By Kenneth R. Harney

Saturday, August 7, 2010; E01

Can you name a housing controversy that pulls Iraq and Afghanistan veterans, consumer advocates, labor unions representing transport workers and government employees, the title insurance industry, the National Council of La Raza, libertarian and property rights groups, and the National Association of Realtors together into a protest coalition demanding quick action from the Obama administration?

A more unlikely collection of real estate bedfellows is hard to imagine. Yet at the end of last month, 11 groups with widely divergent agendas and memberships formed the Coalition to Stop Wall Street Home Resale Fees.

The target of their protest: Private transfer fees being attached as liens on homes and requiring successions of property owners to pay a fee every time the house or lot resells during the coming 99 years. Although proponents say the concept helps real estate developers raise capital for projects by bringing in Wall Street investors, critics contend the liens amount to a perpetual money machine that lowers equity values for unsuspecting consumers and complicates real estate sales.

Here’s how the plan works: Say you buy a $300,000 house in a subdivision where the developer is participating in a private transfer-fee program and has recorded liens on every lot. What the developer might not have disclosed to you, however, is that when you sell the property, you will be required to pay 1 percent of the price you receive. The money must be disbursed out of the closing proceeds and sent to a trustee representing investors. Those investors fronted cash to the developer in exchange for the right to receive streams of payments for decades as individual houses sell and resell.

To illustrate: If you buy a house this year for $300,000 and resell it for $325,000 a few years from now, you will owe $3,250 at closing. Even if the house drops in value, you will still owe the 1 percent fee. And if you refuse to pay it, the deal will not close because a lien has been recorded that runs with the title to the property and mandates that every seller pay.

Your purchaser might not like the fee requirement, either, and might demand a lower price as compensation. When your purchaser later goes to sell, the same rules will kick in. And so on, through successions of sales until 2109, when the covenant recorded in 2010 disappears. Along the way, assuming modest appreciation in real estate values, investors and their estates stand to reap huge amounts of cash.

“It’s a pretty slick way to make money, but it’s bad public policy and bad for consumers,” says Kurt Pfotenhauer, chief executive of the American Land Title Association. Pfotenhauer’s group and the National Association of Realtors have spearheaded drives directed at state legislatures to ban or restrict private transfer fees. But now the focus has shifted to the federal level, where the 11-member coalition wants the Obama administration to prohibit transfer fees on all mortgages purchased or backed by Fannie Mae, Freddie Mac and the Federal Housing Administration.

The FHA has indicated that the fees violate its rules, said the coalition in a July 29 letter to Treasury Secretary Timothy F. Geithner. If Fannie Mae and Freddie Mac, which operate under federal conservatorship, follow suit, the mortgage-financing fuel powering transfer-fee programs will effectively be shut off. With the FHA, Fannie and Freddie account for about 95 percent of mortgage financings.

The principal advocate for the private transfer fee concept, Freehold Capital Partners of New York, did not respond to repeated requests to comment for this column. In an e-mail sent to me this year, Curtis Campbell, a spokesman for Freehold, said that “private transfer fees represent an adaptation in how to pay for development costs” incurred by builders “at a time when funding is not available” to them on “reasonable terms.”

On its Web site, Freehold says that major real estate development firms controlling “hundreds of billions of dollars in real estate projects nationwide,” including some of the “largest, most well respected,” have participated in the program. However, the company has declined to identify any of them.

Members of the anti-fee coalition said they have specific reasons for joining. For example, Jon Soltz, co-founder and chairman of VoteVets.org, said military families generally move every three years and have been disproportionately hard hit by the real estate bust. Because of their frequent moves, “these fees hurt the military more than anyone,” he said, and “take advantage of unsuspecting home owners and buyers.”

Law curtails regulator’s powers, requires radical transparency
American Banker  |  Friday, August 6, 2010

By Heather Landy         

If the Federal Reserve Board stretched the bounds of its emergency authority with the actions it took in 2008, Congress has found a way to snap things back into place.

The financial reform law put new limits on what the Fed can do under “unusual and exigent circumstances” and required that emergency measures be disclosed with a degree of transparency unheard of for the central bank.

The changes to Section 13(3) of the Federal Reserve Act are as much a warning to banks as they are a slap on the wrist for the Fed, which can no longer invoke it to take steps that would help a single company avoid bankruptcy or unload assets.

This means no more Fed backstops for companies that agree to rescue-style acquisitions, such as JPMorgan Chase & Co.’s purchase of Bear Stearns & Co., no more bailouts of reckless insurance companies a la American International Group Inc., and no more guarantees that the banks on the other side of trades with big, troubled firms will be made whole.

In theory, such measures will never be needed again thanks to another portion of the Dodd-Frank Act, which allows the government to seize and unwind distressed firms of systemic importance. In practice, the Fed’s options for future crises will be narrower compared with the last one, regardless of how the resolution process pans out.

“I’m a bit worried that the Fed’s hands will be unduly tied the next time an AIG-like problem arises — not that I’m an admirer of what we did with AIG,” said Alan Blinder, the Princeton University economics professor and former Fed vice chairman.

The bailout of the insurance giant has been a sticking point even for supporters of the Fed’s other emergency actions during the crisis, including interventions that stabilized the commercial paper and asset-backed securities markets.

In response, Congress, in the Dodd-Frank bill, instructed the Fed to limit future rescues to programs with “broad-based eligibility” and to establish policies to ensure that emergency loans are disbursed “for the purpose of providing liquidity to the financial system, and not to aid a failing financial company.”

But the trouble with financial crises is that they frequently make it impossible to distinguish between issues of liquidity and issues of solvency — or between problems that are truly systemic and those that are concentrated in a few very large companies.

“Crises are centered in some mish-mash of institutions and markets,” Blinder said. “Was the credit-default-swap part of the crisis a market problem or an AIG problem? I don’t even know where to begin with that.”

It is possible the Fed didn’t either, but made its best guess, invoking 13(3) to take swift, bold steps to rescue the insurer from its costly misadventures in the derivatives market.

Those actions, while arguably helping to stabilize the financial system, triggered public reactions ranging from skeptical to outraged, particularly when it was disclosed that Goldman Sachs & Co. and other trading partners of AIG were paid in full for swap contracts with the bailed-out insurer.

The Fed has raised no objection to the new limits on its 13(3) authority. Chairman Ben Bernanke testified to Congress in February 2009 that “many of these actions might not have been necessary in the first place had there been in place a comprehensive resolution regime aimed at avoiding the disorderly failure of systemically critical financial institutions.”

But in the absence of a resolution regime, the Fed took actions in 2008 that, combined with the shoot-from-the-hip atmosphere in which the Troubled Asset Relief Program was created, generated a strong constituency for constraints on the types of measures that can be taken in exigent circumstances.

“I believe the use of 13(3) and Tarp were probably necessary, and likely saved the financial system from a calamity that could have been worse than the Great Depression. But it was done very crudely,” said Heath Tarbert, who helped negotiate Dodd-Frank as Republican special counsel to the Senate Banking Committee, before joining Weil, Gotschal & Manges LLP this year to run the law firm’s financial regulatory reform working group. “I don’t think there was necessarily the transparency that everyone would have liked.”

Congress devoted several pages of Dodd-Frank to outlining standards of transparency for Fed actions taken in exigent circumstances.

Within seven days of authorizing an emergency loan or assistance facility, the Fed must submit to the House Financial Services Committee and Senate Banking Committee a special report justifying the exercise of 13(3) authority; identifying the recipients of the aid; detailing the date, amount, collateral requirements and other terms of the assistance and tallying the expected final cost to taxpayers. Then, every 30 days for the life of the loan, the Fed must give written updates regarding the value of the collateral, the interest and fees collected, and the ultimate cost to taxpayers.

The measure is as direct a response as possible to a laundry list of public concerns over the bailout of AIG. But in a nod to the customary discretion with which the Fed has traditionally acted, Dodd-Frank allows for the Fed chairman to request, in writing, that the committee chairmen and ranking members keep confidential the sections of the reports that specify the loans’ recipients, size and collateral agreements.

Furthermore, Dodd-Frank gives the comptroller general the authority to “conduct audits, including on-site examinations,” of the Fed, of banks within the Federal Reserve system and of specific credit facilities to assess the operational integrity or internal controls of an emergency program. Inspections also can be used to validate “the effectiveness of the security and collateral policies established for the facility,” or to determine whether the program “inappropriately favors one or more specific participants over other institutions eligible to utilize the facility.”

Dodd-Frank also says that the Fed “shall place on its home Internet website a link entitled ‘Audit,’ which shall link to a Web page that shall serve as a repository of information made available to the public” about its emergency measures, including audit reports by the comptroller general, annual financial statements prepared by an independent auditor and the reports required by the congressional banking and finance committees.

The law is not nearly as specific when it comes to instructing the Fed on how to build the emergency programs themselves.

Rather than dictating the kinds of collateral that the Fed may accept in exchange for special assistance, for example, the law merely directs the Fed to assign a “lendable value to all collateral” to make sure that the loan is “secured satisfactorily.”

To Thomas Cooley, an economics professor at New York University’s Stern School of Business, a lack of specific rules to protect the integrity of the Fed’s balance sheet was a major omission. Paired with restrictions on the kinds of emergency action the Fed can take, he said, the alterations to 13(3) seem less palatable. “They’ve just constrained [the Fed] without having more sensible rules,” he said. “It could come back to bite us in some future crisis.”

Proof may come when Freddie reports 2Q results

American Banker  |  Friday, August 6, 2010
By Jeff Horwitz and Sara Lepro

People once thought guaranteeing conventional, thoroughly underwritten mortgages with near Treasury-level funding costs was a lucrative, low-risk business. Freddie Mac’s forthcoming second-quarter results could provide a reminder why.

When the government conservatee, a bastion of the mortgage market, releases the results — probably on Monday — it is expected to report hefty losses on derivatives and continued credit troubles, just as it has the last several quarters. However, Freddie will also probably show revenue growth, amid other inklings that the worst of the credit crisis is behind the government-sponsored enterprises.

One such inkling: Fannie Mae said Thursday that its net loss narrowed significantly in the second quarter and that it has enough reserves set aside to cover the “substantial majority” of further credit losses on loans from the bubble years.

Some even say it is reasonable to believe Freddie could return to profitability in the not too distant future.

“I would certainly use the word ‘could,’ ” said Brian Harris, a senior vice president at Moody’s Investors Service. “A fair amount of things need to break their way.”

Fannie reported a $3.1 billion loss for the second quarter after paying preferred dividends — one-fifth its net loss a year earlier — as credit-related expenses fell 74%, to $4.85 billion. Fannie also asked the government for another $1.5 billion to plug its net worth deficit. But it said it expects further draws from the Treasury “will be driven increasingly by dividend payments” on the government’s preferred stock — rather than credit losses.

Freddie, and to a greater extent Fannie, still have huge problems. Another drop in home prices would hurt them, for example.

But there have been some positive signs. Delinquency rates have been falling and, by all accounts, the new loans they have guaranteed are solid as underwriting standards have tightened.

“The best loans are made during recessions,” said Jeremy Diamond, managing director of Annaly Capital Management, a real estate investment trust that owns Fannie and Freddie mortgage-backed securities. “The quality of underwriting across the spectrum improves as banks get more selective about who and when to lend. … As losses get realized, then what’s left is going to have the benefit of positive selection.”

The inference can be made that, just as banks are emerging from the crisis, so, too, are the government-sponsored enterprises.

Though analyst coverage of the GSEs has become nearly nonexistent since the two became wards of the state in September 2008, most everyone has an opinion on Fannie and Freddie and what should be done with them. After all, regardless of their troubles, they are still an integral part of the housing market, backing half of all the outstanding residential mortgages in the U.S.

When talking about their future, the conversation is inevitably littered with “coulds” and “buts.”

The main concerns are when losses from the firms’ 2005 through 2008 books of business subside; whether the new book of business they’ve been writing since 2009 will be profitable; and just how much total cumulative losses, and the subsequent cost to taxpayers, will be.

In its second-quarter report on Thursday, Fannie tried to shed light on some of those questions. For one, it said single-family loans made in 2009 and 2010 have the lowest early serious delinquency rates of any loans the company has acquired in the last 10 years.

Freddie could report even better numbers. It has already shown some improvement. And Freddie is considered to have the better book of business in part because alternative-A loans from the boom years — which have produced big losses — make up a smaller percentage of its overall portfolio.

Freddie’s net loss has narrowed as it has set aside fewer dollars for future credit costs. In the first quarter, the net loss after paying preferred dividends was $6.7 billion, down from $9.9 billion a year earlier. The provision for loan losses dropped to $5.40 billion from $8.92 billion in the first quarter of 2009.

Credit quality has also steadily improved. Freddie’s single-family delinquency rate fell to 3.96% in June from 4.06% in May. The rate was unchanged in May but had fallen in March and April.

The first-quarter results were clouded by one-time items. But the core business looks stable. Net interest income rose 6.9% from a year earlier, to $4.13 billion. Single-family guarantee income, meanwhile, has remained fairly consistent. In the first quarter it was $848 million, down 3% from the year earlier but up slightly from the fourth quarter.

Perhaps the strongest case for a brighter future at Freddie is that the makeup of its portfolio, in terms of the percentage of loans from older vintages, is shifting.

During the first quarter of last year, loans from the years 2005 through 2008 — considered to be the worst-performing vintages — made up 61% of Freddie’s total portfolio. This share fell to 46% in the first quarter of 2010.

As that portion of the portfolio becomes smaller and smaller, replaced with higher-quality loans from 2009, 2010 and beyond, financial performance should improve.

“There’s no question we’re going to see the initial benefits of credit trends from tightening up their credit box,” said Josh Rosner, a managing director at Graham Fisher & Co., a research firm for institutional investors.

Rosner said he expects stabilization of nonperforming assets, but he asserted that such a milestone could be fleeting. “Yes, we’re going to have some stabilization at this point, but is it sustainable?” he asked. “It’s a little too early” to say. The biggest wild card may be what direction home prices take. Some experts worry that the GSEs are not reserving enough to prepare for another drop in home prices.

“Any type of house price depreciation would really impact them,” Moody’s Harris said. “They’d have to start provisioning again.”

On the flip side, if home prices rise, the GSEs are in a good position. “You start playing with those provisioning numbers, and the returns really start changing,” Harris said.

Even if the picture for the GSEs is rosier than a year ago, many bridges remain to be crossed.

“Absent the overhang of the legacy loans and government-directed efforts to modify post conservatorship mortgage loans, Freddie Mac is clearly a viable entity,” said Michael Youngblood, principal of Five Bridges Advisors LLC. “But given the magnitude of the legacy loan issues and the ever broadening array of loan modification efforts, that netting will undoubtedly keep their ink red. … It’s like telling the grasshopper, ‘apart from the elephant on your back, you could really fly high.’ “

CALL TO ACTION

Please click HERE for a video message from NAMB Government Affairs Committee and NAMBPAC Chairman Mike Anderson, CRMS. 

The U.S. Department of Housing and Urban Development has issued a Notice seeking public comment on the Federal Housing Administration’s (FHA) policy changes to strengthen the FHA’s capital and limit risk without interfering with the FHA mission.  The notice (for a copy, click here) solicited comment on three specific measures to reduce financial risk and preserve affordable mortgage financing for responsible consumers: 1) Increase downpayment requirements for new borrowers; 2) Reduce allowable seller concessions from 6 percent to 3 percent; and 3) tighten underwriting standards for manually underwritten loans.  Comments are due by August 16, 2010. 

Also, for a copy of HUD’s press release on the policy changes, click here.

NAMB calls on you to provide HUD with your opinion on the FHA policy changes and how it will affect your business as a mortgage professional.  It is important that you participate in this “Call to Action” so the role of the small business mortgage professional is not adversely impacted.  Below are talking points based on NAMB’s position to help you formulate a letter. 

To submit your letter, click here.  Once on this page, click “submit comment” at the top to send your letter. 

***COMMENTS ARE DUE BY AUGUST 16, 2010***

Talking Points

Support an increase in downpayment requirements for borrowers with credit scores of 580 or lower:

NAMB supports FHA’s policy changes to downpayment requirements by increasing the minimum credit score for new borrowers to utilize the 3.5 percent downpayment program; 

NAMB proposes raising the minimum credit score for FHA-insured mortgages from 500 to 540.

Support tighter underwriting standards for manually underwritten loans:

NAMB is supportive of sound and responsible underwriting and holding predators of irresponsible underwriting accountable through mandatory loans re-purchase requirements; 

NAMB strongly believes keeping FHA whole and protected from such predatory and irresponsible practices is vital for protecting consumers and stabilizing the housing industry.

Replace FHA reduction in allowable seller concessions with new proposal:

Leave the 6 percent seller concession in place for a 24 month period and perform an analysis of the performance of these loans at the end of the two years;

Any seller concession over 3 percent: prohibit the increase of the sales price to more than the listed price verified by local MLS data; and

Any seller concession over 4 percent: the lender must perform a desk review appraisal and include in the insuring package to FHA

Barr, a White House Top Pick for New Post, Has Called for Dramatic Changes at Banks and ‘Plan Vanilla’ Products for Consumers

By DAMIAN PALETTA

Many Democrats and liberal interest groups have launched an all-out campaign to have Elizabeth Warren nominated as the first consumer financial-affairs regulator. Many bankers and Republicans are hell bent on stopping her.

Few are paying attention to who is waiting in the wings.

The White House’s other top candidate, Treasury Department Assistant Secretary Michael Barr, has, like Ms. Warren, spent years calling for stricter curbs on the banking industry. While little known to the public, he has left behind a more-detailed paper trail than Ms. Warren, offering clues to how he might run the agency.

Mr. Barr has called for rules that would force banks to offer “plain vanilla” financial products to consumers. He has pushed for the creation of a public trust to provide “financial education and assistance to troubled borrowers,” funded by the penalty fees banks charge to their customers. He has said regulators should take into account the psychology of borrowers when setting rules.

In short, he has called for dramatic changes to how banks interact with consumers, often in a way that would make it harder for companies to lean on consumer financial products for profits.

“We have to totally transform the financial-services system for low-income people,” Mr. Barr said in 2006 while serving on a panel arranged by former Democratic presidential candidate John Edwards, according to published reports. Mr. Barr declined to comment for this article.

President Barack Obama last month signed into law an overhaul of financial regulations that creates a consumer regulator to police products such as mortgages and credit cards. Democrats and liberal groups are struggling to coalesce around a nominee. For some, the primary focus is on pushing for a person who won’t be swayed by bankers. Others are concerned that an outspoken nominee, such as Ms. Warren, a Harvard Law School professor who helped birth the concept, might not get confirmed.

Edward Yingling, chief executive of the trade group American Bankers Association, said many bankers had concerns about Mr. Barr’s approach. He added that Mr. Barr is a “very quick study, he’s very articulate, and he knows how Washington works.”

Ms. Warren and Mr. Barr remain the top two candidates, people familiar with the process say, although others remain under consideration. Mr. Barr’s presence on the short list is an acknowledgment of the close ties he has established within the Obama administration, particularly Treasury Secretary Timothy Geithner.

One of Mr. Barr’s most controversial proposals came in 2008 when he co-authored a paper saying banks should be required to offer consumers simplified, or “plain vanilla” financial products. Borrowers would be able to get complex loans only if they opt out of the standard product through a process designed to be difficult.

“A plain vanilla set of default mortgages would be easier to compare across mortgage offers,” Mr. Barr, then a law professor at the University of Michigan, wrote in 2008 with co-authors at Harvard and Princeton universities.

The Obama administration tried to include such a provision in its financial overhaul bill, but it was stripped out by Democrats. Business groups felt it allowed the government to intrude too much in private markets. Republicans chided the concept as evidence of a “nanny state.”

In some ways, Mr. Barr’s approach to financial regulation can appear as complex as banking itself. He has written that financial regulation should be informed by the “psychology” of the borrower, borrowing from a theory known as behavioral economics. This goes beyond regulating products lenders can offer and looks into borrowers’ behavior., asking such questions as: Why do they default? Why do they read certain disclosures but not others?

His proposals have erred on the side of regulation. Even though he held a key role in the Clinton administration’s economic team, Mr. Barr has criticized the Clinton White House’s approach to financial regulation as too lax.

Still, he has stopped short of calling for bans on products and has warned against the dangers of overregulation. “Product regulation may stifle beneficial innovation and there is always the possibility that government may simply get it wrong,” according to the 2008 paper he co-wrote.

Mr. Barr, 44 years old, joined the administration from the University of Michigan. He has also been a senior fellow at the Center for American Progress, a liberal think tank with close ties to the White House. He won plaudits within the administration for helping push the financial overhaul through Congress, but rankled Republicans who saw him as inflexible.

Like Ms. Warren, Mr. Barr has promoted the idea that financial disclosures need to be simplified. The 2008 paper said lenders should be required to provide consumers with a menu of loan options and how they would qualify for each.

The paper also proposed requiring credit-card borrowers to make monthly payments “to pay off their existing balance over a relatively short period of time unless the customer affirmatively opted-out of such a payment plan.”

Under existing law, borrowers have wide discretion to determine whether to make a minimum payment each month on their credit-card balance.

“Credit card companies have fine-tuned product offerings and disclosures in a manner that appears to be systemically designed to prey on common psychological biases—biases that limit consumer ability to make rational choices regarding credit card borrowing,” the paper said

Look what’s in store for you at the upcoming TAMP Convention & Marketplace!
September 9-11, 2010 – Hilton Austin Hotel

Education

Education courses designed to help you stay current and increase business! 

●       Federal FHA/HUD

●       Good Faith Estimate/ RESPA/ECOA

●       The “New” Credit Scoring

●       FHA for Originators and Processors

●       TDSML & What’s NEW on the Horizon

●       How to Develop Your Business! Presented by “The Marketing Animals”

●       What’s New with CALYX 7.3

●       The 7 Tactics to Exam Success

●       NMLS National Exam Prep Course (Thursday 8 hour class)

Marketplace

The only exposition in Texas specifically for the mortgage originator industry.

Networking

There’s no better place to “see and be seen” than at TAMP in Austin.

Convention events and Marketplace will be held at the Hilton Austin Hotel.

Call now for hotel reservations:

(512) 482-8000

TAMP discounted room rate:

$179.00 Single/Double Occupancy

WATCH your mail and email for registration brochure…coming soon!
For EXHIBITOR materials log on to www.ttamp.org

American Banker  |  Tuesday, July 13, 2010
By Andrew Johnson    

Banks are looking for more data to help them make lending decisions, beyond the simple matter of whether prospective borrowers pay their bills on time.

The focus on “alternative” data to credit scores in underwriting is not new but has intensified after the lessons banks learned from the credit bubble.

“In the marketplace right now everyone is talking about rethinking underwriting,” said Peter Carroll, a partner in the retail and business banking practice of the management consulting firm Oliver Wyman.

“Everyone realizes that credit scores, as clever as they are, have in some respects left out of the credit-assessment equation certain aspects of the borrower,” Carroll said.

Though more data about people is available today than ever before, sifting through it is arduous.

“Basically people are saying we can either go back to human underwriting, which is cost-prohibitive and not that good anyway, or we can find data sources that potentially shed light on these other dimensions of the borrower,” Carroll said.

Banks are especially interested in ways to improve their identity-verification processes, said Michelle Reinhard, the senior vice president of quality risk management for Huntington National Bank, the banking subsidiary of Huntington Bancshares Inc. in Columbus, Ohio.

“Having a larger tool for risk management is really where I think the whole industry is going, where you can clearly identify your customer,” Reinhard said.

For example, a customer may have applied for credit, listing his home phone number on the application, and later applied again listing a mobile phone number. Reinhard said the discrepancy could trigger a red flag. “The institution may have had to work harder to verify that the consumer information was accurate,” she said, but better identity-verification capabilities could have made this extra work unnecessary.

She said Huntington is trying to fine-tune its decisioning techniques.

Zoot Enterprises Inc. is expanding the data its credit decisioning software can use to help its bank customers evaluate applications. “We find that right now in the market there is a hunger for other data and additional intelligence,” Tom Johnson, Zoot’s vice president of product development, said in an interview.

In February the Bozeman, Mont., technology company struck a partnership with LexisNexis Risk Solutions, which it has worked with previously, to incorporate information from the New York data aggregator’s public records vault into its prescreen applications; it expects to begin marketing the capability as part of its Prescreen 3.0 product this quarter. LexisNexis is a subsidiary of the London information company Reed Elsevier Inc. Zoot has used LexisNexis data in the past with other products but is expanding its relationship with the company through its new agreement.

Johnson said the details in the Lexis data can augment credit bureau files and other information sources that banks commonly use when deciding to extend credit or send prescreened offers to consumers. The potential outcome for banks is better-performing credit portfolios and identification of new customer prospects who previously were denied products, he said.

Carroll said the LexisNexis data included “fundamentally different” details that are “additive” to, “not competitive” with, traditional credit bureau reports.

For example, credit card issuers have long marketed their cards with direct mail. “If you look at everyone in the bureau file and pick the subset that you want to mail to, there’s a whole bunch of people” with no file, he said. “If you’ve got another source of data like LexisNexis … you can use this to pick out good people who would previously have been no hits and thin files.”

That also creates an opportunity to potentially market to underbanked customers, Johnson said.

Zoot also sees opportunities for banks to lower their screening costs by ruling out a credit applicant sooner.

“Every data source that you pull has costs associated with it,” Johnson said. “The sooner in the process you can make a decision … the less expensive the transaction is going to be.”

LexisNexis uses public records and other sources to track bankruptcies and liens — which will usually included in a standard credit report — and plenty of other things that often are not, according to Grayson Clarke, the senior director of credit risk decisioning with LexisNexis Risk Solutions.

This could include details about property values and ownership, an applicant’s educational background, professional licenses, phone service history, subprime credit information such as a payday loan and ownership of other assets, such as boats and airplanes.

“Traditional bureau data captures whether or not someone is repaying an obligation,” Clarke said, while the LexisNexis’ data includes other indicators of a person’s credit risk.

For example, Clarke said people who hold certain professional licenses have proven to be more stable credit risks than those without.

And while those people already may have been deemed good credit risks based on traditional data sources, the ability to tap into such additional details to reinforce that can make a bank’s underwriting stronger and help with segmenting customers for marketing purposes, he said.

All this provides “an additional layer of data to the credit bureau files that improve the acceptance rates and improve” accuracy, said Zoot’s president, Dennis Dixon.

Alan Riegler, a partner and senior consultant with the financial services consulting firm CCG Catalyst in Los Angeles, agrees that giving banks new types of data to evaluate can help mitigate risk, though he said the current economic climate might make it hard for some financial companies to buy new analytics software.

“You can determine from a credit score if [a person] has had a bankruptcy,” Riegler said. “What is not as likely to be determined … is have you committed fraud.”

American Banker  |  Friday, July 16, 2010
By Stacy Kaper

WASHINGTON — Although the Senate finally voted Thursday to send regulatory reform to the president’s desk, policy circles are already abuzz about what changes to seek in a “corrections” bill to fix problems with the legislation.

Top lawmakers have acknowledged another bill will be needed to clean up their bill to overhaul the financial system, in which many complicated provisions were decided near the end of a marathon 20-hour session.

“Everybody knows that there are many technical changes that will need to be made,” said Cornelius Hurley, a banking and financial law professor at the Boston University School of Law. “Anytime that you slap stuff together at 5 in the morning, mistakes get made and need to be corrected.”

The corrections would be yet another step in the marathon process to overhaul the financial system. On Thursday the Senate passed, 60 to 39, the version completed last month by a conference of members from both chambers.

But how far the corrections bill could go remains a question. Some said it may be confined to technical changes to better reflect congressional intent; others see an opportunity to make more substantive alterations.

Despite concerns raised by fellow lawmakers, Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank refused to reopen the bill after making last-minute changes designed to ensure the legislation had enough political support.

Instead, the two chairmen said there would be a future bill to make corrections, and tried to reassure lawmakers that they have plenty of time to enact a bill before the regulatory reform legislation goes into effect.

“Anytime you have a 2,000-page bill there’s always a technical corrections bill that comes at some point, because … there’s always some things you want to look at,” Dodd told reporters after wrapping up the conference committee at the end of June. “As I pointed out on this particular provision, none of the provisions go into effect for another year, so we have some time.”

But Frank hinted during the final conference session that the next bill may go beyond “technical” repairs. The Massachusetts Democrat did not elaborate and told reporters he was unsure what issues would be tweaked or how in later legislation.

“I don’t know yet,” he said. “There were a couple of drafting errors. … Look, these people who work here do an enormously complicated job very well. There are some typos, some that would be considered technical, some which can’t be considered technical and go beyond that. I don’t know what the answer to that is yet … but yeah, you’ll need a minor corrections bill, you always do for something this big.”

How much lawmakers will be willing to tinker with the bill after it passes is unclear.

“There are two kinds of corrections you can do,” said Oliver Ireland, a partner with the law firm Morrison & Foerster. “One of them is you do a corrections bill that is a cleanup and noncontroversial. You make a list of all the corrections with explanations and you send it around and if anybody on your committee objects, you take it off the list. But the idea is that you do a corrections bill on things that need real corrections: They got the wrong page, the wrong cross reference, something like that. On those corrections that would be noncontroversial there are probably a lot of them.”

But there is another possibility, Ireland said.

“There are things that other people will call ‘corrections,’ like they’ll look at a substantive word someplace and say that should have gone out; or an ‘and’ should be an ‘or’ or vice versa,” he said. “Those can be pretty substantive and make a real difference.”

Democrats and the Obama administration are counting financial reform as a major victory and would be unlikely to allow any changes to go through that could be perceived as watering the bill down.

Several observers said they expected lawmakers would have little appetite to touch it again before the elections unless some noncontroversial alterations were immediately pressing.

“Obviously there’s a million loose ends. There’s a million things people will want to change,” said Kip Weissman, a partner with Luse Gorman. “We are really running out of time before the elections. … The only kind of technical corrections you would think you would see is something that everyone readily agrees kind of helps everybody.

Financial services lawyers, regulators and analysts are still poring over the legislation and identifying places where language is ambiguous, conflicting or does not correctly define or describe what it intends.

But deciding where to draw the line will be difficult. Even a change as simple as inserting or striking a word could have a big impact and once any corrections bill delves into making substantive changes, every interested lobbying group will be going to the mat for its issues.

“We would vehemently be opposed to the industry undercutting the bill,” said Ed Mierzwinski, the consumer program director for U.S. Public Interest Research Group. “They are going to try to do that.

But that isn’t stopping industry groups from drawing up a wish list and hoping they can refight lost battles.

Though no industry representative interviewed for this story sounded optimistic about the prospects of rolling back a provision to let the Federal Reserve Board regulate interchange fees for debit cards, the issue remains a priority for credit unions and banks alike.

Other targets are likely to include provisions dealing with derivatives; implementation of the Volcker Rule to ban proprietary trading and limit investments in hedge funds; the elimination of trust-preferred securities as Tier 1 capital; and autonomy given to the new consumer regulator.

Ed Yingling, the president and chief executive of the American Bankers Association, said his group is still analyzing the massive bill to find areas that need to be corrected. The problem, he said, is that a technical corrections bill that gains momentum instantly becomes a target for more controversial, substantive changes that can stop a bill dead in its tracks.

“There are dozens of changes we would like, but they’re not technical corrections,” Yingling said. “The scary thing is that even if you had a bill that had a lot of items that everybody agreed needed to be corrected, we’ve all seen how any bill at any time can be held hostage.”

Yingling said he doubts lawmakers will have much appetite to reopen legislation this year unless there are some widely agreed-upon tweaks.

Still, he said a bill next year could benefit the banking industry if Republicans, as expected, pick up more congressional seats in both chambers.

“In the next Congress, you would at least have the opportunity, and we will certainly be looking at things we want to have changed,” he said. “Next year you will get into — with a new Congress — that’s where the line between technical corrections and substantive changes will come into play.”

Yingling said that if any other group appears to be inserting its wish lists into a purported technical corrections bill, the ABA would follow suit.

“Part of it is always this issue of once we open the door to nontechnical, where do we stop?” he said. “And obviously if anybody else were to go up and seek a substantive change on a technical corrections amendment, we would be first in line with a long list, so that’s the issue that you have and that’s the danger where even a technical bill gets caught up.”

Yingling placed eliminating or weakening the interchange amendment at the top of his list, followed by concerns over a proposed safe harbor in the risk-retention provision that he said left too much uncertainty and could reduce access to credit.

Camden Fine, who heads the Independent Community Bankers of America, said his group would also like to see the interchange amendment struck. Also on his wish list were putting more constraints on the consumer bureau by giving the prudential regulators more authority in its rulewriting and knocking the consumer director off of the board of the Federal Deposit Insurance Corp.

“There needs to be much more defined language for the prudential regulator to have input in the rules that are by the consumer bureau,” Fine said. “I think the prudential regulators should have more say in how those rules are created.”

Fine said that as soon as 30 days after reg reform is enacted, corrections bills could pop up.

Meanwhile, opponents of the bill said the need for ample corrections demonstrates flaws with the underlying bill.

“I would presume they would are going to be back correcting this bill every year for the next 10 years because the problems this bill is going to create are going to far exceed the benefits its going to generate,” Sen. Judd Gregg, R-N.H., said in an interview Thursday.

By Paul Muolo
Paul Muolo

Fannie Mae and Freddie Mac—the Congressionally chartered mortgage giants that provide liquidity for 70% of all residential loans funded in the U.S.—are done. They have no friends in Congress and Republicans (and plenty of Democrats) blame them for creating the housing bubble.

Even their regulator at the Federal Housing Finance Agency, Ed DeMarco, thinks they have no future. Otherwise, he would never have pulled their shares off the New York Stock Exchange while refusing to answer questions about a reverse stock split. (It worked for AIG. Why not the GSEs?)

In six months the White House is scheduled to release its plan on what to do with Fannie and Freddie with a nod toward creating a housing finance system for the 21st century. All eyes will be on the Obama administration, which is already being tarred and feathered by bankers who expect to see their future earnings snipped by 20% or so thanks to the new regulatory reform bill. (If you think that piece of legislation was contentious, wait until you see GSE reform. I’m sure there are plenty of banks that would like to see the value of their GSE preferred stock come back to them in full.)

It might be said that the Fannie/Freddie “question” looms on the horizon, not unlike the BP oil slick, waiting to reach land and destroy what it hasn’t already. And you can pretty much guess that in the fall, the GSEs will be part of a political litmus test where politicians running for office try to prove how tough they tried to be on FanFred in the past, but were blocked by housing liberals, read: Democrats.

It’s easy to kick the GSEs when they’re down. After all, unlike the auto companies, AIG and the megabanks, the billions Fannie and Freddie have received to maintain a positive net worth position won’t eventually be recouped by Uncle Sam, at least it sure doesn’t look that way. But while it’s easy to stick your thumb in their eyes, a central question needs to be addressed: If the two eventually disappear, which firms will fill the void? At last check, Fannie and Freddie had a combined balance sheet of $1.6 trillion, mostly whole loans and MBS. They guarantee $5.5 trillion in residential product, or 55% of all housing debt in the U.S. If they go away, who takes their place?

It’s not a disingenuous question. As mortgage MBS co-inventor Lewis Ranieri once quipped, “Mortgages are about math.” You can’t replace $1.6 trillion of balance sheet capacity overnight. In fact, you can’t replace it within three years either. Those assets must reside somewhere. And if you think that our nation’s megabanks, the regionals and what’s left of the thrifts and credit unions will gladly sweep in to fill the void you’re mistaken.

The profit margin between a residential lender’s cost of funds and the yield on the mortgages they write is quite strong right now and looks to stay that way for 12 to 18 months, maybe even longer. The yield on the 10-year Treasury is in the basement but so is a lender’s cost of funds. (When’s the last time you checked CD rates?) But all this doesn’t mean that it’s safe for a depository to borrow short (deposit accounts) and lend long (30-year fixed-rate loans.) Actually, an argument might be made that borrowing short and lending long is a heck of a lot safer than anyone really thinks, but that doesn’t mean banks will do it or their regulators will it. If you recall your financial services history, the S&L crisis was caused by borrowing short and lending long (followed by unfettered asset deregulation).

But getting back to Fannie and Freddie. The balance sheet issue is only one part of the equation. It’s likely the White House and Congress will allow for some type of successor GSE, mandating that the institution have a small balance sheet for mortgage products that are less liquid. As for whether that GSE will be “on balance” for budget deficit calculations, that’s a different matter. If you put the GSEs’ guarantees “on budget” the potential obligations of the U.S. government just increased by $5.2 trillion. Our creditors may have something to say about that. Or maybe not.

But the guarantees on Fannie/Freddie MBS are a key issue because they account for half of all consumer housing debt. If a covered bond market for housing debt replaces the GSEs the issue of balance sheet capacity for the issuing commercial banks doesn’t go away. Holding residential mortgage assets still requires capital. One former Fannie Mae executive suggested to me that a new housing GSE could issue MBS guarantees and the money would be set aside in an insurance fund. “It would function like deposit insurance,” he said.

One thing the government is not likely to do is fire sale Fannie and Freddie’s assets, namely their MBS. If they do, it would cause MBS prices to crater while creating massive mark-to-market losses at banks, thrifts, insurance companies, pension funds, take your pick. The one asset the government could sell is their automated underwriting systems, Loan Prospector and Desktop Underwriter. 

Technology consultant Jeff Lebowitz estimates that revenue at DU and LP averages $200 million to $250 million a year. “You could sell them for one to two times revenue more or less,” he said. Of course, the money raised would be a drop in the bucket compared to the $140 billion Treasury has pumped into the two. Yes, Fannie and Freddie are done, politically speaking. But for now, they are here to stay

By Kenneth R. Harney

Saturday, July 3, 2010; E01 

With tougher mortgage underwriting rules a virtual certainty under Congress’s financial reform legislation, lenders have begun confronting still another vexing issue: Can homebuyers who have high credit scores be trusted not to pull the plug — strategically default — when the economy hits a rough patch and home values tank?

New research based on data from 25 million active consumer credit files suggests the answer just might be no. Although people with the highest-ranking credit scores are less likely to default on their mortgage compared with people with lower scores, when they do default, they are much more likely to do it strategically: They simply stop paying with little or no warning.

In a study released June 28, researchers from credit-bureau giant Experian and the Oliver Wyman consulting firm found that borrowers with “super prime” credit scores accounted for 30 percent of all mortgages outstanding in mid-2009 but produced just 5 percent of all serious mortgage delinquencies.

However, 28 percent of those elite scorers’ defaults were calculated and strategic, versus 18 percent for the overall population of borrowers in the sample. This pattern, in turn, is forcing lenders and the credit industry to seek new ways to evaluate risk beyond traditional credit scores.

Charles Chung, Experian’s general manager of decision sciences, said in an interview that “lenders not only are looking at creditworthiness,” as measured by traditional credit scoring models, but also at applicants’ likely “ability to pay” under scenarios in which real estate values drop. Lenders might need to adjust underwriting and risk-rating rules — requiring higher minimum-down payments or higher interest rates — to deal with loan applicants who fit the profile for walkaways in a depreciating real estate market.

The latest study, which follows up on research involving credit files where consumers’ personal identifiers had been removed, tracked strategic defaulters in 2009. By examining payment patterns in individual credit files, Experian and Oliver Wyman estimate that about 19 percent of all mortgage defaults last year involved intentional, strategic walkaways.

Although there was some evidence that total defaults might have peaked at the end of 2008, the walkaway issue remains a costly and controversial one for the mortgage industry. Fannie Mae announced late last month that strategic defaults have become such a problem that it is toughening its policy and will pursue walkaways for unpaid balances and penalties wherever permitted by state law.

The Experian-Oliver Wyman study confirmed that geography plays a significant role in the strategic default phenomenon. Homeowners in volatile boom and bust states. includings California and Florida, have been especially prone to walk away from deeply negative equity situations.

A separate study by three researchers at the Federal Reserve found that not only is geography crucial but also that state laws’ treatment of unpaid mortgage balances after a walkaway might play a major role. The Fed study examined 133,281 loan histories in Arizona, California, Florida and Nevada where borrowers were underwater on their loans.

According to the researchers, in California and Arizona, where state law restricts lenders’ abilities to collect post-foreclosure deficiencies on mortgages, borrowers were more prone to walk away from their homes at lower levels of negative equity than borrowers in Florida and Nevada, where lenders face fewer restrictions.

“This result suggests,” the Fed study said, “that borrowers may factor into the costs of default the potential legal liabilities resulting from a foreclosure.”

The Fed researchers concluded that the depth of borrowers’ negative equity is an important tripwire to their decision to send back the keys. Borrowers whose negative equity is relatively modest appear to be much less willing to strategically default, probably because they hold out hope that market conditions will improve enough to restore them to positive equity.

But as negative equity approaches 50 percent — and borrowers see no prospects for higher real estate values — roughly half of all defaults are strategic.

The Fed researchers cited a hypothetical case in Palmdale, Calif., to illustrate the economic logic of strategic defaulters: Purchasers there in 2006 paid $375,000 for a median-priced single-family home. By last year, it was worth less than $200,000. Meanwhile, a three- to four-bedroom house rented for $1,300 a month at the end of last year, far less than what the borrowers were paying.

Why stay in a hopeless situation? Both studies document that many borrowers asked themselves that — and decided to just stop paying.