Another Federal Reserve official is speaking out against Too Big to Fail policies.
Esther George, president of the Kansas City Fed, believes regulators including the Federal Reserve did not fully take advantage of rules that could have helped them curb risky banking practices leading up to the financial crisis.
"During the recent crisis, we had a number of powers that might have been used on Too Big to Fail institutions, but were not employed to any notable extent," George said at the Levy Economics Institute's Hyman P. Minsky Conference in New York, Wednesday.
"The most critical issue in addressing Too Big to Fail concerns is having policymakers with the resolve to follow through," she added.
For example, regulators should have been enforcing rules that give banks only 180 days to clean up their act, if they're not well capitalized or well managed, she said.
That provision, from the Gramm-Leach-Bliley Act of 1999, gives the Fed the ability to force financial holding companies to divest or terminate financial activities, if it finds a bank is engaging in activities deemed not "safe and sound," and fails to enact changes within 180 days.
George also voiced her support for the Volcker Rule, which eliminates proprietary trading by banks and thrifts, and said she supports higher capital requirements phased in sooner rather than later.
Other regional Fed banks have also advocated for the end of the Too Big to Fail era. Last month, the Dallas Fed called for breaking up the nation's largest banks into smaller units.
Their report found that the five biggest American banks control 52% of all banking assets in the United States.
Source: Annalyn Censky CNNMoney
Friday, April 13, 2012
Court approves $26 billion foreclosure settlement
A federal judge approved the $26 billion settlement deal reached between the nation's five largest mortgage lenders and the attorneys general of 49 states and the District of Columbia over foreclosure processing abuses.
Judge Rosemary Collyer in the U.S. District Court for the District of Columbia approved consent judgments with Bank of America (BAC, Fortune 500), Citibank (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), and Ally Financial (the former GMAC) late Thursday.
The approval clears the way for the banks to compensate homeowners who may have been impacted by the so-called robo-signing scandal, in which bank employees signed hundreds of documents a day attesting to facts that they had little or no knowledge of.
Under the settlement, the banks committed at least $17 billion toward modifying mortgages for delinquent borrowers. The modifications will include large principal reductions of as much as $100,000 or more for roughly one million homeowners who are underwater on their mortgages and behind on payments.
Another $3 billion or more will go toward refinancing mortgages for borrowers who are current on their payments. This is supposed to help some 750,000 borrowers take advantage of historic low interest rates.
The banks will also pay $5 billion in fines to the states and the federal government, the only hard money involved in the deal. Out of that fund will come payments of $1,500 to $2,000 to homeowners who lost their homes to foreclosure. Those payments will total $1.5 billion, according to the consent agreement. Other funds will be paid to legal aid and homeowner advocacy organizations to help individuals facing foreclosure or experiencing servicer abuses.
The judge's approval capped more than a year of hard negotiations between the banks and the states attorneys general as well as the U.S. Department of Housing and Urban Development, said Amy Bonitatibus, a spokeswoman for Chase.
"The settlement includes far-reaching relief that will help many of our customers and complement our already extensive efforts to improve our borrower assistance efforts and servicing processes," she said.
As a result of the settlement, banks will get immunity from future claims by the state governments as long as they abide by the terms of the settlement, although homeowners may still pursue individual claims. The states can also press criminal charges, if they're merited.
Only one state attorney general, Oklahoma's E. Scott Pruitt, declined to participate in the agreement. The state reached a separate $18.6 million settlement with the five lenders in early February.
The banks have also agreed to adhere to a strict standard of foreclosure processing, one that does not allow for robo-signing and other abusive practices.
Now that the settlement has been approved, the banks are now free to identify and reach out to delinquent borrowers to offer them more affordable mortgage terms. Bank of America has already compiled a list of 200,000 potential beneficiaries of its principal reduction modifications.
Chase said it is currently reviewing anyone who applied for a mortgage modification to see if the borrower qualifies under the settlement.
"We have been taking calls from customers since March 1 for this program," said Mark Rodgers, a Citibank spokesman. "We have already moved a few hundred cases into the pipeline."
Wells Fargo began accepting applications on March 1, and will start to reach out to customers by mail in a matter of days, according to spokeswoman Vickee Adams.
Ally Financial didn't immediately return calls seeking comment.
When the settlement was first announced, it triggered a flow of both optimism and outrage among mortgage borrowers.
The terms of the settlement will only apply to certain borrowers who have mortgages held by the five major lenders. Borrowers who have a mortgage held by Fannie Mae (FNMA, Fortune 500) or Freddie Mac (FRE) -- roughly half the market -- are out of luck, however. Loans insured by the Federal Housing Administration are also ineligible.
For Hector Ibarra, who lives in the ground zero for foreclosures, Las Vegas, the news is a devastating. Ibarra owes $137,000 on his townhouse, which is now worth less than $40,000 in today's market, but because his mortgage is owned by Freddie Mac he doesn't qualify for a principal reduction or modification under the settlement deal.
Source: Les Christie @CNNMoney
Judge Rosemary Collyer in the U.S. District Court for the District of Columbia approved consent judgments with Bank of America (BAC, Fortune 500), Citibank (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), and Ally Financial (the former GMAC) late Thursday.
The approval clears the way for the banks to compensate homeowners who may have been impacted by the so-called robo-signing scandal, in which bank employees signed hundreds of documents a day attesting to facts that they had little or no knowledge of.
Under the settlement, the banks committed at least $17 billion toward modifying mortgages for delinquent borrowers. The modifications will include large principal reductions of as much as $100,000 or more for roughly one million homeowners who are underwater on their mortgages and behind on payments.
Another $3 billion or more will go toward refinancing mortgages for borrowers who are current on their payments. This is supposed to help some 750,000 borrowers take advantage of historic low interest rates.
The banks will also pay $5 billion in fines to the states and the federal government, the only hard money involved in the deal. Out of that fund will come payments of $1,500 to $2,000 to homeowners who lost their homes to foreclosure. Those payments will total $1.5 billion, according to the consent agreement. Other funds will be paid to legal aid and homeowner advocacy organizations to help individuals facing foreclosure or experiencing servicer abuses.
The judge's approval capped more than a year of hard negotiations between the banks and the states attorneys general as well as the U.S. Department of Housing and Urban Development, said Amy Bonitatibus, a spokeswoman for Chase.
"The settlement includes far-reaching relief that will help many of our customers and complement our already extensive efforts to improve our borrower assistance efforts and servicing processes," she said.
As a result of the settlement, banks will get immunity from future claims by the state governments as long as they abide by the terms of the settlement, although homeowners may still pursue individual claims. The states can also press criminal charges, if they're merited.
Only one state attorney general, Oklahoma's E. Scott Pruitt, declined to participate in the agreement. The state reached a separate $18.6 million settlement with the five lenders in early February.
The banks have also agreed to adhere to a strict standard of foreclosure processing, one that does not allow for robo-signing and other abusive practices.
Now that the settlement has been approved, the banks are now free to identify and reach out to delinquent borrowers to offer them more affordable mortgage terms. Bank of America has already compiled a list of 200,000 potential beneficiaries of its principal reduction modifications.
Chase said it is currently reviewing anyone who applied for a mortgage modification to see if the borrower qualifies under the settlement.
"We have been taking calls from customers since March 1 for this program," said Mark Rodgers, a Citibank spokesman. "We have already moved a few hundred cases into the pipeline."
Wells Fargo began accepting applications on March 1, and will start to reach out to customers by mail in a matter of days, according to spokeswoman Vickee Adams.
Ally Financial didn't immediately return calls seeking comment.
When the settlement was first announced, it triggered a flow of both optimism and outrage among mortgage borrowers.
The terms of the settlement will only apply to certain borrowers who have mortgages held by the five major lenders. Borrowers who have a mortgage held by Fannie Mae (FNMA, Fortune 500) or Freddie Mac (FRE) -- roughly half the market -- are out of luck, however. Loans insured by the Federal Housing Administration are also ineligible.
For Hector Ibarra, who lives in the ground zero for foreclosures, Las Vegas, the news is a devastating. Ibarra owes $137,000 on his townhouse, which is now worth less than $40,000 in today's market, but because his mortgage is owned by Freddie Mac he doesn't qualify for a principal reduction or modification under the settlement deal.
Source: Les Christie @CNNMoney
Does mortgage principal reduction work?
The world will only have to wait a few more weeks to find out whether Fannie Mae and Freddie Mac will allow principal reductions on mortgages they back.
The Federal Housing Finance Agency will decide this month whether Fannie and Freddie should allow write downs on the balances of borrowers who owe more than their homes are worth, said Ed DeMarco, acting director for the agency.
Fannie and Freddie have been at the center of a tug-of-war over fixing the housing market. They have long resisted calls to write down the balances on the loans in their portfolio, saying it would be too costly for taxpayers.
But the pressure has been building, especially in the wake of the $26 billion mortgage settlement that will reduce principal for 1 million borrowers whose loans aren't backed by Fannie and Freddie.
The agency, which regulates the government-controlled companies, had decided against allowing principal reduction after internal studies showed that alternatives such as adjusting monthly payments or forbearing principal were more cost effective.
DeMarco has said his agency is charged with protecting taxpayers' interests, and principal reduction would amount to an expensive taxpayer bailout of troubled homeowners.
Since then, however, the Obama administration has sweetened the pot. It tripled the incentives it will pay to Fannie and Freddie for reducing principal under the Home Affordable Mortgage Program, or HAMP. This has prompted the agency and the companies to redo their analysis.
But will it even matter if Fannie and Freddie start allowing principal reduction?
How many are eligible?
Together, Fannie and Freddie have about 3 million loans that are seriously underwater, according to company filings. But three-quarters of these homeowners are current on their payments and may not qualify.
"These borrowers are demonstrating a continued willingness to meet their mortgage obligations," said DeMarco in a recent speech. "This should be recognized and encouraged, not dampened with incentives for people to not continue paying."
In the end, the number of eligible underwater Fannie and Freddie loans could range from a few hundred thousand up to 750,000, according to estimates. That's not that much considering there are 11 million underwater borrowers in the U.S., just over a quarter of whom are behind in their payments.
Is it effective?
"The scheme would still be a useful way to tackle the foreclosure problem," said Paul Diggle, property economist at Capital Economics. "And it certainly wouldn't do any harm to the housing recovery."
But experts still fear that allowing principal reduction will open a new wave of strategic defaults, where homeowners decide to stop paying their mortgages in order to benefit from modification programs. This so-called moral hazard has been one of the main concerns that has kept principal reductions at bay.
"Principal reduction will prevent more foreclosures for some borrowers who are delinquent," said Susan Wachter, real estate professor at the University of Pennsylvania's Wharton School. "But there is a potential for it to undermine borrowers' incentive to keep current on their mortgages."
How much will it cost?
Though part of that would be covered by the Obama administration, it's still ultimately taxpayer money whether it comes from HAMP or from the open line of bailouts Treasury provides to Fannie and Freddie.
Not everyone is convinced that the benefits are worth the price.
"The question is at what cost will it have an effect?" said Ted Gayer, co-director of economic studies at the Brookings Institution.
Source: Tami Luhby @CNNMoney
The Federal Housing Finance Agency will decide this month whether Fannie and Freddie should allow write downs on the balances of borrowers who owe more than their homes are worth, said Ed DeMarco, acting director for the agency.
Fannie and Freddie have been at the center of a tug-of-war over fixing the housing market. They have long resisted calls to write down the balances on the loans in their portfolio, saying it would be too costly for taxpayers.
But the pressure has been building, especially in the wake of the $26 billion mortgage settlement that will reduce principal for 1 million borrowers whose loans aren't backed by Fannie and Freddie.
The agency, which regulates the government-controlled companies, had decided against allowing principal reduction after internal studies showed that alternatives such as adjusting monthly payments or forbearing principal were more cost effective.
DeMarco has said his agency is charged with protecting taxpayers' interests, and principal reduction would amount to an expensive taxpayer bailout of troubled homeowners.
Since then, however, the Obama administration has sweetened the pot. It tripled the incentives it will pay to Fannie and Freddie for reducing principal under the Home Affordable Mortgage Program, or HAMP. This has prompted the agency and the companies to redo their analysis.
But will it even matter if Fannie and Freddie start allowing principal reduction?
How many are eligible?
Together, Fannie and Freddie have about 3 million loans that are seriously underwater, according to company filings. But three-quarters of these homeowners are current on their payments and may not qualify.
"These borrowers are demonstrating a continued willingness to meet their mortgage obligations," said DeMarco in a recent speech. "This should be recognized and encouraged, not dampened with incentives for people to not continue paying."
In the end, the number of eligible underwater Fannie and Freddie loans could range from a few hundred thousand up to 750,000, according to estimates. That's not that much considering there are 11 million underwater borrowers in the U.S., just over a quarter of whom are behind in their payments.
Is it effective?
"The scheme would still be a useful way to tackle the foreclosure problem," said Paul Diggle, property economist at Capital Economics. "And it certainly wouldn't do any harm to the housing recovery."
But experts still fear that allowing principal reduction will open a new wave of strategic defaults, where homeowners decide to stop paying their mortgages in order to benefit from modification programs. This so-called moral hazard has been one of the main concerns that has kept principal reductions at bay.
"Principal reduction will prevent more foreclosures for some borrowers who are delinquent," said Susan Wachter, real estate professor at the University of Pennsylvania's Wharton School. "But there is a potential for it to undermine borrowers' incentive to keep current on their mortgages."
How much will it cost?
Though part of that would be covered by the Obama administration, it's still ultimately taxpayer money whether it comes from HAMP or from the open line of bailouts Treasury provides to Fannie and Freddie.
Not everyone is convinced that the benefits are worth the price.
"The question is at what cost will it have an effect?" said Ted Gayer, co-director of economic studies at the Brookings Institution.
Source: Tami Luhby @CNNMoney
Housing: The one bailout America could really use
Laurie Goodman is an apolitical number cruncher who has spent most of her 28-year career out of the public view, studying the minutiae of mortgage-backed securities (MBS) for big investment banks. She's long been a star among Wall Street insiders, however. She holds the record for the most top rankings for fixed-in-come research from the trade bible Institutional Investor.
While Goodman concedes she underestimated the impact of the housing bubble's bursting early on, by mid-2007 she was warning investors to prepare for a deep downturn. She prepared herself as well
After her employer at the time, UBS, shut down its mortgage trading desk in 2008, she jumped to Amherst Securities, a small company that serves as an MBS broker-dealer for big investors. From there she's published research that has raised her profile and made her an oft-cited source by would-be housing reformers in both the private and public sectors. If she is underestimating the problems the housing market has now, we're all in trouble.
Goodman often pauses several seconds before speaking, choosing her words deliberately. So it is especially distressing to hear her warn of a potential housing "death spiral."
On top of the 2.5 million homes that have already fallen to foreclosure since the bubble burst, another 4.5 million mortgage holders have given up paying and are likely to lose their homes, she calculates.
Source: Kim Clark CNNMoney
While Goodman concedes she underestimated the impact of the housing bubble's bursting early on, by mid-2007 she was warning investors to prepare for a deep downturn. She prepared herself as well
After her employer at the time, UBS, shut down its mortgage trading desk in 2008, she jumped to Amherst Securities, a small company that serves as an MBS broker-dealer for big investors. From there she's published research that has raised her profile and made her an oft-cited source by would-be housing reformers in both the private and public sectors. If she is underestimating the problems the housing market has now, we're all in trouble.
Goodman often pauses several seconds before speaking, choosing her words deliberately. So it is especially distressing to hear her warn of a potential housing "death spiral."
On top of the 2.5 million homes that have already fallen to foreclosure since the bubble burst, another 4.5 million mortgage holders have given up paying and are likely to lose their homes, she calculates.
Source: Kim Clark CNNMoney
Craziest tax deductions
Call it extreme communication. One taxpayer was so distrustful of technology that he wouldn't use a telephone or computer.
That posed a problem when it came to communicating with his business partner, who lived across town in Phoenix. So he came up with a plan: carrier pigeons.
The two now send messages to each other via the birds. And the technophobe thought it made sense to write off the pigeons, as well as their care, food and housing as a business expense.
Shauna Wekherlien, the CPA at Tax Goddess Business Services who prepared his return, said she asked him a lot of questions (like whether he has ever owned a computer) to establish whether he had ever used technology to communicate with people in the past.
He said he hadn't so she determined that the deduction was fair game, given that it was the only way he could reach his business partner
Source: CNNMoney
That posed a problem when it came to communicating with his business partner, who lived across town in Phoenix. So he came up with a plan: carrier pigeons.
The two now send messages to each other via the birds. And the technophobe thought it made sense to write off the pigeons, as well as their care, food and housing as a business expense.
Shauna Wekherlien, the CPA at Tax Goddess Business Services who prepared his return, said she asked him a lot of questions (like whether he has ever owned a computer) to establish whether he had ever used technology to communicate with people in the past.
He said he hadn't so she determined that the deduction was fair game, given that it was the only way he could reach his business partner
Source: CNNMoney
Don't overlook this $6,000 tax credit
Many of the people who could use a little extra money the most are missing out on a tax credit worth up to nearly $6,000.
Aimed at helping the working poor, the Earned Income Tax Credit lifts millions of Americans out of poverty each year, yet one in five taxpayers eligible for the credit doesn't end up claiming this extra windfall.
That's a big loss, because the credit is one of the largest the IRS provides. The Tax Policy Center has found that it is the second largest cash assistance program for low-income families in the country -- after the government's food stamp program, which doled out nearly $72 billion in benefits last year.
By claiming the EITC, nearly 27 million taxpayers received about $59.5 billion from the credit in 2011, with refunds averaging $2,240, according to the IRS.
These payments helped an estimated 6.3 million people escape poverty in 2010, according to the most recent data from the Center on Budget and Policy Priorities. About half of those people were children. The government defines the poverty threshold as having an annual income of under about $11,000 for an individual and about $22,000 for a family of four.
"For people earning minimum wage, having enough money to get by can be really problematic," said Michael Saltsman, a research fellow at the Employment Policy Institute. "This credit is not only reducing poverty, but stimulating employment, so there's definitely an increased effort on the part of the government to let people know it's out there."
How it works: Since the EITC is refundable, claiming it lowers the total amount of taxes owed and can result in a refund if the amount of the credit exceeds the tax liability. This essentially allows low-income earners to hold on to more of the money they earned during the year instead of forcing them to give it all back to the government in the form of taxes, said Saltsman.
To claim the credit, the taxpayer must have a job and their income must fall under certain thresholds. The credit amount increases with the number of children claimed as dependents. For the 2011 tax year, single filers earning $13,660 or less who have no children are eligible for credits of up to $464, while married filers with income of less than $49,078 and single filers reporting income of under $43,998 who have three or more qualifying children are eligible for credits of up to $5,751.
Source: Blake Ellis @CNNMoney
Aimed at helping the working poor, the Earned Income Tax Credit lifts millions of Americans out of poverty each year, yet one in five taxpayers eligible for the credit doesn't end up claiming this extra windfall.
That's a big loss, because the credit is one of the largest the IRS provides. The Tax Policy Center has found that it is the second largest cash assistance program for low-income families in the country -- after the government's food stamp program, which doled out nearly $72 billion in benefits last year.
By claiming the EITC, nearly 27 million taxpayers received about $59.5 billion from the credit in 2011, with refunds averaging $2,240, according to the IRS.
These payments helped an estimated 6.3 million people escape poverty in 2010, according to the most recent data from the Center on Budget and Policy Priorities. About half of those people were children. The government defines the poverty threshold as having an annual income of under about $11,000 for an individual and about $22,000 for a family of four.
"For people earning minimum wage, having enough money to get by can be really problematic," said Michael Saltsman, a research fellow at the Employment Policy Institute. "This credit is not only reducing poverty, but stimulating employment, so there's definitely an increased effort on the part of the government to let people know it's out there."
How it works: Since the EITC is refundable, claiming it lowers the total amount of taxes owed and can result in a refund if the amount of the credit exceeds the tax liability. This essentially allows low-income earners to hold on to more of the money they earned during the year instead of forcing them to give it all back to the government in the form of taxes, said Saltsman.
To claim the credit, the taxpayer must have a job and their income must fall under certain thresholds. The credit amount increases with the number of children claimed as dependents. For the 2011 tax year, single filers earning $13,660 or less who have no children are eligible for credits of up to $464, while married filers with income of less than $49,078 and single filers reporting income of under $43,998 who have three or more qualifying children are eligible for credits of up to $5,751.
Source: Blake Ellis @CNNMoney
Bush tax cuts: The real endgame
Congress has a way of waiting to the very last minute to resolve big issues, so December is usually a busy month on Capitol Hill. This year will be no exception. But next year? Next year will be no exception on steroids.
This December, for example, lawmakers will have to decide, among other things, whether to extend the payroll tax cut, long-term unemployment benefits, the Medicare "doc fix," Alternative Minimum Tax relief and a bevy of business tax breaks.
But that list -- worth less than $1 trillion -- will pale in comparison to the $5 trillion of fiscal decisions likely to be left for a lame-duck Congress during the seven weeks between the Nov. 6 election and New Year's Eve.
The biggest items on the agenda? The expiration of the Bush tax cuts and the impending enactment of the automatic spending cuts that many want to replace.
Coloring these decisions, of course, will be two unpredictable factors: The state of the economy and who wins control of the House, the Senate and, of course, the White House.
And the decisions Congress makes this year about whether to extend various expiring provisions may add to 2012's end-of-year to-do list for lawmakers.
"[T]he amount of expiring policies and spending cuts set to take effect over the next few years is large [and] the risk from a political impasse is not only that Congress fails to enact long-term fiscal reforms, but also that it fails to extend current policies and in doing so adds to the drag on growth from fiscal policy," Goldman Sachs wrote in a research note.
Source: Jeanne Sahadi @CNNMoney
This December, for example, lawmakers will have to decide, among other things, whether to extend the payroll tax cut, long-term unemployment benefits, the Medicare "doc fix," Alternative Minimum Tax relief and a bevy of business tax breaks.
But that list -- worth less than $1 trillion -- will pale in comparison to the $5 trillion of fiscal decisions likely to be left for a lame-duck Congress during the seven weeks between the Nov. 6 election and New Year's Eve.
The biggest items on the agenda? The expiration of the Bush tax cuts and the impending enactment of the automatic spending cuts that many want to replace.
Coloring these decisions, of course, will be two unpredictable factors: The state of the economy and who wins control of the House, the Senate and, of course, the White House.
And the decisions Congress makes this year about whether to extend various expiring provisions may add to 2012's end-of-year to-do list for lawmakers.
"[T]he amount of expiring policies and spending cuts set to take effect over the next few years is large [and] the risk from a political impasse is not only that Congress fails to enact long-term fiscal reforms, but also that it fails to extend current policies and in doing so adds to the drag on growth from fiscal policy," Goldman Sachs wrote in a research note.
Source: Jeanne Sahadi @CNNMoney
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