I know someone who recently sold their home. Everything was going great until four days before the closing when they got a call from their closer that there was an unsatisfied lien on the property. The homeowners were shocked. Turns out a mortgage they had in the early 1990s had not been properly recognized as closed. County records had not been updated to show the loan had been paid off in 1995. Fortunately, the homeowners had the loan origination documents, and a bank statement from 1995 showing the loan was paid off.
The bank that lent the money had been purchased by a larger bank about a decade ago. When the homeowners called, the acquiring bank referred the homeowners to a toll-free number that put them in touch with a customer service person in a town some 400 miles away. The customer service person there told the homeowners that they would need three to five business days to research the situation. But she warned that given the situation involved something that happened 15 years ago and banks are only required to keep records seven years, she was not hopeful the situation could be resolved.
The homeowners were disappointed that the bank statement from 1995 showing the loan payoff was not sufficient to satisfy the title company. They were further disappointed that the bank seemed so indifferent about resolving the problem. And the homeowners were particularly disappointed that it looked like their closing would be pushed back; it seemed there was no way they were going to get a satisfaction letter before the originally scheduled closing.
The homeowners’ realtor, however, took matters into his own hands and contacted someone else at the bank. It was a local contact who had helped the realtor on another matter a year or so ago. That bank employee was able to go to the bank’s archives and found the loan documents from the early 1990s. With the documents located, it was no problem for the bank to produce a mortgage satisfaction letter that met the title company’s requirements. The bank agreed to immediately notify the county so they could get their records up to date.
It remains unclear why the county records were out of date. Did the bank neglect to inform the county 15 years ago? Were the borrowers responsible for notifying the county? Did the county fail to record the info even after being informed? No one knows.
I share this story because there have been many, many bank acquisitions in the last one or two decades, and the acquiring bank assumes responsibility for mortgages made by the acquired bank, even mortgages that have long since closed. I wonder how many of them were not properly recorded by their respective counties? How many will show us as a problem that threatens to delay future real estate transactions? Maybe it is a minor problem in the scheme of things, but it certainly doesn’t seem minor to anyone who is planning to close on the sale or purchase of their home.
The historically low rates available on mortgages currently create an opportunity for banks. The rate on a conventional 30-year fixed-rate mortgage is 4.25 percent. That’s amazingly low, allowing people to buy more house with less money. For most people interested in moving, however, the challenge isn’t finding a house to buy, it’s selling the one they’ve got.
Unless your house is nearly perfect — no, let’s say perfect — it’s very difficult to attract the attention of buyers, particularly in urban areas. There is a lot of inventory out there and only the best homes are attracting good offers. So many homeowners who wish to move need to do remodeling or updating on their existing home. Where there is a lot of competition for homes, a seller needs to have a home with an attractive exterior, updated kitchen, good floors and window treatments, and clean walls. Any decorating remaining from the early 1990s needs to be updated.
This can cost some money, and this is where a bank might have an opportunity. A bank might consider promoting a loan product to people who need a little money to update their home so they can sell it. It’s a pretty good loan for a bank because it would be paid off when the home is sold. So most of these loans would not need to have terms any longer than a year, or perhaps two years at the most.
Home sales remain slow, but there is activity. Some people really do want to move. If they have been in their house for a decade or more, they can likely expect to pull considerable equity out of the house when they sell, so they can put 20 percent down on a new one and get an incredible rate on their next mortgage. But they might not be anticipating the level of work they need to do on their current home to assure a sale. A good marketing campaign from the local bank could educate them on this point. This would be a real service for people considering selling, while putting the bank in great position to make some new loans.
Cramdown opponents in the U.S. Senate defeated the measure earlier this year, but Michigan Congressman John Conyers revived cramdown language as an amendment to H.R. 4173, the regulatory reform bill passed recently by the House Financial Services Committee. The bill is now being considered by the full House.
Conyers’s announcement prompted an about face from ICBA, which earlier this week was urging House members to pass H.R. 4173. Following the Conyers announcement ICBA wrote to House Speaker Pelosi, saying that ICBA would withdraw its support for H.R. 4173 if the amendment were adopted. ICBA president and CEO Camden Fine said:
“It troubles me to have to write this letter. We have been working with
Chairman Frank and the Members of the Financial Services Committee to enact
legislation that would rein in the nation’s too-big-to-fail banks and finally impose effective
regulation on the shadow banks that have so badly abused consumers. It would be
unfortunate if this amendment generated by another committee forced us to withdraw
our support. Please ask the Rules Committee to not make the amendment in order.”
This City Journal article about the House bill to expand CRA suggests that many CRA loans are in effect subprime loans. Even though most CRA loans are issued at “prime” interest rates with fixed-rate repayment structures
“Approximately 50 percent of CRA loans for single-family residences were nevertheless made to borrowers who made down payments of 5 percent or less or had low credit scores–characteristics that indicated high credit risk. Whether or not anyone called these loans “subrpime,” in other words, the chances are good that many of them have defaulted or remain at high risk of doing so.”
If author Edward Pinto’s assertion leaves you wanting evidence, then you’ll sympathize with the impetus of his article: that it’s impossible to judge the contours of the home-finance crisis, or CRA’s role in it, because “not one regulator had the sense to track the performance of CRA loans…the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and other regulators appear to have no idea how trillions of dollars in CRA loans are performing now.”
Pinto, formerly the chief credit officer at Fannie Mae, says that Fannie and Freddie plus Wells Fargo, JPMorgan Chase, Citibank and Bank of America could provide performance data on a large portion of outstanding CRA loans. He says the information should be evaluated before Congress expands the law.
Community banks are definitely gaining clout. You can read in this earlier post about the carve-out the House Financial Institutions Committee is giving community banks on the consumer financial protection agency. Now, this. It seems the president is going to propose opening up TARP so that community banks have easier access to those funds. This is something community bankers have been asking for, and apparently the Administration was listening.
While I am heartened to read that U.S. Rep Keith Ellison (D-Minn.) acknowledges the difference between the nation’s largest banks and its community banks, I don’t buy into his argument that we need a CFPA, and I really don’t buy into the argument that such an agency would be a benefit to community bankers.
Here is an excerpt from Ellison’s essay:
One cause (there were many) was the failure of our system of consumer financial protection. No one was there to review transactions or protect consumers. The proposed Consumer Financial Protection Agency provides the lifeline that consumers need.
The most abusive and predatory lenders were not federally regulated. More than 50 percent of the subprime mortgage loans made in 2005 and 2006 were originated by lenders not subject to federal supervision. Mortgage brokers, finance companies and payday lenders made toxic home and consumer loans with few limits — loans with little or no documentation — commonly known as “liar loans.”
Ellison is wrong. It is illegal to lie on a loan document. It’s called loan fraud, and the FBI has jurisdiction. One of the real scandals of the financial system collapse during the last 18 months revolves around the question of why charges were not brought against mortgage lenders who encouraged borrowers to lie on mortgage applications. If I were in congress, I would not be advocating for the creation of a new federal agency, I would be calling for an investigation into the FBI to find out why it has not prosecuted more loan fraud cases and other financial crimes in connection with the mortgage crisis. Why hasn’t the FBI gone after those borrowers, those lenders, and — perhaps most importantly — the executives who encouraged their lenders to stoop to illegal practices to make predatory loans?
So Ellison and other lawmakers are wrong to say that no federal agencies had any ability to do anything that might have prevented the massive abuses that took place in the mortgage market. The FBI is a well-funded federal agency; if they fell asleep on the job, why should we have confidence that a new agency would do any better? We don’t need new tools to fix the potential for abuse in the financial services industry; we need to use the ones we have.
The National Association for Business Economists predicted a second-half growth rate of 2.9 percent, declaring “the great recession” over. The group is meeting today in St. Louis.
Other encouraging news: “The more-than-three-year downturn in the housing market is very close to coming to an end, with substantial growth (from a low base) expected for next year.”
NABE concluded: “This deep and long recession appears to be over, and with improving credit markets, the U.S. economy can return to solid growth next year without worry about rising inflation.”
Curtis Hage, chairman and CEO of Home Federal Bank in Sioux Falls, S.D., participated in a panel discussion at the National Housing Forum last week in Washington, D.C. I talked to Hage after the conference; he said everyone was talking about ways to reduce the number of home mortgage foreclosures. Various industry observers offered ideas about what should be done. See the Jan. 1 NorthWestern Financial Review for a report.
Hage commented, however, that many of the steps designed to mitigate foreclosures that have already been taken are causing problems. For example, he said that efforts to reduce fraud in loan applications are likely to substantially slow the mortgage approval process.
He said new rules have been implemented which require a borrower to present a Social Security card. “Most people don’t carry their Social Security card with them, and many don’t know where their card is,” Hage said. In those cases, the lender gets a waiver from the borrower allowing the lender to get a copy directly from the Social Security Administration.
“My concern is, I don’t know if anyone bothered to call Social Security,” Hage said. “I don’t know if they have people to support that, or is it going to take us months to get turn-around from the Social Security Administration?”
Hage said he has similar concerns about a new requirement to match an applicant’s tax return with returns actually filed with the IRS. Mortgage lenders are now required to obtain copies of tax returns from the IRS in order to verify information presented by borrowers seeking stated-income loans.
“I don’t know if anyone called IRS to tell them they may be getting thousands of calls asking for copies of tax returns. Are you staffed up and ready to do that? Our other experiences with the Social Security Administration and the IRS is they respond in their own sweet time. Sometimes that is months — if not years — apart from the time you start asking for stuff and the time you get it,” Hage said.
“You could have people standing in line at a title company for 6, 8 12 months to get information from Social Security and/or the IRS.”
