To Boomers and Refis: A Warning

By Ken Harney 5/25/2012 6:36 PM

WASHINGTON – It’s a mortgage problem that is likely to intensify as homeowning baby boomers by the millions shift into retirement: Though they may have significant financial assets tucked away in retirement accounts, their diminished monthly incomes may not be sufficient to meet some lenders’ hyper-strict underwriting rules.

Jim Eberle of McLean, Va., found this out the hard way when he applied to refinance his mortgage. After spending much of his career working for banking industry trade associations in Washington, Eberle, 68, decided to take advantage of this spring’s unprecedented low interest rates with a 2.89 percent adjustable-rate 30-year loan offered by a large Midwestern bank.

To his utter shock, Eberle was rejected – the first time in 45 years of homeownership and eight different home loans. The reason for the turndown: insufficient income. “To get rejected was incredible,” Eberle said in an interview, because based on the extensive documentation he provided the bank, he looked highly qualified. He had substantial checking, savings and 401(k) holdings and a net worth he describes as “in seven figures.” The appraisal the bank did on his house showed it to be worth $664,700 – more than double the $322,000 refi he was seeking. His credit score, according to TransUnion, was 826, indicating minimal risk of default.

Yet the bank “told me it could not make the loan because, even though I have sufficient (liquid) assets and a high credit score,” his monthly Social Security payments, bank deposits, checking accounts and 401(k) plan “were not enough.”

How commonplace is Eberle’s experience? Conversations with mortgage lenders and analysts suggest it is happening more frequently, thanks to some large banks ratcheting up their underwriting standards so tightly that the old joke – they’ll only lend to people who don’t really need the money – is beginning to resemble reality for some borrowers.

Eberle says he was willing to pull out funds from his checking and banking deposits and set them aside to make up any perceived monthly income shortfalls. “I was willing to do whatever it took,” he said. But the bank still said no.

Mortgage market experts, such as Dennis C. Smith, co-owner of Stratis Financial in Huntington Beach, Calif., are not surprised at Eberle’s experience. Smith had a recent client – a physician seeking a $350,000 loan with $2.5 million in bank accounts – who was rejected by one lender because the deposits, which were proceeds from an inheritance, had been in his account for just eight months. This was too short a time period to satisfy the bank’s pristine and unyielding standard.

Part of the problem here, according to Smith, appears to be overcorrections by some banks to the lax underwriting that characterized the years leading up to the housing bust – especially see-no-evil practices such as “stated income,” where the loan officer accepted the monthly income number provided by the applicant with no verification. But another factor, says Bruce Calabrese, president and co-founder of Equitable Mortgage in Columbus, Ohio, is that some loan officers aren’t aware of techniques available for qualifying retirees who are asset-rich but income-deficient.

For example, Calabrese’s firm employs “annuitization” procedures acceptable to Fannie Mae to help borrowers over 59 1/2 qualify on income tests using their IRA and other retirement account balances. “We take 70 percent of the total value of the funds and then spread them out over 360 months if the loan is a 30-year fixed and 180 months if the loan is a 15-year fixed. We also gross up their Social Security by 1.25 percent. So if they get $1,000 per month in Social Security income, we give them credit for $1,250 as long as they don’t have to pay income tax” on that income.

Jeff Lipes, vice president of Rockville Bank outside Hartford, Conn., uses similar income-qualification procedures sanctioned by Freddie Mac. Say you’re a senior with $1 million in a brokerage account. To help qualify you for a refi, Lipes would “discount the value by 30 percent to $700,000 and use a conservative rate of return – say 2 percent – and that would give the person (an extra) $14,000 a year in income.”

Some of the computations can get complex, but the message here is clear: Just because a homeowner’s post-retirement income is below what it used to be, this doesn’t mean he or she can’t refinance, get a new mortgage or buy a house, provided they have sufficient retirement assets. You just need to shop around and deal with experienced loan officers who know the ropes and are willing to work with you for your business.

To Boomers and Refis: A Warning

By Ken Harney 5/25/2012 6:36 PM

WASHINGTON – It’s a mortgage problem that is likely to intensify as homeowning baby boomers by the millions shift into retirement: Though they may have significant financial assets tucked away in retirement accounts, their diminished monthly incomes may not be sufficient to meet some lenders’ hyper-strict underwriting rules.

Jim Eberle of McLean, Va., found this out the hard way when he applied to refinance his mortgage. After spending much of his career working for banking industry trade associations in Washington, Eberle, 68, decided to take advantage of this spring’s unprecedented low interest rates with a 2.89 percent adjustable-rate 30-year loan offered by a large Midwestern bank.

To his utter shock, Eberle was rejected – the first time in 45 years of homeownership and eight different home loans. The reason for the turndown: insufficient income. “To get rejected was incredible,” Eberle said in an interview, because based on the extensive documentation he provided the bank, he looked highly qualified. He had substantial checking, savings and 401(k) holdings and a net worth he describes as “in seven figures.” The appraisal the bank did on his house showed it to be worth $664,700 – more than double the $322,000 refi he was seeking. His credit score, according to TransUnion, was 826, indicating minimal risk of default.

Yet the bank “told me it could not make the loan because, even though I have sufficient (liquid) assets and a high credit score,” his monthly Social Security payments, bank deposits, checking accounts and 401(k) plan “were not enough.”

How commonplace is Eberle’s experience? Conversations with mortgage lenders and analysts suggest it is happening more frequently, thanks to some large banks ratcheting up their underwriting standards so tightly that the old joke – they’ll only lend to people who don’t really need the money – is beginning to resemble reality for some borrowers.

Eberle says he was willing to pull out funds from his checking and banking deposits and set them aside to make up any perceived monthly income shortfalls. “I was willing to do whatever it took,” he said. But the bank still said no.

Mortgage market experts, such as Dennis C. Smith, co-owner of Stratis Financial in Huntington Beach, Calif., are not surprised at Eberle’s experience. Smith had a recent client – a physician seeking a $350,000 loan with $2.5 million in bank accounts – who was rejected by one lender because the deposits, which were proceeds from an inheritance, had been in his account for just eight months. This was too short a time period to satisfy the bank’s pristine and unyielding standard.

Part of the problem here, according to Smith, appears to be overcorrections by some banks to the lax underwriting that characterized the years leading up to the housing bust – especially see-no-evil practices such as “stated income,” where the loan officer accepted the monthly income number provided by the applicant with no verification. But another factor, says Bruce Calabrese, president and co-founder of Equitable Mortgage in Columbus, Ohio, is that some loan officers aren’t aware of techniques available for qualifying retirees who are asset-rich but income-deficient.

For example, Calabrese’s firm employs “annuitization” procedures acceptable to Fannie Mae to help borrowers over 59 1/2 qualify on income tests using their IRA and other retirement account balances. “We take 70 percent of the total value of the funds and then spread them out over 360 months if the loan is a 30-year fixed and 180 months if the loan is a 15-year fixed. We also gross up their Social Security by 1.25 percent. So if they get $1,000 per month in Social Security income, we give them credit for $1,250 as long as they don’t have to pay income tax” on that income.

Jeff Lipes, vice president of Rockville Bank outside Hartford, Conn., uses similar income-qualification procedures sanctioned by Freddie Mac. Say you’re a senior with $1 million in a brokerage account. To help qualify you for a refi, Lipes would “discount the value by 30 percent to $700,000 and use a conservative rate of return – say 2 percent – and that would give the person (an extra) $14,000 a year in income.”

Some of the computations can get complex, but the message here is clear: Just because a homeowner’s post-retirement income is below what it used to be, this doesn’t mean he or she can’t refinance, get a new mortgage or buy a house, provided they have sufficient retirement assets. You just need to shop around and deal with experienced loan officers who know the ropes and are willing to work with you for your business.

Senate Hearing Points Path to Bipartisan Compromise on Refi Bill

By Kevin Wack MAY 24, 2012 5:15pm ET

WASHINGTON – Key senators signaled guarded optimism Thursday about the chances of finding a bipartisan compromise on mortgage refinancing legislation, though the bill still faces an uphill fight in the House.

At a Senate Banking Committee hearing, GOP Sen. Bob Corker outlined four changes he is seeking to a bill sponsored by Democratic Sen. Robert Menendez.

Minutes later, Corker sounded a positive note about a conversation that he and Menendez had Thursday about the proposed changes. “I think there is a desire to look at some of the things that we’ve brought forth,” Corker told American Banker, “so we’ll just have to see.”

Menendez, also speaking after the hearing, said: “We’re certainly open to consider reasonable requests as long as we get to the ultimate goal. Time is of the essence if we’re going to actually get 3 million or more homeowners the opportunity to refinance.”

Corker’s stamp of approval would allow the bill to pass the Banking Committee with bipartisan support. That would help the measure garner the 60 votes – including the votes of at least seven Republicans – that are routinely necessary to pass legislation in the Senate.

During Thursday’s hearing, Corker laid out his requested changes in a series of questions to witnesses who were testifying about the bill. The legislation, which is being co-sponsored by Democratic Sen. Barbara Boxer, would make refinancing easier for millions of homeowners with Fannie Mae and Freddie Mac mortgages.

Corker, R-Tenn., suggested that he wants a change to prevent homeowners from refinancing under its terms more than once. He would also like to retain the ability of Fannie and Freddie to put back refinanced mortgages to their originators.

In addition, Corker would change the bill’s provisions on data collection. And lastly, while the bill currently states that homeowners must have a mortgage originated prior to June 2010 in order to qualify, Corker would push that date back to June 2009.

Democrats on the Banking Committee have not ruled out the possibility of bypassing a committee vote and taking the Menendez-Boxer bill directly to a vote on the Senate floor. Republicans, on the other hand, have been pushing for a committee vote.

“I think the Senate hasn’t been functioning properly because we’ve been airdropping things in,” Corker said during the hearing, “and yet I notice when we pass things out of committee in a bipartisan way they actually seem to happen. ”

Menendez, D-N.J., estimated that his bill will help roughly 3 million homeowners who are current on their mortgages by expanding access to the Obama administration’s flagship refinancing program. That program – the Home Affordable Refinancing Program, or Harp – was already expanded once after its initial terms yielded disappointing results.

The Menendez-Boxer legislation aims to increase competition between lenders by removing some of the requirements that apply to new originators, but do not apply to existing ones. It would also allow homeowners who have more than 20% equity in their homes to qualify for the program, now known as Harp 2.0.

“Any homeowner with a Fannie or Freddie loan should be able to get a pre-approved package in the mail from the lender, sign on the bottom line and be automatically put into a refinance loan that saves them hundreds of dollars a month,” Menendez said at Thursday’s hearing.

“No more lending bureaucracy, no more red tape. It should be simple for any homeowner to do this.”

Testifying on behalf of the bill Thursday were Moe Veissi, president of the National Association of Realtors, and Bill Emerson, the chief executive officer of Quicken Loans.

Emerson argued that the terms of Harp 2.0 put lenders like Quicken Loans at a disadvantage to the largest banks.

“Notwithstanding the good intentions of the large servicers, they will simply not be able to help enough HARP 2.0-eligible borrowers,” Emerson said. “They simply can’t wrap up their platforms and hire and train people fast enough to help the millions of homeowners.”

“Because HARP 2.0 is being utilized by a small number of firms, the demand for HARP 2.0 originations is dramatically exceeding the supply of firms who fully offer the program,” he added.

Many of the legislation’s proposals for expanding Harp could be enacted unilaterally by the Federal Housing Finance Agency. But in a statement Thursday, the FHFA suggested that it is not likely to enact the changes on its own, and the agency also expressed opposition to Congress imposing the changes through legislation.

“HARP 2.0 has been fully available only since mid-March, and the early results are dramatic,” a spokeswoman for the agency said in a written statement. “HARP refinances have almost doubled since HARP 2.0 was rolled out in January, jumping from approximately 93,000 loans in the fourth quarter of 2011 to approximately 180,000 in the first quarter of 2012.”

“The initial results on the enhanced HARP program show that it is working,” the spokeswoman added, “and new legislation at this time would slow down that progress.”

In order for legislation to pass Congress, analysts see a bipartisan compromise in the Senate as a necessary step before an uphill fight in the Republican-led House.

“A compromise would ensure the bill gets out of the Senate,” Jaret Seiberg of Guggenheim Securities’ Washington Research Group wrote in a research note Thursday.

Brian Gardner of Keefe Bruyette & Woods, Inc., predicted that the legislation has about a 25% chance of passage.

“Even if the Menendez bill passes the Senate, we see very little chance that the House will take up the bill,” he wrote in a research note.

Lawyers Enlist Mortgage Brokers to Find Plaintiffs, Sue Banks

By Kate Berry

MAY 24, 2012 6:44pm ET

“Why mortgage litigation is the next refi boom.”

That was the subject line of an email the Litigation Compliance Law Center sent out to mortgage brokers earlier this month. It was part of an invitation to a web seminar the Los Angeles law firm was setting up to introduce what the email termed an “increasingly profitable area of mortgage litigation.”

As the law center explained during the May 10 webinar, it was offering to pay finders’ fees to mortgage brokers for recruiting homeowners who themselves paid a $5,000 up-front “retainer” to affiliated attorneys.

The sales pitch appears to be the latest tactic in a cat-and-mouse game between plaintiffs’ attorneys and debt-modification firms on one side and regulators on the other.

The tactics used to sell loan modification services first became the focus of criticism in the media and elsewhere in the wake of the housing collapse a half-decade ago. Many related legal cases involve so-called mass joinder suits in which attorneys claim they can obtain favorable mortgage concessions from lenders, or can stop a foreclosure. Homeowners typically are required to pay $6,000 to $10,000 in advance but often fail to enjoy the advertised benefits.

Such suits have added to banks’ legal burdens and to concerns among regulators and bar associations that troubled homeowners are at growing risk of falling victim to mortgage modification scams. The State Bar of California alone has revoked the licenses of 18 lawyers since 2009 over charges related to loan modification wrongdoing.

The Federal Trade Commission responded to growing reports of abuse in late 2010 by implementing the Mortgage Assistance Relief Services rule. Known as Mars, it bans mortgage assistance relief companies – mortgage brokers, lead generators and affiliated marketing companies – from collecting “advance fees” from homeowners. Instead, loan modification firms are permitted to collect fees only after homeowners have received written loan modification offers that they deem acceptable from lenders or servicers.

Attorneys are exempted from Mars, primarily because they are already required to comply with state ethics rules. To be eligible for the Mars exemption, a lawyer must be licensed in the state where a homeowner-client resides, offer mortgage assistance as part of his regular practice and comply with all state regulations, says Reilly Dolan, assistant director in the FTC’s division of financial practices.

The FTC has brought 36 actions against companies under the Mars rule. Mars rulemaking authority was transferred last July to the Consumer Financial Protection Bureau, which is yet to launch any enforcement actions. The FTC and CFPB share Mars enforcement authority.

The Litigation Compliance Law Center says on its website that it’s involved in “the process of procuring clients” who want to file mortgage-related suits against banks. Mortgage brokers can earn a “six or seven figure income” by helping the law firm enlist homeowner-plaintiffs to pursue mortgage litigation, it adds.

The Litigation Compliance Law Center lists no physical address and Chad T-W Pratt Sr. as its only attorney. Pratt, a 1989 graduate of Loyola Law School, is separately listed as a senior litigation attorney at Real Estate Law Center PC. The Pasadena, Calif., firm appears to be a one-partner shop. Letterhead jointly bearing the name of the firm and Chad T-W Pratt & Associates Inc. lists as its local phone number 441-CHAD.

“Mortgage litigation is the homeowner suing their [sic] lender for predatory lending, robo-signing and bad acts by the lender,” Pratt said during the webinar. Pratt spoke only briefly at the beginning of the webinar. He then ceded the floor to Brian Suder, who was introduced by an unidentified presenter as a mortgage expert and a “superstar.” No job title or corporate affiliation was given for Suder. Not long afterward, the presenter said that Pratt was no longer online.

Contacted after the webinar by phone, Pratt declined comment and quickly hung up.

A Brian R. Suder is listed as president of an outfit called Home Rescue Programs of Marina del Rey, Calif., according to his LinkedIn profile. A person with the same name was banned from offering loan modification services in Washington state in 2010 after doing business without a mortgage broker’s license. That person was fined $12,000 and had to refund $9,195 in fees collected from at least four consumers, according to an order from the state’s Department of Financial Institutions. Brian R. Suder was also banned from engaging in loan modification services in Maryland in 2009 over a failure to obtain the required license, according to an order from the state’s Commissioner of Financial Regulation. He and four others were fined and ordered to refund more than $55,000 to at least 20 homeowners for failing to obtain loan modifications for them, the order states.

“The Law Center works only with mortgage professionals dealing with repercussions of Mars, and they’ve been able to transition their offices over,” Suder told his webinar audience. “We offer a much better product, more aggressive, with an aggressive stand against the lender. . We want people who already have existing mortgage companies. It’s a product in which a lot of people were doing mods [mortgage modifications] and veered away from that because of the legal repercussions.”

With his new product, “75% of all mortgages qualify for mortgage litigation,” Suder said. Mortgage brokers can “easily and quickly create a pipeline of 100 clients a month.”

Continued Suder: “You go ahead and you sell the retainer, which is typically $5,000, and we pay each broker for their [sic] expertise. This is set up so each mortgage company or marketing firm can market this product and we take over from there. Your clients get a phone call from an attorney prior to selling. It sets up the sale and they [clients] talk to a real attorney. . The litigating law firm does their [sic] own compliance call to make sure there are no guarantees. You can’t make guarantees.”

Efforts to contact Suder by phone at Home Rescue Programs were unsuccessful. Suder did not reply to an email request for comment sent to an address provided by Litigation Compliance Law Center. It is unclear how Suder and Home Rescue Programs are affiliated with the Litigation Compliance Law Center.

Following him on the webinar was a second lawyer, Deepak Parwatikar. Listed as an attorney with the Balanced Legal Group in Los Angeles, Parwatikar was suspended in 2004 from practicing law in California for one year and placed on three years’ probation. The penalties were the result of his failure to disclose $30,000 in civil judgments against him by a former employer, according to the state bar association’s website.

Parwatikar described to webinar participants how the $25 billion national mortgage settlement with the top five mortgage servicers has made banks especially vulnerable to lawsuits and other mortgage-related claims. “Bringing significant cases against the lenders these days is only going get them to want to get rid of cases,” he said. “They want these cases gone. They want the litigation gone completely. They don’t like the negative press.”

He also described how Litigation Compliance Law Center’s process would prevent brokers from running afoul of the FTC’s Mars rule and prohibitions on fee-splitting.

“We all know about the Mars issue,” Parwatikar said. “The FTC came in and gave exact terms on how you can market, who can market and the exact terms of what the violations might be. Mars does not include litigation. You have to watch out for the unauthorized practice of law. You have to have a potential client speak to an attorney and a nonattorney cannot give legal advice.”

On splitting fees with nonattorneys, Parwatikar said a law firm “can pay a fee to a nonattorney for a specific service but you cannot split fees or have a percentage of the fee” go to a nonlawyer.

Repeated calls to Balanced Legal’s toll-free number met with repeated busy signals. Parwatikar did not return messages left with the firm’s answering service.

Andrew Pizor, a staff attorney at the National Consumer Law Center, was not familiar with the Litigation Compliance Law Center. However, he is familiar with many unrelated cases in which plaintiff attorneys and mortgage brokers have cooperated to sidestep the intent, if not the letter, of the law. “To get the benefit of the attorney exemption [from the FTC's Mars rule], some companies will find an attorney who is willing to cooperate and is fronting a law license even if the attorney is not really participating in it,” Pizor says. “This seems to be a way to get referral business.”

Pizor fears the massive increase in loan modification firm suits could end up hurting homeowners with legitimate claims. “It’s a real serious issue, a complete abuse of the courts, and it runs the risk of prejudicing people, including judges, against legitimate claims,” he says.

Earnings Report Leaves Industry in Suspense on Lending

By Joe Adler

MAY 24, 2012 10:00am ET

WASHINGTON – If Tuesday’s bank earnings report by the Federal Deposit Insurance Corp. was the season finale of a hit TV series, viewers tuning in to get some insight on the state of lending were probably left unsatisfied.

The previous report had showed real hope for sustained lending growth. In contrast, the Quarterly Banking Profile released Tuesday was less encouraging, with loans falling in the first quarter by 0.8%.

But under the surface, the numbers were inconclusive. Loans still grew year-over-year, commercial lending keeps growing and other categories continue to climb toward positive ground. Meanwhile, despite the lower balances, mortgage originations actually rose and loan-sale gains increased sharply.

The takeaway on lending indicators was basically “stay tuned.”

“While most [loan] categories are still declining on a 12-month basis, the rates of decline have been diminishing,” acting FDIC Chairman Martin Gruenberg said at a press briefing. “The overall decline in loan balances is disappointing after we saw three quarters of growth last year. But separating the components gives us more perspective on the change, and we should be cautious in drawing conclusions from just one quarter.”

Moreover, bank profits continue to surge, and revenue seemed to make a comeback last quarter. Buoyed by the gains on loan sales – the $4 billion in gains was 130% higher than a year earlier – noninterest income rose 8% compared with the first quarter of 2011 to $63 billion.

The 3% growth in net operating revenue compared to a year earlier – to about $170 billion – was only the second such increase in five quarters. Overall, banks and thrifts earned $35.3 billion last quarter, their highest net income since the second quarter of 2007, and a nearly 23% increase from quarterly profits a year earlier.

The industry’s profit, which was 34% higher than in the previous quarter, also was helped by 38% rise – from a year earlier – in income stemming from fair-value changes in certain instruments. Increased revenue from fiduciary activities and service charges on deposit accounts also provided a lift.

The industry’s average return on assets rose above 1% for just the second time since the middle of 2007. Quarterly earnings for the industry have gone up, year-over-year, for 11 straight quarters. The FDIC said over 67% of all institutions had higher year-over-year income totals, and the 10.3% of institutions that were unprofitable was the lowest level since the second quarter of 2007.

“Revenue was higher in the first quarter than a year ago, while [loss] provisions were down. Both developments contributed to the increase in earnings,” Gruenberg said. “The year-over-year improvement in revenue was due mostly to noninterest income, particularly income from loan sales. But it remains to be seen whether banks can continue to sustain revenue growth going forward.”

Limits on what banks report for originations and loan sales also made loan activity hard to gauge. All institutions report gains from loan sales but only certain ones report originations and loan-sale volume, and even that data are limited to just home loans to be sold.

Still, the available data suggests that loan sales may have contributed to lower balances. Institutions over $1 billion of assets or that had more than $10 million in quarterly originations reported $476 billion in originations of closed-end mortgages to be sold, a 10% increase from the fourth quarter and a 35% increase from a year earlier. But sales on those loans were even higher, totaling $490 billion. (Origination data do not distinguish between new loans and refinancings.)

“The actual amounts . kept on balance sheet declined,” said Ross Waldrop, the FDIC’s senior banking analyst.

Officials also pointed to the tendency for credit-card borrowers to pay down their balances early in the year as a factor in the decline in total loans.

Meanwhile, other indicators were more encouraging. Total loans were still up 2% compared to a year earlier, and commercial and industrial loans rose 2% during the quarter to $1.37 trillion. Overall, total assets rose 0.3% compared to yearend 2011 to just under $14 trillion, as mortgage-backed securities rose 5% and investments in state and municipal securities increased 3.5%.

“Even with the decline in loans, bank balance sheets continued to grow. Total assets, deposits and capital all increased during the quarter and compared to a year ago,” Gruenberg said.

But in addition to mortgages, construction and development loans, nonfarm nonresidential loans and other loans to individuals have still not achieved positive growth. Residential mortgage balances declined 1% during the quarter to $1.86 trillion, and construction loans fell 4.9% to $228 billion.

Loan-loss provisions declined for the 10th straight quarter, falling by 31.6% from a year earlier to just over $14 billion, the smallest quarterly provision since the second quarter of 2007. Loan losses declined from the year-earlier total for the seventh straight quarter. Net charge-offs fell 34.8% from a year earlier to $21.8 billion, the lowest quarterly total in four years.

Even though asset quality has improved dramatically since the crisis, Gruenberg said, “noncurrent and charge-off rates remain elevated.”

“But the declining trend in troubled loans has meant that banks have been able to reduce their provisions for credit losses, and that more revenue is passing through to the bottom line,” he said.

The FDIC’s report also identified capital levels as being “at or near record levels.” The average leverage capital ratio at the end of the quarter of 9.2% “matched an all-time high,” while the average Tier 1 risk-based capital ratio of 13.28% was a new record.

The FDIC’s list of “problem” institutions fell by 41 institutions to 772. Assets for those on the list dropped by $27 billion to $292 billion. Meanwhile, the agency’s ratio of insurance reserves to insured deposits rose 5 basis points to 0.22%.