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Sunday, December 23, 2007
Fed plan reins in dicey mortgage loans
The Federal Reserve, criticized for standing aside as risky subprime mortgage lending soared then crashed, did an about-face Tuesday by proposing sweeping new consumer protections.
The Fed proposals would cover tens of thousands of banks and non-bank lenders, mortgage brokers and mortgage-servicing companies. They would rein in the dicey policies of some lenders, such as approving "no-document" loans based on stated income and penalizing borrowers who repay loans early.
STORY: Banks jump at Fed loan auction
Such loose standards led to surging foreclosures, forced scores of subprime lenders out of business, threw the housing market into recession and sparked a credit crunch as financial firms that bought bonds backed by the loans were stuck with sour investments.
But the proposals go well beyond the 20% of the mortgage market that is subprime, loosely defined as higher-cost loans to borrowers with poor credit. The Fed would tighten rules covering advertising, servicing and appraisals for conventional mortgages, too, affecting all home buyers.
FIND MORE STORIES IN: Congress | Democrats | Washington | Federal Reserve | Alan Greenspan | Fed Chairman | US Federal Reserve System | Mortgage Bankers | Financial services | Noelle Knox | Kirchhoff
"I can't think of a time when the Fed took sweeping action like this in the consumer-protection area without some specific mandate from Congress," said Robert Lawless, a law professor at the University of Illinois who specializes in bankruptcy and consumer credit.
Consumer groups, which have pushed the Fed and other regulators for years to take a tougher line, generally said the rules fell short and expressed concern that business groups would embrace the Fed plan as a way to head off tougher proposals by Democrats.
"I don't think (this) gets anybody off the hook from having to pass stronger legislation," said Janis Bowdler, senior housing analyst for the National Council of La Raza, a Hispanic advocacy group.
Still, the mortgage industry wasn't happy, either.
"We are concerned … that some of the restrictions in the proposals may unnecessarily limit the credit options available to borrowers," said Kieran Quinn, chairman of the Mortgage Bankers Association.
The Fed rules are notable for both what they do and don't do. They won't help people now stuck in mortgages they can't afford. They don't untangle a confusing web of state and federal regulations. Enforcement would be run by an alphabet soup of agencies.
The Fed said it lacked authority to address such issues as the licensing of mortgage brokers or whether Wall Street firms that repackage mortgages into securities should be held liable for fraudulent loans.
But the rules would provide national consumer protections. And they'd ensure minimum standards if Congress failed to pass more comprehensive rules.
The move could also make the conservative Fed more receptive to broader regulation in the future. Fed Governor Randall Kroszner, who took the lead in drafting the rules, said he hoped the rules would preserve credit for lower-income borrowers.
The action underscores that the Fed, though slow to perceive the threat to subprime loans, has become one of the only federal entities able and willing to act.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, who criticized the Fed for limiting but not ending prepayment penalties and doing too little to stop brokers from steering people to high-cost loans, has moved a raft of housing bills.
But the measures have stalled in the Senate. Congress has yet to clear a bill to help borrowers refinance into Federal Housing Administration loans, despite months of effort. So unsettled is the political atmosphere that former Fed chairman Alan Greenspan has gone further than many Democrats by suggesting that Congress provide direct financial aid to homeowners. Greenspan, lionized while at the Fed, has been forced to defend himself in TV and print interviews for not having done more to regulate mortgage lending.
source: usatoday.com
The Fed proposals would cover tens of thousands of banks and non-bank lenders, mortgage brokers and mortgage-servicing companies. They would rein in the dicey policies of some lenders, such as approving "no-document" loans based on stated income and penalizing borrowers who repay loans early.
STORY: Banks jump at Fed loan auction
Such loose standards led to surging foreclosures, forced scores of subprime lenders out of business, threw the housing market into recession and sparked a credit crunch as financial firms that bought bonds backed by the loans were stuck with sour investments.
But the proposals go well beyond the 20% of the mortgage market that is subprime, loosely defined as higher-cost loans to borrowers with poor credit. The Fed would tighten rules covering advertising, servicing and appraisals for conventional mortgages, too, affecting all home buyers.
FIND MORE STORIES IN: Congress | Democrats | Washington | Federal Reserve | Alan Greenspan | Fed Chairman | US Federal Reserve System | Mortgage Bankers | Financial services | Noelle Knox | Kirchhoff
"I can't think of a time when the Fed took sweeping action like this in the consumer-protection area without some specific mandate from Congress," said Robert Lawless, a law professor at the University of Illinois who specializes in bankruptcy and consumer credit.
Consumer groups, which have pushed the Fed and other regulators for years to take a tougher line, generally said the rules fell short and expressed concern that business groups would embrace the Fed plan as a way to head off tougher proposals by Democrats.
"I don't think (this) gets anybody off the hook from having to pass stronger legislation," said Janis Bowdler, senior housing analyst for the National Council of La Raza, a Hispanic advocacy group.
Still, the mortgage industry wasn't happy, either.
"We are concerned … that some of the restrictions in the proposals may unnecessarily limit the credit options available to borrowers," said Kieran Quinn, chairman of the Mortgage Bankers Association.
The Fed rules are notable for both what they do and don't do. They won't help people now stuck in mortgages they can't afford. They don't untangle a confusing web of state and federal regulations. Enforcement would be run by an alphabet soup of agencies.
The Fed said it lacked authority to address such issues as the licensing of mortgage brokers or whether Wall Street firms that repackage mortgages into securities should be held liable for fraudulent loans.
But the rules would provide national consumer protections. And they'd ensure minimum standards if Congress failed to pass more comprehensive rules.
The move could also make the conservative Fed more receptive to broader regulation in the future. Fed Governor Randall Kroszner, who took the lead in drafting the rules, said he hoped the rules would preserve credit for lower-income borrowers.
The action underscores that the Fed, though slow to perceive the threat to subprime loans, has become one of the only federal entities able and willing to act.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, who criticized the Fed for limiting but not ending prepayment penalties and doing too little to stop brokers from steering people to high-cost loans, has moved a raft of housing bills.
But the measures have stalled in the Senate. Congress has yet to clear a bill to help borrowers refinance into Federal Housing Administration loans, despite months of effort. So unsettled is the political atmosphere that former Fed chairman Alan Greenspan has gone further than many Democrats by suggesting that Congress provide direct financial aid to homeowners. Greenspan, lionized while at the Fed, has been forced to defend himself in TV and print interviews for not having done more to regulate mortgage lending.
source: usatoday.com
Key answers about the Fed's proposal
Q: Which loans would be covered?
A: The Fed rules cover mortgages with rates 3 percentage points above comparable Treasury bill rates and second mortgages or equity loans with rates 5 or more points above the Treasury rates. This would cover the subprime market and some of the "Alt-A" sector, which are loans that rate between prime and subprime. The Fed sees problems cropping up in Alt-A loans as well.
The rules would also impose tighter restrictions for mortgage broker payments, advertising and the servicing of conventional and subprime loans, affecting all borrowers. Consumers could sue for rule violations.
Q: What would be required of lenders?
A: Lenders would have to consider a borrower's ability to repay a loan not just at an initial "teaser" rate but over the life of the loan and whether a borrower can pay at the highest rate in the first seven years.
FIND MORE STORIES IN: Fed | Treasury bill
Lenders would have to verify borrowers' income and assets. More than half of 2006 subprime loans included little or no such supporting data. But consumers could use a variety of documents, including stubs from check-cashing firms or letters from employers — important for some people with only cash income.
Penalties for early repayment of a loan would have to expire at least 60 days before any rate increase. Many subprime adjustable-rate loans have imposed heavy prepayment penalties.
Lenders would have to create escrow accounts for borrowers' real estate taxes and insurance. Borrowers could opt out after a year. Some lenders have advertised low payments excluding taxes and insurance.
Q: What about the rules covering all borrowers, including those with prime loans?
A: Mortgage brokers would have fewer incentives to put borrowers in loans with higher rates to earn a fatter fee. Borrowers would sign a document laying out the broker's total compensation from all sources.
Lenders and brokers would be barred from coercing appraisers to inflate a home's value. Mortgage servicers would have to credit an account the day a payment is received. Several ad schemes would be banned, including stating that a loan is "fixed" when the payment or rate isn't set for the life of the loan.
source: usatoday.com
A: The Fed rules cover mortgages with rates 3 percentage points above comparable Treasury bill rates and second mortgages or equity loans with rates 5 or more points above the Treasury rates. This would cover the subprime market and some of the "Alt-A" sector, which are loans that rate between prime and subprime. The Fed sees problems cropping up in Alt-A loans as well.
The rules would also impose tighter restrictions for mortgage broker payments, advertising and the servicing of conventional and subprime loans, affecting all borrowers. Consumers could sue for rule violations.
Q: What would be required of lenders?
A: Lenders would have to consider a borrower's ability to repay a loan not just at an initial "teaser" rate but over the life of the loan and whether a borrower can pay at the highest rate in the first seven years.
FIND MORE STORIES IN: Fed | Treasury bill
Lenders would have to verify borrowers' income and assets. More than half of 2006 subprime loans included little or no such supporting data. But consumers could use a variety of documents, including stubs from check-cashing firms or letters from employers — important for some people with only cash income.
Penalties for early repayment of a loan would have to expire at least 60 days before any rate increase. Many subprime adjustable-rate loans have imposed heavy prepayment penalties.
Lenders would have to create escrow accounts for borrowers' real estate taxes and insurance. Borrowers could opt out after a year. Some lenders have advertised low payments excluding taxes and insurance.
Q: What about the rules covering all borrowers, including those with prime loans?
A: Mortgage brokers would have fewer incentives to put borrowers in loans with higher rates to earn a fatter fee. Borrowers would sign a document laying out the broker's total compensation from all sources.
Lenders and brokers would be barred from coercing appraisers to inflate a home's value. Mortgage servicers would have to credit an account the day a payment is received. Several ad schemes would be banned, including stating that a loan is "fixed" when the payment or rate isn't set for the life of the loan.
source: usatoday.com
Foreclosure filings rise 68% from last year
U.S. homeowners increasingly failed to keep up with their home loan payments in November, with the number of foreclosure filings surging 68% compared with the same month a year ago, RealtyTrac, a mortgage research company, said Wednesday.
Lenders made 201,950 foreclosure filings last month, or one for every 617 households, RealtyTrac said.
Last month's filings fell 10% from October's level, though.
But the decline in filings from October to November likely corresponds with a lull in adjustable-rate mortgage resets, said Rick Sharga, RealtyTrac's vice president of marketing.
Such loans typically have a low introductory interest rate, then reset sharply higher after a set period. The number of borrowers who took on adjustable-rate mortgages that offer a teaser rate for just two or three years rose sharply in the last couple of years of the housing boom, particularly in high-priced states such as California.
FIND MORE STORIES IN: October | November | Mortgage Bankers | Realtytrac
The foreclosure filings include default notices, auction sale notices and bank repossessions. Some properties might have received more than one notice if the owners have multiple mortgages.
Forty-three states saw an increase in foreclosure filings in the past year.
Many borrowers have been unable to afford the increased payments that come with the resets, and falling housing prices have made it harder to refinance or sell. A flood of rate resets for such loans has helped drive up the number of home loan defaults in the last few months.
"We'll see another fairly big spike in (foreclosure) filings in early '08," Sharga said. "Then there's another group of loans that's due to reset in May and June, so we'll see another wave of defaults probably in the fall."
Around 2 million adjustable-rate mortgages are due to reset at higher rates in the next seven months.
Nevada, Florida and Ohio had the highest foreclosure filing rates in the country last month, RealtyTrac said:
•Nevada reported one foreclosure filing for every 152 households, earning the state the highest rate in the nation for the 11th month in a row. The state had 6,694 filings in November, up 1% from October and up 167% from November 2006.
•Florida had one foreclosure filing for every 282 households. The state reported 29,238 filings last month, down more than 3% from October, but up 212% from November last year.
•Ohio reported one foreclosure filing for every 307 households. The state had 16,308 filings last month, down nearly 6% from October and nearly double the number from November 2006.
•California had 39,992 foreclosure filings last month, up 108% from a year earlier and the most in the nation. Its foreclosure rate was one filing for every 325 households. The state's filings fell 21% from October's total.
•Rounding out the states with the top 10 foreclosure filing rates in November were Colorado, Michigan, Georgia, Arizona, Indiana and Illinois.
Soaring foreclosures have set regulators and lawmakers scrambling to curb the trend, which many economists say could tip the economy into recession.
Meantime, applications for mortgages tumbled 19.5% last week as short-term interest rates soared and refinancing requests fell back to November levels, the Mortgage Bankers Association said Wednesday. It was the largest weekly percentage decline since 2004, and it erased much of a surge at the end of November.
source: usatoday.com
Lenders made 201,950 foreclosure filings last month, or one for every 617 households, RealtyTrac said.
Last month's filings fell 10% from October's level, though.
But the decline in filings from October to November likely corresponds with a lull in adjustable-rate mortgage resets, said Rick Sharga, RealtyTrac's vice president of marketing.
Such loans typically have a low introductory interest rate, then reset sharply higher after a set period. The number of borrowers who took on adjustable-rate mortgages that offer a teaser rate for just two or three years rose sharply in the last couple of years of the housing boom, particularly in high-priced states such as California.
FIND MORE STORIES IN: October | November | Mortgage Bankers | Realtytrac
The foreclosure filings include default notices, auction sale notices and bank repossessions. Some properties might have received more than one notice if the owners have multiple mortgages.
Forty-three states saw an increase in foreclosure filings in the past year.
Many borrowers have been unable to afford the increased payments that come with the resets, and falling housing prices have made it harder to refinance or sell. A flood of rate resets for such loans has helped drive up the number of home loan defaults in the last few months.
"We'll see another fairly big spike in (foreclosure) filings in early '08," Sharga said. "Then there's another group of loans that's due to reset in May and June, so we'll see another wave of defaults probably in the fall."
Around 2 million adjustable-rate mortgages are due to reset at higher rates in the next seven months.
Nevada, Florida and Ohio had the highest foreclosure filing rates in the country last month, RealtyTrac said:
•Nevada reported one foreclosure filing for every 152 households, earning the state the highest rate in the nation for the 11th month in a row. The state had 6,694 filings in November, up 1% from October and up 167% from November 2006.
•Florida had one foreclosure filing for every 282 households. The state reported 29,238 filings last month, down more than 3% from October, but up 212% from November last year.
•Ohio reported one foreclosure filing for every 307 households. The state had 16,308 filings last month, down nearly 6% from October and nearly double the number from November 2006.
•California had 39,992 foreclosure filings last month, up 108% from a year earlier and the most in the nation. Its foreclosure rate was one filing for every 325 households. The state's filings fell 21% from October's total.
•Rounding out the states with the top 10 foreclosure filing rates in November were Colorado, Michigan, Georgia, Arizona, Indiana and Illinois.
Soaring foreclosures have set regulators and lawmakers scrambling to curb the trend, which many economists say could tip the economy into recession.
Meantime, applications for mortgages tumbled 19.5% last week as short-term interest rates soared and refinancing requests fell back to November levels, the Mortgage Bankers Association said Wednesday. It was the largest weekly percentage decline since 2004, and it erased much of a surge at the end of November.
source: usatoday.com
Rates on 30-year mortgages are highest level in 4 weeks
Mortgage rates edged up for a second straight week and 30-year loans reached their highest level in a month.
The mortgage company Freddie Mac reported Thursday that 30-year, fixed-rate mortgages averaged 6.14% this week. That compares with 6.11% last week and was the highest since averaging 6.20% the week of Nov. 21.
GRIM OUTLOOK: Home builders see prices falling until 2009
Just two weeks ago, 30-year rates had dipped to 5.96%, the lowest in more than two years.
Analysts attributed this week's increase to worries about inflation stemming from sharp increases in prices at both the consumer and wholesale level as well as unexpected strength in a report on retail sales.
FIND MORE STORIES IN: Freddie Mac | Mortgage rates
"Stronger-than-expected inflation reports and retail sales for November put upward pressure on long-term interest rates last week," said Frank Nothaft, chief economist at Freddie Mac.
Other mortgage rates also moved higher this week.
Rates on 15-year fixed-rate mortgages, a popular choice for refinancing, rose to 5.79% from 5.78%.
For five-year adjustable-rate mortgages, rates increased to 5.90%, compared with 5.89%. Rates on one-year adjustable-rate mortgages moved to 5.51% from 5.50%.
The pickup in mortgage rates comes as some prospective home buyers struggle with a credit crunch that has made it more difficult to secure financing for homes and other big-ticket purchases. Tighter lending requirements have aggravated the housing slump, which is weighing heavily on economic activity.
The mortgage rates do not include add-on fees known as points. Thirty-year and 15-year mortgages each carried a nationwide average fee of four-tenths of a point. Five-year adjustable-rate mortgages had a fee of one-half point while one-year adjustable mortgages carried an average fee of six-tenths of a point.
A year ago, 30-year mortgages stood at 6.13%; rates on 15-year mortgages were at 5.89%; five-year ARMS averaged 5.96%; and one-year ARMs were at 5.44%.
The housing market has suffered through a severe slump following five-years of record sales and soaring prices. Sales and prices have slumped and foreclosures have climbed to record highs. The problems in housing are expected to persist well into next year.
source: usatoday.com
The mortgage company Freddie Mac reported Thursday that 30-year, fixed-rate mortgages averaged 6.14% this week. That compares with 6.11% last week and was the highest since averaging 6.20% the week of Nov. 21.
GRIM OUTLOOK: Home builders see prices falling until 2009
Just two weeks ago, 30-year rates had dipped to 5.96%, the lowest in more than two years.
Analysts attributed this week's increase to worries about inflation stemming from sharp increases in prices at both the consumer and wholesale level as well as unexpected strength in a report on retail sales.
FIND MORE STORIES IN: Freddie Mac | Mortgage rates
"Stronger-than-expected inflation reports and retail sales for November put upward pressure on long-term interest rates last week," said Frank Nothaft, chief economist at Freddie Mac.
Other mortgage rates also moved higher this week.
Rates on 15-year fixed-rate mortgages, a popular choice for refinancing, rose to 5.79% from 5.78%.
For five-year adjustable-rate mortgages, rates increased to 5.90%, compared with 5.89%. Rates on one-year adjustable-rate mortgages moved to 5.51% from 5.50%.
The pickup in mortgage rates comes as some prospective home buyers struggle with a credit crunch that has made it more difficult to secure financing for homes and other big-ticket purchases. Tighter lending requirements have aggravated the housing slump, which is weighing heavily on economic activity.
The mortgage rates do not include add-on fees known as points. Thirty-year and 15-year mortgages each carried a nationwide average fee of four-tenths of a point. Five-year adjustable-rate mortgages had a fee of one-half point while one-year adjustable mortgages carried an average fee of six-tenths of a point.
A year ago, 30-year mortgages stood at 6.13%; rates on 15-year mortgages were at 5.89%; five-year ARMS averaged 5.96%; and one-year ARMs were at 5.44%.
The housing market has suffered through a severe slump following five-years of record sales and soaring prices. Sales and prices have slumped and foreclosures have climbed to record highs. The problems in housing are expected to persist well into next year.
source: usatoday.com
Suffering increases for some fund investors
Investors in real estate funds have already seen their funds crumble. Now, those funds are giving them an extra smack when they're down, in the form of big taxable gains payouts.
The average real estate fund has tumbled 15.8% this year, compared with a 4.7% gain for the Standard & Poor's 500-stock index. Yet many of those real estate funds are doling out large capital gains distributions this year, which means shareholders will face the indignity of paying sizable taxes on a losing investment.
Despite its losses, the average real estate fund has paid $2.38 a share in long- and short-term capital gains distributions this year, according to Lipper. Mutual funds tally up all their gains and losses from trading and pay those gains out to shareholders at least once a year. Shareholders must then pay taxes on the distributions.
Long-term capital gains are taxed at a maximum 15%; short-term capital gains are taxed at your regular income tax rate, which is higher than the capital gains rate for most investors.
A fund with a large capital gains payout can mean a weighty tax bill. Suppose you had 1,000 shares of Davis Real Estate A, which has fallen 15.5% this year. The fund paid $0.2454 a share in short-term capital gains and $8.45 a share in long-term capital gains. Assuming you were in the top 35% tax bracket, you'd owe:
FIND MORE STORIES IN: Standard | Mutual funds
•35% on your $245.40 short-term capital gains payout, or $85.89.
•15% on your $8,455.50 long-term capital gains payout, or $1,268.33.
Why such big capital gains distributions from funds that have lost money?
Real estate funds have racked up huge gains over the past five years — an average of 130%, Lipper says. When a fund sells some of its winners, those gains must be distributed to shareholders, even if most of the gains were earned in previous years. Some funds might also have sold stocks with gains because they decided there were better investments elsewhere.
But some funds probably sold holdings to pay departing shareholders. Lured by soaring returns from real estate funds, investors poured an estimated $9.8 billion into real estate funds in 2006. The fund industry fanned the fever by rolling out 37 new real estate funds this year, says Andy Gogerty, fund analyst at Morningstar, the investment tracker.
But as returns have soured, investors have fled, yanking $1.1 billion from the real estate funds in the three months that ended in November, according to Lipper.
Many will recall a similar period seven years ago. Back then, the bursting of the tech stock bubble in 2000 smacked investors with fat tax bills from losing funds that made big distributions based on previous gains.
source: usatoday.com
The average real estate fund has tumbled 15.8% this year, compared with a 4.7% gain for the Standard & Poor's 500-stock index. Yet many of those real estate funds are doling out large capital gains distributions this year, which means shareholders will face the indignity of paying sizable taxes on a losing investment.
Despite its losses, the average real estate fund has paid $2.38 a share in long- and short-term capital gains distributions this year, according to Lipper. Mutual funds tally up all their gains and losses from trading and pay those gains out to shareholders at least once a year. Shareholders must then pay taxes on the distributions.
Long-term capital gains are taxed at a maximum 15%; short-term capital gains are taxed at your regular income tax rate, which is higher than the capital gains rate for most investors.
A fund with a large capital gains payout can mean a weighty tax bill. Suppose you had 1,000 shares of Davis Real Estate A, which has fallen 15.5% this year. The fund paid $0.2454 a share in short-term capital gains and $8.45 a share in long-term capital gains. Assuming you were in the top 35% tax bracket, you'd owe:
FIND MORE STORIES IN: Standard | Mutual funds
•35% on your $245.40 short-term capital gains payout, or $85.89.
•15% on your $8,455.50 long-term capital gains payout, or $1,268.33.
Why such big capital gains distributions from funds that have lost money?
Real estate funds have racked up huge gains over the past five years — an average of 130%, Lipper says. When a fund sells some of its winners, those gains must be distributed to shareholders, even if most of the gains were earned in previous years. Some funds might also have sold stocks with gains because they decided there were better investments elsewhere.
But some funds probably sold holdings to pay departing shareholders. Lured by soaring returns from real estate funds, investors poured an estimated $9.8 billion into real estate funds in 2006. The fund industry fanned the fever by rolling out 37 new real estate funds this year, says Andy Gogerty, fund analyst at Morningstar, the investment tracker.
But as returns have soured, investors have fled, yanking $1.1 billion from the real estate funds in the three months that ended in November, according to Lipper.
Many will recall a similar period seven years ago. Back then, the bursting of the tech stock bubble in 2000 smacked investors with fat tax bills from losing funds that made big distributions based on previous gains.
source: usatoday.com
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