s called the Civil Penalty Fund, which the agency can then use to compensate victims of fraud, as well as to fund consumer education and financial literacy programs.

That specific provision of the Dodd-Frank Act was mostly forgotten during the CFPB’s first year in existence, since the agency had yet to impose any penalties. But the fund received its first infusion of cash after the bureau assessed a $25 million penalty to Capital One. The fine is just the opening deposit in what’s expected to become a substantial pool of money.

Now the CFPB must decide how to implement the mere two sentences in Dodd-Frank that govern its use of the fund. Its decisions will be closely watched by congressional Republicans who worry that the money will be awarded under contracts with outside consumer groups that are the agency’s political allies.

“People will want to know exactly who this money is going to and for what purpose, and why a particular contractor and particular issue was chosen,” said Ann Jaedicke, a managing director at Promontory Financial Group.

Among the federal banking agencies, there is no precedent for this type of fund, and so far the CFPB has shed little light on how it will work.

The consumer agency in July released a three-page fact sheet that announced the formation of an internal board to oversee the fund, along with another three-page document that lays out the criteria it will use to award contracts for consumer education and financial literacy programs.

But in response to written questions from American Banker, the agency provided only vague answers to a number of key questions.

For example, the bureau did not give any more detail than Dodd-Frank itself does about how officials will determine when money should go to individuals who suffered harm, and when it should be used for other purposes.

The 2010 law states that the fund “may” be used for consumer education and financial literacy “to the extent that such victims cannot be located” or that payments to them “are otherwise not practicable.”

And what will happen in cases like the Capital One settlement, where the victims of the company’s violations are expected to receive full compensation without any need to dip into the penalty funds?

The consumer agency again pointed to the language of Dodd-Frank. The law merely states that the money “shall be available, without fiscal year limitation,” to pay victims of activities where penalties have been imposed under federal consumer financial laws.

That language might be interpreted to mean that the CFPB can stash away the $25 million from Capital One to compensate victims in future consumer protection cases. But for now the agency is not offering its own interpretation of the law.

The CFPB has good reason to tread carefully, since the Civil Penalty Fund has become a bugaboo for the agency’s Republican critics in Congress.

Earlier this year the GOP-controlled House of Representatives voted to repeal the fund. That move followed a December 2011 speech on the Senate floor where GOP Sen. Richard Shelby argued that the fund explains why Democrats have resisted Republican proposals to alter the agency’s structure.

“This consumer bureau, as now structured, is allowed to dole out money it collects from fines and penalties to liberal consumer groups,” Shelby said in the speech. “This reveals why the administration and the majority want so desperately for the bureau to be unaccountable. They want the bureau to be a permanent funding machine for their political allies.”

Shelby doubled down on that argument recently, saying in a statement that CFPB Director Richard Cordray has “unchecked control of this unique slush fund.”

No matter what decisions the consumer bureau eventually makes, the Civil Penalty Fund will surely face close scrutiny from Republicans on Capitol Hill.

“If I was Congress, I’d want to know, after it’s been up, how much of it has actually gone to victims,” said Mark Calabria, a former Shelby aide who is now the director of financial regulation studies at the Cato Institute, a conservative think tank.

“There’s going to be real pressure on them to get money out the door,” Calabria added. “If they have this sitting around for any significant amount of time, Congress will find a way to use it to pay for something.”

As the consumer agency begins to make decisions about the money, perhaps its best guide will be the Securities and Exchange Commission. Under the Sarbanes-Oxley Act of 2002, Congress authorized the SEC to return the penalties it collects to investors who were victimized.

Since then the SEC has collected $10.6 billion in penalties for distribution to victims, of which $9.6 billion have actually gone to the victims, according to the agency.

The $1 billion difference includes taxes owed by the funds, funds not yet paid to investors, money returned to the Treasury Department and administrative costs. An agency spokesperson said the SEC has not analyzed the ratio of payments to victims versus administrative costs.

James Overdahl, a former SEC chief economist, said the agency’s process for distributing funds to victims has spawned a small industry of lawyers and consultants who administer the payments.

“I don’t think anyone disagrees with the notion of returning money to harmed investors. However, people do worry about the cost, as administering the process can be extremely cumbersome,” said Overdahl, who is now vice president at NERA Economic Consulting.

There are a couple of important differences between the processes at the SEC and the consumer bureau. First, at the SEC, money that doesn’t go to victims must be returned to the Treasury rather than being sent to outside groups.

Also, the SEC sets up separate funds for victims of different companies – approximately 260 funds have been established over the last decade – whereas the CFPB is establishing a single fund.

Nonetheless, the consumer bureau will face many of the same issues that the SEC has encountered. And it will do so in a more highly charged political environment.

In response to Sen. Shelby’s concerns, the consumer agency stated that the fund’s governance board was taking steps to ensure that the money is distributed in a transparent and efficient way that protects against waste, fraud and abuse. It also said that it will be transparent about any administrative expenses.

The consumer bureau has yet to sign any contracts for consumer education or financial literacy, but it has stated that the process will be subject to federal contracting requirements.

Whatever decisions the agency makes, lots of eyes will be watching.

“The CFPB over time could collect a substantial amount of money in fines,” Jaedicke said. “There is likely to be a lot of money available for consumer literacy and education.”

Mortgage loosening? Don’t bet on it

By KENNETH R. HARNEY

Aug 3, 2012

With home prices rising in many markets around the country, might mortgage lenders start loosening up on their hyper-strict underwriting rules and extend loans to buyers who now find themselves on the sidelines?

Could current preferences for FICO credit scores in the mid-700s, down payments of 20 percent-plus, and tight debt-to-income ratios begin to ease a little, given the widely acknowledged fact that loans underwritten in the past several years have performed exceptionally well — that is, defaulted at low rates?

Maybe. A lower unemployment rate would help, say mortgage industry leaders, as would signs of more robust growth in the overall economy. But the industry is unlikely to go back to what Frank Nothaft, chief economist of Freddie Mac, the giant federally backed investor, calls “the loosey-goosey standards we had in 2005 through 2007″: minimal documentation of income and assets, zero down payments and a widespread disregard for applicants’ ability to afford payments on the mortgages they sought.

Nothaft added in an interview, however, that “we have gotten better news on the home-pricing front,” which might allay some bankers’ fears about making loans secured by assets that are declining in value.

So the answer is yes, there are possibilities for easing in the months ahead. But there are also signs that for certain borrowers, things could get worse. Fannie Mae, the other dominant investor along with Freddie Mac in the conventional mortgage market, is planning an overhaul of its automated underwriting system in October. Fannie’s system plays a huge role far beyond its own business, since lenders often submit borrowers’ application data through it to get a quick read on whether a loan meets the baseline tests for eligibility or not — even if the mortgage is destined ultimately for FHA, VA or a bank’s portfolio.

While Fannie Mae officials insist that the upcoming changes to credit risk evaluation and other factors won’t significantly alter the percentages of approvals that the system generates, they concede that some applicants who are currently getting green lights for loans won’t get them, and others who are currently on the margins will sail through.

Some changes in the Fannie underwriting black box almost certainly will make approvals tougher, such as for certain condo loans. Under its current guidelines, Fannie Mae’s system allows lenders to perform a “limited project review” on the financial and other conditions of the underlying condominium community when purchasers put down as little as 10 percent. But under the upcoming changes, applicants making down payments of up to 20 percent will be subjected to a “full project review.”

This is “potentially a big deal” for condo buyers and sellers, says Philip J. Sutcliffe, a condo financing consultant based in Lansdale, Pa. “Most lenders aren’t equipped” to perform a full project review — which involves “legal review of the condo documents” and other tasks that can be costly and time consuming. The net effect: Some lenders may not want to bother with the hassles and expenses that come with such condo applications, potentially cutting off a key source of mortgage money for unit sellers and purchasers.

Other signs that the lending industry may not be quite ready to loosen up: In the latest quarterly survey of banks conducted by the Comptroller of the Currency, 25 percent said they had tightened rules for mortgages in recent months, whereas just 10 percent said they had eased their standards. Two-thirds said their rules remained the same.

Also, a study by mortgage data firm Ellie Mae of new loans closed in June found that credit scores for approved mortgages remain extraordinarily high. Fannie and Freddie’s refinancings had an average FICO score of 767 and average equity percentages of 29 percent. Home purchase loans had average down payments of 21 percent and 763 FICOs. Even the conventional home purchase loan applications that lenders rejected had high credit scores and down payments by historical standards: 738 average FICOs and 19 percent down payments.

FHA, which used to average somewhere in the mid-600s for FICO scores on approvals, appears to be continuing to cherry-pick applicants as well, based on the Ellie Mae survey data, which the firm says represents approximately one-fifth of all loans originated in June. FHA’s average FICO on approved refis was 716, up three points from May. For successful home purchase applications, the average FICO score was 701.

What does all this mean? If there’s a loosening of underwriting standards coming down the road, there are scant hints of it at the moment.

Refi Boom Drives Profits, But Can It Last?

By Kate Berry

JUL 30, 2012 12:35pm ET

Mortgage refinancings once again drove banks’ profits last quarter and, with interest rates at record lows, most industry experts expect the trend to continue at least through the end of the year.

Still, it is not too soon for bank executives to be thinking about the end of the refi boom. In conference call after call this earnings season, CEOs were asked how they intend to make up for the lost profits when interest rates rise and the number of borrowers eligible to refinance ultimately peters out.

“Margins now are fat and everybody loves them,” says Joe Garrett, a principal at the consulting firm Garrett, McAuley & Co., in San Francisco. “But at some point, everybody who can refinance has refinanced and eventually all parties come to an end.”

Many CEOs were prepared for questions about how they plan to offset an inevitable slowdown in mortgages, saying they are diversifying their revenue streams, expanding into new areas of lending and, of course, cutting costs. Joseph Campanelli, the chairman and CEO at Flagstar Bancorp (FCB) in Troy, Mich., repeatedly used the word “diversify” to explain how the $14.4 billion-asset bank plans to sustain the momentum generated by mortgage originations. Flagstar posted its first quarterly profit in four years in the second quarter, thanks by a 170% jump in residential mortgage originations from the same period last year.

“We continue to use strong mortgage banking revenues to help fuel the growth in other lines of business” – primarily commercial lending – “thus diversifying and lessening the volatility of our revenue streams over time,” Campanelli told analysts.

In the short-term, refinancing activity is expected to continue to drive profits. Refi applications soared to their highest level last week since 2009 as the average 30-year fixed-rate mortgage dropped to new lows of 3.74%, according to the Mortgage Bankers Association. Refinancings now make up a whopping 80% of all mortgage applications while home purchases remain anemic by historic standards.

“Both the first and second quarters were really strong and we really haven’t seen pipelines slowing,” says Jeffrey Harte, a principal at Sandler O’Neill & Partners. “With rates getting as low as they are, refinancing is again economically viable, kicking in a whole new wave of borrowers who have already refinanced and are doing it again.”

On top of borrowers refinancing at ultra-low rates, the largest mortgage servicers have been inundated since January with a wave of new refinance applications for the revised Home Affordable Refinance Program, known as Harp 2.0. The program has help mostly underwater borrowers with high loan-to-value ratios who previously could not refinance and whose loans are guaranteed by Fannie Mae or Freddie Mac. Harp 2.0 program has brought in an additional 25% of all refinance applications. It also has been criticized for boosting big banks’ profits.

Several other factors may help sustain strong mortgage revenue and profits into the second half. Other than Wells Fargo (WFC), the nation’s largest retail mortgage lender, most banks are not adding much additional staff to handle the increased volume. Scott Buchta, head of mortgage strategy at Sandler O’Neill & Partners, says a 50-basis-point rise in interest rates could lead to a dramatic drop in refinancing applications and banks simply do not want to be stuck with too much staff when the refi boom slows. Plus less overhead means higher profits.

“Capacity is being built, but banks don’t want to build it fast so it doesn’t disrupt primary-secondary spreads,” says Buchta, referring to the difference between the cost of 30-year loans and yields on Fannie Mae mortgage securities that determine lender’s profit margins.

Also, Wells Fargo’s exit from wholesale lending and Bank of America’s (BAC) exit from correspondent lending has allowed smaller lenders to add market share.

Wells Fargo’s mortgage banking income in the second quarter jumped 79% from a year earlier, to $2.9 billion, contributing 63% to the San Francisco bank’s total earnings of $4.6 billion in the second quarter. Its originations more than doubled to $131 billion year-over-year as its pipeline of loans hit $102 billion at the end of the quarter.

Chris Marinac, an analyst at FIG Partners, says that banks’ mortgage pipelines “were pretty darn full at the end June,” which bodes well for third-quarter profits, but eventually banks will be forced to cut expenses to replace strong mortgage revenue.

“This industry needs to get leaner and meaner and there is plenty of fat to trim,” he says. “The CEOs know it and low interest rates pressuring net interest margins and the eventual slowdown in mortgage fees is going to have to focus back on process improvements.”

McAuley & Co.’s Garrett says that while there’s enough refi demand to sustain profits through early next year, banks need to be preparing now for the eventual rise in rates. He advises clients to create board-approved exit plans with clear definitions and specific steps to take when rates rise and refi demand slows. Such plans would kick in when mortgage applications drop by a certain percentage for several consecutive weeks, which could help banks avoid widespread staff cuts.

Still, Willie Newman, president of Cole Taylor Mortgage, a unit of Taylor Capital Group (TAYC) in Chicago, says banks that are truly committed to mortgage lending can only cut staff so much.

“It takes more people to process an application and there’s a higher degree of scrutiny for every data point and loan file,” Newman says. “The whole industry is just harder.”

Mortgage lending once again drove profits at the $4.8 billion-asset Taylor Capital, but the company continues to strive for balance. It recently opened a commercial lending office in the Milwaukee area, its second in Wisconsin, and just launched a nationwide equipment leasing division targeting middle-market firms. The unit is headed by Edward Dahlka, the former president of LaSalle National Leasing in Towson, Md., where Taylor’s new leasing arm is also based.

“I’ve known Ed for many years, and the highly experienced team has an established network in the marketplace,” Mark A. Hoppe, Cole Taylor’s president and CEO, said when the division was launched in July. “We expect that Cole Taylor Equipment Finance will become a strong source of balance sheet growth and fee revenue for the bank and further contribute to the diversification of our earnings.”

The Return of supply and demand

By KENNETH R. HARNEY Jul 27, 2012

Though many home shoppers who assume they are still in a buyer’s market find it hard to believe, one of the sobering fundamentals shaping real estate this summer is shrinking inventory: The supply of houses for sale is down significantly in most areas compared with a year ago, sometimes dramatically so. And that is having important side impacts – raising prices and homeowners’ equity stakes, and reducing total sales.

In major metropolitan markets from the mid-Atlantic to the West Coast, the stock of homes listed for purchase is down by sometimes extraordinary amounts – 50 percent or more below year-ago levels in several areas of California, according to industry studies. In Washington, D.C., and its nearby suburbs, listings are down by 28 percent, reports Redfin, a national online realty brokerage. In Los Angeles, available inventory is 49 percent lower than it was last summer, San Diego by 53 percent. In Seattle, listings are off by 41 percent. According to the National Association of Realtors, total houses listed for sale across the country in June were 24 percent lower than a year earlier. The dearth of listings is often more intense in the lower- to mid-price ranges, less so in the upper brackets.

Peggy James, an agent with Erick & Co. of Exit Choice Realty in Prince William County, Va., says she gets calls “all the time” from buyers asking, “Where are all the new listings? Are you agents bluffing” – holding back? But the reality is that “there just haven’t been many” listings in some high-demand price categories lately, she says.

In Orange, Calif., Carlos Herrera, broker-owner of Casa Blanca Realtors, says “it’s really strange right now. We have many buyers but few sellers,” forcing purchasers to bid up prices on what’s available.

Just south of San Francisco, Redfin agent Brad Le says inventory in Silicon Valley is down so drastically – and demand so strong – that the bidding wars are spinning off the charts. “We’re not just talking about 10 or 15″ offers, he says, “but sometimes 40 and 50.” Some buyers are inserting escalation clauses into their contracts to keep pace with counter-bids, and waiving financing contingencies, inspections and even agreeing to increase their down payments to counter any differences between the accepted sale price and the appraised value. One modest, 1,700-square-foot house recently was listed at $879,000. It drew more than 50 competing offers and sold to an all-cash buyer for $1,050,000 in less than a month.

Silicon Valley is in its own special economic niche, but declining inventories are nationwide. In its latest survey of 146 large markets, Realtor.com found that 144 had lower supplies of listings last month than a year earlier. Online real estate and mortgage data firm Zillow reports that some of the steepest declines in inventory are in places that got hit the hardest during the bust, and where sizable percentages of owners still are underwater on their mortgages. In Phoenix and Miami, for example, 55 percent and 46 percent of owners respectively have negative equity.

Both cities have seen significant drops in inventory, and both are experiencing strong appreciation in home prices. According to data from research firm CoreLogic, Phoenix prices are up 14.7 percent for the year and Miami by 9.7 percent.

What’s behind the widespread declines in listings? Analysts say negative equity plays a major role – it discourages people who might otherwise want to sell from doing so. They don’t want to take a big loss, especially in a slowly improving price environment. So they sit tight rather than list. Banks with large stocks of pre-foreclosure and foreclosed properties are doing the same, creating a so-called “shadow inventory” of houses estimated to total 1.5 million units.

Where’s this all headed? Stan Humphries, chief economist for Zillow, says the likely trend is for more of the same: Constricted supplies will lead to price increases, especially in segments of local markets where demand is strongest. Longer term, price increases will gradually rewind the cycle, increasing owners’ equities and convincing more of them to list and sell. This, in turn, should put a brake on price increases, especially under today’s super-strict mortgage underwriting and appraisal practices.

Bottom line for anyone looking to list or purchase anytime soon: Though conditions vary by location and price segment, lower supplies of houses available for sale are changing market dynamics – putting sellers in stronger positions than they’ve been in years.