Report: Mortgage foreclosures more profitable than workouts

We’ve previously warned consumers to avoid foreclosure rescue scams and seek help from legitimate sources instead.

But now there’s new evidence that even alternatives promoted by the federal government, such as the Home Affordable Modification Program, aren’t providing the help struggling homeowners need because many large banks and other companies that service mortgages find it’s better for their own bottom line to foreclose rather than offer loan modifications that would benefit both homeowners and the economy overall.

After homeowners sign all of those stacks of paper at closing on a new home, the original lender or investment group that purchases the mortgage on the secondary market typically hires another bank or financial company to serve as the mortgage servicer, which then collects monthly payments and administers the loan.   The problem is that unlike homeowners or the investors backing the mortgages, these mortgage servicers don’t risk losing money on foreclosures, and the system actually has built-in incentives that allow them to profit when consumers lose their homes, according to a just-released report from the National Consumer Law Center. 

“Foreclosures are a costly ordeal for the homeowner, the lender and the community.  Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes,” says Diane Thompson, an NCLC attorney who is the author of the report.  As a result, Americans who might be able to stay in their homes under a modification plan are unnecessarily being moved right past that option and on to foreclosure.  

The report charges that Congress, the Obama Administration, the Securities and Exchange Commission--as well as credit rating agencies and bond insurers who set the terms in the mortgage market--have all failed to provide mortgage servicers with the necessary incentives to reduce foreclosures and increase loan modifications. “What is lacking in the system is not a carrot; what is lacking is a stick. Servicers must be required to make modifications where appropriate and the penalties for failing to do so must be certain and substantial,” the report concludes. In addition to documenting how the system is failing, the report offers recommendations on specific steps that could be taken to correct the problem.–Andrea Rock

 

The Great Recession: Where's the consumer's voice?

A report recently published by the not-for-profit Pew Research Center's Project for Excellence in Journalism reveals some interesting biases in the media when covering the Great Recession. For one, the report says that TV, print, radio, Internet and other news media focused an awful lot on players at the top–President Obama and his staffers, federal agencies, and business leaders–as opposed to folks at the bottom of the ladder, often suffering the most. The stimulus package, the banking bailout, and efforts to help the struggling auto industry were the dominant topics. Most coverage took place in New York and Washington, the capitals of finance and government, respectively. And when the stock market started to rise, coverage started to peter out. 

For that reason, I'd like to brag a bit about the monthly Consumer Reports Index, which asks consumers for their sentiment on the state of their own financial well-being. That includes not only what they spent and did over the prior month, but their spending plans for the next month. The index results are based on answers by a nationally representative sample. Stay tuned for the next index, about halfway through the month, for a unique gauge of what's going on close to the ground, not up in the vaulted realms of power.–Tobie Stanger

Reports on failed banks show shoddy oversight

As was widely reported Tuesday, Federal Deposit Insurance Corp. officials announced that U.S. banks must ante up $45 billion to replenish the insurance fund that protects bank depositors against loss when banks fail. The fund began the year with $34 billion, which has been depleted more quickly than expected by the steady stream of bank failures this year. The total hit 95 on Sept. 26 with the failure of Atlanta-based Georgian Bank, which is expected to drain $892 million from the FDIC fund.

Though the drumbeat of bank failures is expected to roll on, FDIC Chairman Sheila Bair has publicly reassured depositors that they should have no qualms about the insurance fund’s ability to protect them.  Though that safety net for depositors is financed by annual and special assessments that banks are required to pay, the FDIC can also turn to the U.S. Treasury to borrow additional funds if need be.  As we reported previously, FDIC insurance coverage for deposits has been boosted from $100,000 to $250,000 per depositor through the end of 2013.

Nevertheless, recently released audit reports by the U.S. Treasury Dept.’s Office of the Inspector General provide an eye-opening, behind-the-scenes view of what prompted at least two of the bank failures that were among the first to begin draining money from the FDIC fund early this year. Both are cautionary tales that underscore the need for more stringent banking regulation that puts consumers’ needs and the nation’s economic health above bankers’ self-interest. All details in the following accounts of banks that went under are drawn from the Treasury Inspector General’s audit reports.

•Ocala National Bank of Ocala, Fla. failed in January 2009, resulting in an estimated loss of $99.6 million to the FDIC insurance fund. 

The bank failed because of significant losses within its construction and land-development loan portfolio, which grew rapidly from 2004 through 2006, largely due to 400-percent growth in construction loans.  In 2005, the bank owner’s son became chief executive officer of Ocala National, even though he had no previous experience running a bank. The bank pursued aggressive growth through high-risk products, but did not adequately control risk or credit underwriting, according to the OIG report.

No tax bite on cash-for-clunkers vouchers

In case you were wondering, those vouchers of up to $4,000 to purchase a new car through the government's "cash for clunkers" program aren't considered taxable income to buyers. So it won't cost you anything on the 2009 federal income tax return you file next year.

For tax geeks, here's the language from the Consumer Assistance to Recycle and Save Act of 2009 (CARS): 

Sec. 1302 (h)(2)

FOR PURPOSES OF TAXATION- A voucher issued under the program or any payment made for such a voucher pursuant to subsection (a)(3) shall not be considered as gross income of the purchaser of a vehicle for purposes of the Internal Revenue Code of 1986.

For a change, good news from the IRS!–Tobie Stanger

Home buyers: For $8,000 tax credit, aim to close soon

Some sage advice from HSH Associates, a provider of loan and mortgage data: If you want to take advantage of the economic stimulus package's $8,000 tax credit for first-time homebuyers, get going now. You need to close by December 1. There’s always the possibility that Congress may extend the deadline, but that’s probably not something you’ll want to count on in the middle of a contract.

Even in a normal environment, it usually takes four to six weeks to get from the contract to the closing table.  But these aren’t normal times. Loan processors still can’t keep up with the surge in applications that began in January, and you can expect much more rigorous scrutiny by underwriters.

For more details on the credit, check out the IRS Web site.–Chris Horymski 

Don’t get snookered trading in your clunker

With a federal credit of up to $4,500, the "cash for clunkers" program is providing a big incentive for consumers to trade in their gas guzzlers for the purchase or lease of a new fuel-efficient vehicle. But don’t let all the excitement leave you paying too much, choosing a car you really don’t want, or even ending up victimized.

• Watch for scams. The Better Business Bureau reports that even before the Car Allowance Rebate System (CARS) was passed by Congress, federal authorities found Web sites soliciting consumer names, addresses and Social Security numbers, all on the pretext of registering people for the program. That information could be used to steal your identity or apply for credit in your name. Keep in mind that you don’t need to register or obtain a voucher. A CARS participating dealer will do all the necessary paperwork for you. 

• Avoid contingency agreements. The U.S. Department of Transportation’s CARS Web site is advising car buyers not to asign so-called contingency agreements, promising to reimburse the dealer if the federal government rejects the credit for their purchase. Some dealers are asking customers to sign such a promise, the agency said. Also, dealers must allow you to take your new car immediately. Some are holding onto the vehicle until the CARS application is approved..

• Don't pay too much. Seeing growing demand and smaller vehicle inventories, dealers may resist consumers who attempt to negotiate great deals. That’s especially likely once the CARS program again begins running out of money. Estimates are that current funding should last through Labor Day. 

To make sure you’re getting a good deal, discover the available incentives and even find what other buyers are paying. Consumer Reports car price reports and new car buying kits can provide detailed pricing information to empower negotiations, including dealer holdback, hidden dealer incentives, and rebates. The free TrueCar site provides recommendations for good and great prices based on what others are paying for specific models nationally, regionally, and in your local area.

• Don't buy a bad car. Finally, don’t let the prospect of a CARS credit pressure you to settle for a vehicle you don’t really want. That might happen as inventories for the most reliable, fuel-efficient, and top-rated vehicles decline because of CARS-driven demand. If necessary, forget the credit and wait until a dealer has something worth owning or leasing. It may be a short wait, as 2010 models are arriving this month. As demand declines after the CARS program ends, there should be plenty of good deals to compensate.

For more information about the program, visit the CARS Web site or Consumer Reports Cash for Clunkers resource center.–Anthony Giorgianni

By the numbers: Economic indicators hit 50-percent benchmark

In money news, 50 is the magic number today. First, the Institute of Supply Management (ISM) announced that for July, its manufacturing index increased to 48.9 percent, which puts it on a pace to cross 50 percent this month. The ISM's index measures economic activity in the nation's manufacturing sector. A reading above 50 would indicate an overall expansion.

Also, today the S&P 500 surpassed 1,000, which is a 50-percent rise in value from its low of 666 in March. (The tech-heavy Nasdaq Composite Index today passed 2,000.)

Market historians point out that this is exactly how we would identify the end of this miserable recession. The ISM figure is usually coincident with economic recovery, and stocks, almost magically, tend to anticipate the recession’s end by running up in price.

The big question going forward is the unemployment rate, which, unfortunately, tends to lag the economic cycle. Unemployment peaks just after the end of most recessions, but the Obama Administration isn’t anticipating the fever to break before the middle of next year.–Chris Horymski

Is the proposed Consumer Financial Protection Agency elitist?

Why do consumers need consumer protection when choosing financial products? Because many financial products are hard to understand, and deceptive marketing that exploits that complexity can lead even smart consumers to make bad choices.

That sounds like common sense. But opponents of the proposed Consumer Financial Protection Agency (CFPA), say such protections could be "elitist" because they would effectively restrict the sale of innovative and potentially beneficial products only to the most sophisticated buyers. "Conservatives have long argued that liberalism reflects a paternalistic desire on the part of elites to control and limit others’ choices while leaving themselves unaffected," stated Peter F. Wallison of the American Enterprise Institute in his comments yesterday before a Senate subcommittee. "The [proposal] seems to validate exactly that critique. Providers will be at risk if they offer some products to ordinary consumers but could feel safe in offering the same products to those who are well educated and sophisticated."

Harvard Economist Sendhil Mullainathan, who specializes in behavioral economics–the melding of economics and psychology–has an answer to that. Sophisticated or not, educated or not, we can't all be experts in everything. And without some protections, many people make very damaging mistakes. 

In his testimony yesterday, he illustrated by comparing how we shop for paint and how we buy digital cameras and mortgages. Though Benjamin Moore has 140 types of white, the process of selecting white–or any other color–doesn't necessarily require expert skills (apologies to interior decorators). 

One reason why we need a Consumer Financial Protection Agency

At today's Senate Banking, Housing & Urban Affairs Committee hearing on the proposed Consumer Financial Protection Agency, representatives from both the American Bankers Association and the American Enterprise Institute outlined the chilling effect such a new regulatory body would have on financial innovation. The proposed agency would require purveyors of more-exotic financial products, such as payment option adjustable-rate mortgages, to also provide consumers with "plain vanilla" alternatives such as 30-year fixed mortgages, and with simple disclosures for meaningful comparison. The agency also could ban certain unfair terms and practices, and require brokers and other financial intermediaries to determine if their products really were affordable to the borrower.

Saddled with those requirements, among others, many financial institutions won't bother to offer innovative products to consumers who might indeed benefit, noted Edward L. Yingling, president and CEO of the American Bankers Association. The costs of compliance would be too high, he asserted. That could stifle choice and competition, which ultimately would be bad for consumers. "Ideas that could give consumers benefits or lower costs would never see the light of day," he said.

What would a new Consumer Financial Protection Agency do?

President Obama yesterday unveiled his 89-page blueprint for Financial Regulatory Reform. Here's a summary, supplied by the Wall Street Journal, of proposed consumer financial protections:

For regulations protecting consumers and investors, the proposal:

• Creates a new agency, the Consumer Financial Protection Agency, with broad authority over consumer-oriented financial products, such as mortgages and credit cards. The new agency would work with state regulators.
• Gives the new agency power to write rules and levy fines based on a wide range of existing statutes.
• Proposes new authority for the Federal Trade Commission over the banking sector, in areas such as data security.
• Creates an outside advisory panel to keep an eye on emerging industry practices.
• Says the new agency should play “a leading role” in educating consumers about finance.
• Gives the new agency authority to ban or restrict mandatory arbitration clauses.
• Improves transparency of consumer products and services disclosures.
• Says the new regulator should have authority to define standards for simple “plain vanilla” products, such as mortgages, which would have to be offered “prominently” by companies.
• Proposes the government “do more” to promote these simple products.
• Beefs up the agency’s power to regulate unfair, deceptive or abusive practices.
• Imposes “duties of care” that will have to be followed by financial intermediaries, such as stock brokers and financial advisers.
• Regulates overdraft protection plans, treating them more like credit credit-card cash advances.
• Promotes access to credit in line with community investment objectives.
• Strengthens SEC’s framework for investor protection by expanding the agency’s powers to beef up disclosures to investors, establish a fiduciary duty for broker-dealers who offer advice and expand protection for whistleblowers, including a fund that would pay for certain information.
• Requires non-binding shareholder votes on executive compensation packages.
• Requires certain employers to offer an “automatic IRA plan” for employee retirement, with investment choices prescribed by regulation or statute.
• Urges exploration of ways to improve participation in 401(k) retirement plans

While it remains to be seen whether this agency will actually see the light of day, every one of its proposed activities is designed to benefit consumers and individual investors, for whom fine-print disclosure statements and current state and federal safety nets have been insufficient. For an example of the ways lenders, credit card companies and other peddlers of financial services and products take advantage of consumers, check our recent article, "Financial Traps are Flourishing."