Mortgage Industry Panics Over Obscure Provision in Senate Tax Bill

November 29, 2017 | Bloomberg            The mortgage industry is panicking over a provision in the Senate tax bill that some analysts and trade groups say may drive small lenders out of the business.

The Mortgage Bankers Association and other bank and mortgage trade groups scrambled over Thanksgiving weekend after staff members discovered a provision in the bill that would change the time at which lenders pay taxes on the streams of income they earn from managing borrowers’ mortgages.

That change could cost banks tens of billions of dollars as the value of those income streams drops. The reduction would be enough to drive smaller lenders and non-bank lenders to either exit the mortgage market altogether or restructure their businesses, said MBA president David Stevens.

“It’s a fire drill,” Stevens said. “We’re scrambling to get people on phone calls. It would cause a significant disruption in the industry.”

It’s unclear whether Senate tax writers intentionally targeted lenders -- or whether they intend to leave the provision in place. The episode may reflect the unusual speed with which the Senate is trying to approve legislation that was introduced in written form only nine days ago. Senate leaders plan to vote on the bill Thursday or Friday.

“As Congress continues to debate the Senate’s tax reform plan that was reported out of the Finance Committee, Chairman Hatch will work with members to make the appropriate policy decisions to help deliver a comprehensive tax overhaul that will grow the economy, boost job creation, and increase paychecks for the American people,” Julia Lawless, a Senate Finance Committee spokeswoman, said in an email.

For lenders, the issue surrounds a central way they make money. When a borrower takes out a loan, lenders often sell that loan to government-backed companies, while keeping the right to collect borrower payments and manage the loan. Those so-called mortgage servicing rights are a valuable asset, and lenders often sell them to each other or to outside investors such as hedge funds when they want cash.  Read more here.

Should Texas loosen lending laws that shielded the state from foreclosures?

Banks and realtors want to make more money on home equity loans.

Houston Chronicle | August 7, 2017        Twenty years ago, Texas became the last state in the union to legalize the home equity loan, allowing people for the first time to use their own homes as collateral. But lawmakers also kept tight restrictions on the loans, which saved Texans from the excesses that contributed to a housing bust that nearly brought down global economy.

Across the country, homeowners borrowed against the value of their properties to supplement their incomes as a bubble grew, piling on debt that became unsustainable when the market tanked. Texas' limits on home equity loans were widely credited with saving the state from the worst of the foreclosure crisis.

Now, a coalition of lenders and realtors is trying to loosen the rules on those loans in ways that homeowner advocates say could get borrowers in trouble.

"It's a wolf in sheep's clothing," says Charlie Duncan, a fair housing planner at the advocacy non-profit Texas Low-Income Housing Information Service. "Make no mistake, more families will lose their homes because of the irresponsible lending this amendment will allow."

The proposed changes will be on the ballot this fall as a constitutional amendment, having passed unanimously through both houses of the Legislature. (The section of the Texas Constitution that deals with home equity loans is the longest in the entire document, spelling out all terms and regulations rather than leaving them to statute, because of Texas' historic emphasis on property rights.)

In the ballot language, the changes seem innocuous, but may carry risk.

One provision would expand the list of entities able to make home equity loans from primarily banks to savings and loan companies, mortgage bankers, subsidiaries of banks and credit unions.

Another provision lowers the cap on fees that lenders can charge homeowners from 3 percent of the loan to 2 percent. But the change would likely would increase the amount borrowers end up paying by shifting most of the large expenses in closing costs — surveys, appraisals, and title insurance — outside the cap. In that way, the fees paid by homeowners could rise to 4 to 5 percent of the loan, according to Chip Lane, a Houston attorney who represents homeowners in foreclosure cases.

Banks say the change is necessary to make it worth it for them to do smaller loans. Their profits took a hit in 2013, when the Texas Supreme Court overturned interpretations by the Texas Finance Commission that allowed lenders to add expenses on top of the 3 percent cap.

State-chartered banks how hold about $6.6 billion in home equity loans, which is down significantly since 2009. (That doesn't include loans made by national banks, which don't have to break out that loan category by state.) 

"There was a hesitance on the part of lenders to make smaller home equity loans," says Steve Scurlock, executive vice president of the Independent Bankers Association of Texas. "What we tried to do is get the banks back in the game, and get those homeowners who may not have a $2 million home to have an ability if they needed to borrow $20,000 or $30,000 a bit more opportunity to do it."

But Robert Doggett, a lawyer who has represented homeowners for decades and led the litigation that resulted in the 2013 Supreme Court decision, says the change would make these loans more expensive, and prompt lenders to pressure homeowners into taking out loans they don't need.

"Lender fees are not about simply bilking homeowners out of money," Doggett says. "Up-front fees are very dangerous because they incentivize bad loans, they give loan officers and bad originators a reason to make up stuff so the loan is approved." 

Banks shouldn't need to make money on up front fees, Doggett says, because interest on the loan generates a steady income, as long as lenders keep them on the books. Many lenders instead sell those loans, reducing their incentive to make sure the loan is sound in the first place — especially if they've already been paid well at closing.  

Advocates are also alarmed by a provision that would allow homeowners to convert their home equity loans into regular mortgage loans, which have lower interest rates, but fewer protections.

In order to foreclose on a home equity loan, a lender must get a ruling from a judge, and can't go after a homeowner's other assets if the value of the property doesn't cover the amount owed. Lenders can foreclose on regular mortgage loans more quickly and easily, and can claim the borrower's other assets if necessary in order to be paid back in full.

When it originally helped negotiate the legalization of home equity loans back in 1997, the Texas Association of Realtors had insisted that home equity loans should always have a thicker layer of protections, because a rash of foreclosures could be bad for the entire market. This year, they joined lender groups to allow homeowners to convert their home equity loans into regular mortgage loans.

"In order to have that protection, you pay a premium," says Daniel Gonzalez, legislative director for the Realtors' association. "We want to make sure we're not standing in the way of homeowners getting lower interest rates. What this amendment will do is simply give folks an option."

But advocates worry that sometimes people under financial stress will choose to convert their home equity into conventional loans loans for lower interest rates, and not  realize that they could more easily lose their properties if they fell behind on payments.

"If you're a regular homeowner in Texas, you're not going to know that you've got all these protections with a home equity loan," says Lane, who testified against the amendment in committee. "If they come along and say 'I can save you $200 on your monthly mortgage payment,' you're going to do it."  

One important part of the law, limiting the amount of the loan to 80 percent of the value of the home, will stay put. 

Along with the Realtors and community banks, the amendment is supported byJPMorgan Chase, Wells Fargo, the Texas Credit Union Association, the the Texas Land Title Association, the Texas Farm Bureau and Texas Mortgage Bankers Association.

Several of those organizations have been top donors  to  state Sen. Kelly Hancock, a Fort Worth Republican and chairman of the Senate Business and Commerce Committee, and state Rep. Tan Parker, R-Flower Mound,  chairman of the House Investments and Financial Services Committee. They were the lead sponsors of the bills underlying the constitutional amendment.

Hancock declined to comment. Parker said the Legislature approved the bill "as as a result of Texans sharing their challenges concerning the current home equity law" with him an his colleagues.

Correction: An earlier version of the story included data that reflected only home equity loans issued by lenders regulated by the Office of the Consumer Credit Commissioner. The story has been updated to include data from state-chartered banks. 

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Wells Fargo Says 3.5 million Accounts Involved in Scandal

AP via Houston Chronicle | August 31, 2017           The scope of Wells Fargo's fake accounts scandal grew significantly on Thursday, with the bank now saying that 3.5 million accounts were potentially opened without customers' permission between 2009 and 2016.

That's up from 2.1 million accounts that the bank had cited in September 2016, when it acknowledged that employees under pressure to meet aggressive sales targets had opened accounts that customers might not have even been aware existed. People may have had different kinds of accounts in their names, so the number of customers affected may differ from the account total.

Wells Fargo said Thursday that about half a million of the newly discovered accounts were missed during the original review, which covered the years 2011 to 2015.  Read more here.

Mortgage Lender PHH Agrees to Pay $74 Million Settlement

Associated Press via Houston Chronicle | August 11, 2017              MINNEAPOLIS - Federal prosecutors in Minnesota say PHH Corp. and two subsidiaries have agreed to pay over $74 million to settle allegations they violated standards for underwriting government-backed mortgages.

Acting U.S. Attorney for Minnesota Gregory Brooker said Tuesday that Mount Laurel, N.J.-based PHH submitted defective loans for government insurance, and that homeowners and taxpayers paid the price.

The government said it incurred "substantial losses" in paying insurance claims on Federal Housing Administration loans. About $9 million will go to a whistleblower who formerly worked for PHH.

PHH says it settled without admitting liability to avoid the distraction and expense of litigation.  Article here.

Wells Fargo Hit With Class-Action Lawsuit Over Auto Insurance Charges

Los Angeles Times | July 31, 2017          Wells Fargo & Co., which is still settling class-action lawsuits over its fake-accounts scandal, has now been hit with yet another — related to the bank’s revelation last week that it charged auto loan customers for unnecessary insurance.

An Indiana man who says he was charged $598 for auto coverage despite repeatedly asking Wells Fargo to rescind the charges is the lead plaintiff in the case, which accuses the San Francisco bank of scheming with National General Insurance Co. to “bilk millions of dollars from unsuspecting customers.”

The lawsuit, filed Sunday in U.S. District Court in San Francisco, does not name the insurance carrier as a defendant. It is seeking class-action status.

Last week, the bank acknowledged that an internal probe spurred by customer complaints found that, between 2012 and 2017, about 570,000 borrowers may have been wrongly pushed into auto-insurance policies despite having their own coverage.  Read more here.

How to Protect Yourself From Unauthorized Mortgage Modifications

It’s important to review any mortgage statements or documents you receive. Changes outside of what you originally agreed to should be considered red flags.

 

The Seattle Times | July 9, 2017        The company that holds your mortgage isn’t supposed to extend your loan or alter your monthly payments if you don’t agree to it beforehand. But recent lawsuits argue Wells Fargo changed the terms of home loans held by customers in bankruptcy without their consent.

Wells Fargo allegedly attached loan-modification letters to payment-change notices, forms routinely filed in Chapter 13 bankruptcy cases to authorize preapproved adjustments. Without following the proper procedures, the bank allegedly lowered monthly payments and extended loan terms by years, potentially costing borrowers thousands of dollars in interest.

It’s unclear how many of the unauthorized loan changes Wells Fargo is alleged to have made (the company has denied wrongdoing), but if you’ve filed for bankruptcy, pay attention to what’s happening to your mortgage, especially if you live in a jurisdiction that allows a trustee to make payments on your behalf.

“Even though the consumer might be in a bankruptcy, they should not ignore any written notices that they get from their mortgage servicer,” says John Rao, a bankruptcy expert and attorney with the National Consumer Law Center. “If there’s anything in it that suggests that there’s a payment change or something, you know, they probably want to contact their attorney and just make sure that this is correct.”  Read more here.

New Wells Fargo Scandal Over Modifying Mortgages Without Authorization

CNN | June 15, 2017          Christopher and Allison Cotton had 16 years remaining on their mortgage when family medical expenses forced them into bankruptcy in 2014.

Wells Fargo went ahead and modified the North Carolina couple's mortgage several times without their authorization, according to a class action lawsuit. The bank extended the term of the mortgage by nearly 26 years, documents say.

If the "stealth" modifications hadn't been caught, the Cotton family's total interest payments would have nearly tripled to more than $140,000, the lawsuit said.

"I anticipate Wells Fargo has done this to thousands of customers," said Theodore Bartholow III, a lawyer who represents the Cottons and last week launched the class action.

News of the latest legal trouble facing Wells Fargo (WFC) was first reported by The New York Times. It comes as Wells Fargo continues to dig out of a scandal over unauthorized account openings and alleged worker retaliation.

Bartholow described an "insidious" process where Wells Fargo uses a routine, but little-noticed form to "sneak through" mortgage modifications on unsuspecting homeowners.  Read more here.

Bank Forecloses on 'Extreme Makeover' Homeowner

USA Today | May 26, 2017         HOLT, Mich. — Nearly nine years after her home was rebuilt on national television, Arlene Nickless must turn in her keys.

Designers with ABC’s Extreme Makeover: Home Edition — with the help of hundreds of volunteers — built her family's home in 2008 following the death of Tim Nickless, her husband of 18 years. But Arlene Nickless has been struggling to manage the mortgage for years and must leave by Monday.

The home was foreclosed on in September and has been up for auction online for weeks.

This past Sunday, cardboard boxes were stacked on the dark hardwood floors once showcased in nationwide broadcasts. The 2009 Ford Flex given with the home sat in the driveway hooked to a moving trailer.

And the overwhelming feeling a tearful Arlene Nickless had all those years ago took on a different tenor.

“When I stepped out of the house the day Extreme Makeover came, you will see me say ‘I can’t believe this is happening,’ ” she said. “And, truthfully, that’s what I feel right now: I can’t believe this is happening.”

Arlene Nickless is quick to defend the ABC show, whose lavish rebuilds have in some cases led to foreclosure because of increased property taxes and pricey utilities. She's less complimentary of her mortgage servicer that state regulators now are targeting.

Her home’s foreclosure resulted from an ongoing struggle to manage the property’s pre-makeover mortgage — a balance that rested at about $30,000 after the 2008 makeover, but had ballooned to at least $113,000 by the end of 2016, she said.  Read more here.

The Shame of the Mortgage-Interest Deduction

It’s not just a failure of housing policy. It's a symbol of everything that’s wrong with the American tax code.

 

The Atlantic | May 14, 2017        It might be one of the most important policies in the U.S. economy, but the mortgage-interest deduction sounds esoteric to most people. Perhaps that’s because, for most people, it’s completely irrelevant.

Although about two-thirds of American households own a home, only one-quarter of them claim the deduction, which sometimes gets abbreviated to MID. As Matthew Desmond, a sociologist at Harvard University, explains in a magisterial essay on the MID in the New York Times Magazine, this little fact has played an outsized role in the United States’ yawning wealth inequality.

Federal housing policy transfers lots of money to rich homeowners, a bit less to middle-class homeowners, and practically nothing to poor renters. Half of all poor American families who rent spend more than 50 percent of their income on housing costs. In May, rental income as a share of GDP hit an all-time high. Meanwhile, in 2015, the federal government spent $71 billion on the MID, and households earning more than $100,000 receive almost 90 percent of the benefits. Since the value of the deduction rises as the cost of one’s mortgage increases, the policy essentially pays upper-middle-class and rich households to buy larger and more expensive homes. At the same time, because national housing policy’s benefits don’t accumulate as much to renters, it makes it harder for poor renters to join the class of homeowners.  Read more here.

Supreme Court Says Cities Can Sue Banks Over Predatory Loans

USA Today | May 1, 2017       The Supreme Court ruled Monday that cities can sue banks for discriminatory mortgage lending practices, but they must prove that predatory loans led to damages such as lost tax revenue and higher spending on municipal services.

The decision was a partial victory both for Miami, which sought standing to sue banks under the Fair Housing Act, and for Bank of America and Wells Fargo, which argued that the city's damages were too many steps removed from the original loans. The dispute now returns to lower courts for further action.

The 5-3 ruling was written by Justice Stephen Breyer and backed by the court's liberal justices and Chief Justice John Roberts. Three justices — Clarence Thomas, Anthony Kennedy and Samuel Alito — argued that the city had no right to sue under the landmark 1968 civil rights law in the first place. Newly confirmed Justice Neil Gorsuch did not take part in the decision.  Read more here.