Mike McBey/Creative Commons
Your mortgage company wants that one, and that one, and also that one.
First Response
Those of us who have done some work on foreclosures over the years know that what mortgage companies tell their borrowers only has a passing relationship to the truth. After the financial crisis, borrowers were told that they had to miss three payments to get any relief under the government’s loan modification program. This was not true; nothing required this. And those who did what they were told gave their servicing company the ability to trap them in debt and take their home away.
So when I started hearing from borrowers that they were being told that they could apply for three months forbearance (a deferment of their loan payment), but would have to pay all three months back at the end of the period, my ears pricked up. Others have heard this as well, like this Wall Street Journal reporter and Lisa Epstein, one of the subjects of my book Chain of Title, who writes for a subscription-based website called The Capitol Forum. Both found AmeriHome Mortgage, a private equity-backed firm, telling customers about a lump-sum payment immediately due at the end of three months, and this isn’t limited to them. (I’ve heard from Wells Fargo customers as well.)
First of all, the forbearance period authorized in the CARES Act was six months, which could be re-upped to a year. So I wasn’t sure where the three-month number came from. The balloon payment also didn’t sound right.
It wasn’t right. Broadly speaking, two types of loans are eligible for forbearance: FHA loans, and those owned or guaranteed by Fannie Mae and Freddie Mac. Here’s the FHA guidance. It says that servicers must offer borrowers forbearance if they have financial hardship, that it “may be up to 6 months,” that an additional 6 months must be approved if needed, that all fees for missing the payments must be waived, and that borrowers must be evaluated for “home retention options” (that’s a loan modification) after the forbearance period ends. It says nothing about an immediate balloon payment. Likewise, this Freddie Mac call script for servicers makes clear that if the borrower cannot afford a balloon payment, the servicer must offer “alternative ways” of payment “in a manner that is affordable.”
As if that weren’t enough, yesterday Mark Calabria, head of the Federal Housing Finance Agency (FHFA), Fannie and Freddie’s conservator, stated flatly, “No lump sum is required at the end of a borrower's forbearance plan,” and said he was specifically addressing concerns in consumer complaints. The way it’s supposed to work is that borrowers using forbearance will get options, from a repayment plan, to modifying the loan by putting the payments owed on the back end of the mortgage, to reducing the monthly payment.
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So why would servicers lie to borrowers about a lump sum? Some servicers have claimed FHFA told them that was required, but obviously this was untrue. If you listen to industry mouthpieces, like former FHA head David Stevens, they’ll blame Congress, saying the CARES Act didn’t authorize a bailout for servicers, who must keep advancing money to investors in the loans despite the missed payments. “It’s a destructive incentive,” Stevens told the Journal, that forces servicers to lie to their customers.
But that doesn’t explain this lie. Why would telling borrowers they have to repay a lump sum help servicers? Presumably, knowing that they couldn’t repay in three months, borrowers would opt out of forbearance. They would then either a) scrape together enough money to pay the loan for a while, at which point servicers get paid, or b) cut their losses and go into foreclosure, at which point servicers get to assess all kinds of foreclosure fees and get paid MUCH MORE. The now eleven year-old study of why servicers prefer foreclosure to modification remains operative; the compensation structure hasn’t changed. Servicers get paid more from foreclosure, so they try to trigger it, steering borrowers away from better options to trap them.
I appreciate Calabria stepping out on this, and maybe raised awareness will stop a foreclosure crisis replay. But you will need oversight and enforcement; servicers are tricky, and borrowers aren’t given to read the FHFA website. As Christopher Peterson, former top CFPB official, told me: “It is a meltdown waiting to happen.”
Donna Speaks
Quite a debut for the newest member of the Congressional Oversight Commission, intended to police the Federal Reserve bailouts. The headline of this Politico story is about how Republican Senator Pat Toomey and Elizabeth Warren aide Bharat Ramamurti have “split” on what conditions the Fed should attach to its lending. But Shalala undercut her Democratic colleague at every turn. She told Politico “I’m not particularly interested in nitpicking” the Fed’s choices, rather just “seeing what’s their strategy, who are they helping and what are the details.”
In other words, she wants to react after the money is out the door and there’s nothing much that can be done rather than trying to influence the direction of the aid. This from someone who voted for the legislation authorizing the aid! You’d think she’d be mildly interested in congressional intent being met. Then, in a thinly veiled shot at Ramamurti, she said, “This is a commission, it’s not an individual assignment… we should not be rogue in this role.” Finally, responding to those of us who questioned her appropriateness for the job, Shalala claimed she had the relevant experience because “I’ve long had relationships with Treasury in particular, and I’ve known almost all of the Fed chairs as well as the governors, and I understand the Fed.” In other words, the people over whom she will be conducting oversight are her friends and run in the same social circles, so everything’s fine.
It’s becoming more clear now that Shalala was put on the oversight panel to police Bharat Ramamurti, not the Federal Reserve. “Pelosi was sending a message to populists and progressives within her caucus that they hold no real power,” wrote Jeff Hauser of the Revolving Door Project in an email. “It will be fascinating to see what, if anything, populists and progressives do in response.”
Another Day at the SBA
The restarted Paycheck Protection Program for small businesses got off to a rousing start yesterday when the Small Business Administration’s computer system locked up ten minutes in. Keep in mind that this was two weeks after the first round ended, giving the SBA time to fortify its IT. Plus, it’s a first-come-first-served process which, if it’s going to be administered at all fairly, needs to be able to track when requests land. Within ten minutes that was over, giving rise to inevitable questions of fairness.
Those have dominated the program from the start, since Congress allowed a loophole that made eligible franchises with multiple locations, as long as each had under 500 workers. This damaged the reputation of the PPP, and the SBA and Treasury closed the loophole by writing new guidance suggesting they would investigate companies getting the loans who had alternative means of financing paradoxically exacerbated it, because it led businesses to give the loans back, raising awareness of how many got the money initially. Steve Mnuchin just announced that every loan over $2 million will be audited, cleaning up the reputational mess Congress made. Over $2 billion has been returned already (over .5 percent of the first round), the latest by the Los Angeles Lakers, which is clearly not a small business. The Knicks, maybe.
Meanwhile, the real failing of the PPP is not temporary IT dysfunction or undeserving recipients, but that it doesn’t have enough money. The system crashed because banks lined up so many loans that missed out on round one. If you didn’t have your application in weeks ago you aren’t getting this money. That’s what’s creating the political headlines; if there was enough to go around nobody would care much about the Lakers. The PPP being oversubscribed is ridiculous, because the Federal Reserve has already committed to indirectly taking on the loans, and could absorb the costs on their balance sheet. Two months of payroll is also underweight; nobody expects this to be over in that time frame. A duration-of-the-emergency basic income for these businesses, as it were, makes much more sense.
SBA did one thing right yesterday, averting another PR disaster. It blocked the portfolio companies of hedge funds and private equity firms from getting the loans, reasoning that firms engaged in speculation and investment are ineligible. This is the latest blow to private equity, who see bright skies down the road when they can buy up sick companies at a discount, but who are stuck now with failing portfolio firms they bought at elevated rates. High-profile private equity bets are considering bankruptcy. The industry has other means to get their bailout; the Federal Reserve’s purchase announcement on high-yield debt protects them in part. But it’s interesting to see PE firms in the same boat as everyone else for a change.
Today I Learned
- House Democrats moving forward with proxy voting because the New Democrats want it, and they matter more. (Politico)
- AOC and Elizabeth Warren propose a merger moratorium during the pandemic, which House Antitrust Subcommittee chair David Cicilline did last week. (NBC News)
- Mitch McConnell is more concerned with liability releases for reopened businesses than triggering a depression by denying state and local governments aid. (Bloomberg)
- The Fed expanded its muni bond program, so at least someone in Washington recognizes the biggest threat. (CNBC)
- The Saudis have now put big stakes into Carnival Cruises and Live Nation. (Financial Times)
- A group in Oxford has a head start on a vaccine. (New York Times)
- Yet more evidence that the death count is vastly understated. (Washington Post)
- Adam Tooze on the coming fight over austerity. (The Guardian)
