Fewer people lost their homes to foreclosure in November as banks backed off to deal with the robo-signing controversy. Image: CC tombothetominator/Flickr

Foreclosures dropped in the U.S. at a record pace in November. But these days a positive housing market news item has a dark foreclosure shadow lurking behind it. Foreclosures dropped because of robo-signing moratoriums, similar to a recent drop in underwater mortgages due to increasing foreclosures.

What the foreclosure drop means

Foreclosure notices in the U.S. fell 21 percent in November. According to RealtyTrac, an online clearinghouse for foreclosed properties, the month-to-month decline was the steepest ever recorded since the company began tracking foreclosure statistics in 2005. The number of homeowners cast out on the street after bank repossessions dropped even more — 28 percent from October. In a press release, RealtyTrack said foreclosures dipped below 300,000 a month for the first time since February 2009. A seasonal foreclosure drop is typical in November, but a delay in foreclosures in response to the robo-signing controversy is the main reason for the decline, which is expected to be temporary.

The robo-signing effect

Last fall the robo-signing controversy erupted when an employee at Ally Financial admitted in court to not reading foreclosure documents before he signed them. Robo-signing exposed negligent processing of foreclosure documents in a mortgage industry overwhelmed by the sheer number of foreclosures. Banks operating in states where courts are involved in foreclosure proceedings took a time out to clean up their acts. Most borrowers in foreclosure have gotten a temporary reprieve from repossession and eviction. Meanwhile, the unemployment rate rose, U.S. home values continued to fall, and banks are gearing up their foreclosure machines once again.

Foreclosures and housing values

Last week a drop in underwater mortgages recorded in the third quarter was credited to a surge in foreclosures, rather than an appreciation in U.S. home values. A foreclosure takes an underwater mortgage off the books. But some are still willing to search for a bright side. An analyst told MarketWatch that the November drop in foreclosures, albeit artificial, could help existing home sales in December and January. A reduction in inventory could start an upward trend in home prices that could result in a reduction of underwater mortgages that isn’t illusory.

Sources

CNNMoney.com

MarketWatch

Mortgageorb

New mortgage rules designed to protect consumers and prevent another financial crisis are being debated in Congress this week and being aggressively fought by lending industry lobbyists. Flickr photo.

The U.S. House and Senate will start on refining mortgage legislation Tuesday. The legislation would enforce the biggest overhaul to mortgage lending rules in decades. The mortgage legislation, part of the financial reform bill, is intended to end the risky lending practices blamed for causing the financial crisis. Mortgage industry lobbyists are working overtime to take the teeth out of provisions that would protect consumers and limit the industry’s ability to find loopholes in underwriting standards.

Mortgage rules to prevent another financial crisis

Proposed changes to mortgage lending rules include new rules for loan repayment, the ability to sue your lender for fraud or poorly underwritten mortgages, revised appraisal rules and rules about how much risk lenders must share on the loans they sell to investors. Housing Watch reports that most of these rules will affect how expensive mortgages will be and what types of mortgages will be offered by lenders. One of the key new rules mortgage industry lobbyists want to undermine requires lenders to hold a 5 percent stake in loans that are bundled and sold with other loans. Those bundles are the mortgage-backed securities that imploded and caused the financial disaster.

Will mortgage lenders behave?

With mortgage legislation that requires lenders to hold a stake, the idea is that they will act more professionally with their underwriting. When lenders sold their risk along with their loans, they were very careless and handed out many loans that were destined for default. The Wall Street Journal reports that mortgage industry lobbyists want to exempt mortgages from the 5 percent risk-retention requirement if the loans fully document a borrower’s income and assets and don’t include interest-only payments, negative amortization or balloon payments. Exempt loans would also have to cap certain mortgage-origination fees at 3 percent of the loan.

More expensive mortgages with new rules?

Banks say new mortgage lending rules about risk retention will make mortgages more expensive for consumers because banks will be required to hold more capital, a challenge for smaller lenders. But Housing Watch said consumer groups support “encouraging the market” to sell safer products. New mortgage lending rules will make more paperwork for borrowers, but they already push a lot of paper trying to get loans in today’s constricted credit markets. More diligence from banks about verifying a borrower’s income to prevent default should be good for everyone.

Protecting borrowers from predators

New mortgage lending rules also include compensation guidelines that prevent lenders from making more money by making riskier loans. This provision of the financial reform bill would bar lender-paid commissions based on the rate or type of loan. The Wall Street Journal reports that brokers say that the rule would make it harder for them to compete with banks, reduce competition and raise costs for consumers. Consumer advocates say the changes will make it easier for borrowers to shop for loans and compare prices. Barry Zigas, director of housing policy for the Consumer Federation of America told the Journal that the new provisions will shift the burden of proof “from the consumers having to protect themselves from unreasonable fees to the providers of services justifying their costs.”

Saving mortgage lenders from themselves

Other new mortgage rules that industry lobbyists are fighting include limiting the fees mortgage lenders charge if a borrower refinances the loan or pays it off early. They also don’t like the rule that requires them to prove that it is in the borrower’s best interest to finance a loan, instead of just pushing a new loan to benefit from additional fees or commissions. Finally, mortgage lenders don’t want borrowers to be able to sue them if they violate the new mortgage rules. Industry lobbyists say this would make buying mortgages too risky for investors.

Banks have suffered through the recession with huge mortgage industry defaults, but a new fear that credit cards will do the same is looming. Ken Lewis, Bank of America CEO, stated he believes that despite the government’s $700 billion rescue program, it will be “an awful year” for credit cards and companies that issue them.

It’s estimated there are almost $76 billion in credit card loans, and more than half of that debt is held by Bank of America, JPMorgan Chase and Citigroup.

The charge-off rate

Already setting the stage for disaster is the banking industry’s estimate that  their charge-off accounts have reached a historic high of 7.73 percent. Most experts anticipate that figure will increase, as the unemployment rate is still dangerously high.  This rate is commonly accepted as the most accurate indicator of future losses in the banking, mortgage and credit card industries.

Analyst Mike Taiano believes that the charge-off rate could be higher than 10 percent by year’s end. “With the economy the way it is, most consumers are still struggling. … Though there are some indicators that we are through the recession, there is still a long way to go to recover,” he said.

Bracing for the loss

Unlike the recession of the ’80s, when unemployment rates ran high also, this generation brings its own set of problems. First, new proposed legislation is set to allow consumers to request their banks reduce their mortgage debt if they have filed bankruptcy. Experts are fearful that this will cause more people to file bankruptcy so they can default on credit cards and other outstanding debts.

On the brighter side

David Robertson, publisher of the Nilson Report, stated that it’s “encouraging” that banks are adept at maneuvering recessionary periods after “years of practice.” When facing credit card losses, they know what cautionary actions to take.

For example, banks are slashing limits already and raising interest rates to bring in as much revenue as possible.  They are also working their customer service teams exceptionally hard, encouraging communication with customers. American Express is a leader in the mitigation process and recently offered their credit card holding customers a $300 cash-back return if they paid their account balances off and the closed their accounts before April.

Citibank

There is also news that Citibank is joining the ranks of a banks coming up with strategies to mitigate loss.  The company is looking to work out a joint venture for its private credit card division that serves retailers, as a way of moving out of the credit card business altogether.  However, experts say Citibank is alone in wanting to distance themselves from the credit card industry.

Most banks know they will have a difficult time attracting a completely new set of customers and would rather work hard to keep the ones they have, while easing their own risk.  Stuart Gunn, director of Bridge Strategy Group, stated: “If you want to be the retail bank of choice, it means you have to have CDs, debit cards, home equity loans and credit cards. Do you really want to exit one of the major lines of business?”