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Falling Mortgage Interest Rates Not Enough to Signal Housing Market Recovery

In spite of falling interest rates and low home pricing, sales hit a 14-year low this year. Analysts project home sales for 2011 to fall short about one million homes from what would indicate a healthy market. The median sales price since the same time last year dropped five percent, bringing the median down to roughly $163 thousand dollars. Although first time home buyers have slightly increased to 36%, that is still 4% below what is considered an indication to recovery.

A backlog of foreclosures and government regulations have prevented the flooding of the housing market to avoid flooding housing inventory and further decreasing pricing. 2011 is expected to bring 20 percent more homes lost to foreclosures over the previous year. As the home market inventory increased to just under 4 million homes, an equal increase in demand has not been the case. The time expected to sell home inventory has increased 33 percent, going from six months to over nine. Consumer knowledge of increasing foreclosures may lead to hesitation on purchases in anticipation of further depreciation.

Home mortgage interest rates have fallen .02 percent on a both 30 and 15 year loans since late last year, but have not been enough to signal a healthy housing market recovery.


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Colleges Establish New Guidelines on Student Loans

Certain profit based Colleges, such as DeVry University are set to lose federal government assistance unless they meet new guidelines on student loans as indicated by the United States Department of Education. This excludes non profit colleges such as DePaul University.

Students at non profit colleges make up 88 percent of those in school, but only represent about 1/2 of the defaulted student loans; therefore, the other half pertains to defaults from for profit schools. This is the reason why the “gainful employment” talk within the government has been in recent discussions where if graduates owe too much relative to their income, or too few former students are paying back their student loans, colleges may lose grants and federal tuition loans.

In order to hold federal assistance, for profit schools will have to show that their previous attendees have not defaulted on more than 65 percent of the loans and that the student loan payments do not equate to one third of their total income, or twelve percent of their annual income. Estimates predict that close to 20 percent of such colleges will fail to reach those requirements and only about 95 percent will get to keep such federal government aid programs which may leave up to 5 percent closing down.

Arne Duncan, Education Secretary, said, “We’re asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective. “This is a perfectly reasonable bar and one that every for-profit program should be able to reach.”

This will all set into place July of 2012; however, schools may not be ruled ineligible until 2015, giving 3 years for readjustment. Talk continues as the requirements are proposed to become more lenient as stocks for profit based schools increased.
 


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Proposed California Legislation Aims to Raise Payday Loan Cap

September 8, 2011 – Payday loans can offer short-term financial relief for borrowers strapped for cash, but as debate on a new California bill has pointed out, they can also put borrowers deeper in debt while stacking on high interest rates and fees.

California lawmakers are discussing a bill (AB 1158) written by Assembly Majority Leader Charles Calderon (D-Whittier) that would amend the current state laws to increase the maximum amount borrowers can receive.

Current law sets the maximum payday loan at $300, with a cap for lender fees at 15 percent of the loan. For a two-week loan, this fee amounts to a 460 percent APR. According to the bill, California is tied with one other state for the lowest cap among the states that allow payday financing.

“California is one of the most costly states in which to live, and yet the state has one of the lowest advance limits in the nation,” bill advocates said.

Among the bill’s supporters are members of the payday lending industry, the California financial Service Providers’ Association and the Community Financial Services Association. Opposition includes Center for Responsible Lending, California Reinvestment Coalition and the city of San Diego, among a variety of others.

One concern the opposition has voiced is that borrowers can take out more than one payday loan at a time. Existing state legislation, enforced by the Department of Corporations, limits a payday lender from granting a borrower more than one at a time; however, it does not prohibit a borrower from taking out a loan from a different company to pay off another.

Lawmakers on both sides are advocating changes to the bill to make it more effective, such as considering income-based limits and repayment plan options. Also up for debate, according to an article in the Los Angeles Times, is requiring lenders to assess a borrower’s financial situation before giving them a loan, and also limiting the number of loans a borrower can take out each year.

Many are also concerned with the borrowers’ ability to pay back these larger sums in a short period of time. In the Assembly’s third reading of the bill, opposition said, “Increasing the amount of debt payday borrowers owe will only increase the likelihood that payday borrowers will not be able to pay off the loan at their next payday and will be more likely to land in the debt trap.”

AB 1158 is currently in a Senate Judiciary Committee and debate is ongoing.


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FHA to Implement New Home Loan Limits

September 8, 2011 – After three years of higher loan limits in some areas, the Federal Housing Administration (FHA) announced in August that single-family home loan limits will be lowered starting Oct. 1. This change is in accordance with the Housing and Economic Recovery Act (HERA) that was passed in July 2008.

The Economic Stimulus Act passed in February 2008 under President George W. Bush raised limits for home loans insured by the FHA to 125 percent of the median house price in the area. This was an effort to “mitigate the effects from the economic downturn and the sharp reduction of mortgage credit availability from private sources,” according to a May market analysis from the U.S. Department of Housing and Urban Development.

While initially the new loan limits stipulated in the HERA were set to take effect in January 2009, financial strains in the credit market delayed congressional implementation until now. The loan limits beginning on Oct. 1 will be in effect until Dec. 31, 2011. The floor loan limit in low cost areas will stay at $271,050 for one-unit properties, while the ceiling limit in high housing cost areas will change from $729,750 to $625,500, or 115 percent of the median house price (whichever is lower).

The new loan limits will take effect in the highest cost metropolitan areas in the country, which amounts to 669 counties out of the 3,234 total in the U.S. in which the FHA insures home loans. According to the FHA, loans in these areas accounted for about three percent of loans granted last year. Any loans insured by the FHA before Oct. 1, 2011 will not be affected by these new limits, including streamline refinance loans. Limits in Hawaii, Guam, the Virgin Islands and Alaska are higher than in other areas because of higher construction costs.


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FHFA Sues 17 Financial Institutions for Toxic Mortgage Securities

September 9, 2011 – After the housing market collapsed in 2008, many subprime mortgage-backed securities issued by U.S. financial firms became toxic, causing major losses for Fannie Mae and Freddie Mac. Taking action on Friday, Sept. 2, the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, filed a suit against 17 firms for alleged violations of federal securities laws and common law in sales of subprime mortgage-backed securities.

Among the 17 institutions facing these allegations are Bank of America Corporation, Citigroup, Inc., Goldman Sachs & Co. and JP Morgan Chase & Co. The suits indicate that the toxic securities Fannie Mae and Freddie Mac purchased from these entities totaled almost $200 billion in losses, although this number does not represent the amount of compensation the FHFA is seeking. It has not yet announced an amount for its compensation, saying that “actual recoveries will be determined based on filings by the parties, evidence and judicial findings.”

The FHFA argues that these institutions did not accurately present the characteristics of the mortgages backing these securities when they presented them to Fannie Mae and Freddie Mac. It said it “seeks compensatory damages for negligent misrepresentation,” such as misstating the owner occupancy percentage and loan-to-value ratio.

It claims these reports violated the Securities Act of 1933. More broadly, the FHFA filed these complaints it accordance with its authority under the Housing Economic Recovery Act of 2008.

In a statement issued on Sept. 6, the FHFA stated, “Some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings.”

In a statement responding to the lawsuit, Bank of America said that it did not portray false characteristics or misleading information to Fannie Mae and Freddie Mac about the securities. Fannie and Freddie, the statement said, “claimed to understand the risks inherent in investing in subprime securities and continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so.”

The lawsuits against these institutions were filed in federal and state courts in New York and in the federal court in Connecticut.  They follow a similar one against UBS Americas, Inc. on July 27, 2011.


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Hard Economic Times Cause Increase in Default on Student Loans

September 12, 2011 – Although student loans can help finance a college education for many students who need the extra help, studies released today from the U.S. Department of Education show that student loans are increasingly throwing students in over their heads in debt.

“These hard economic times have made it even more difficult for student borrowers to repay their loans,” U.S. Secretary of Education Arne Duncan said in a press release.

The department’s data shows that the default rate for student loans rose substantially between the fiscal years 2008 and 2009. The overall national student loan cohort default rate rose from seven percent to 8.8 percent. Broken down by department, the data indicates that the rate rose from six percent to 7.2 percent for public institutions, from four percent to 4.6 percent for private institutions and from 11.6 percent to 15 percent at for-profit schools.

These rates account for students whose first loan payment was due between Oct. 1, 2008 and Sept. 30, 2009 and who defaulted before Sept. 30, 2010. There are 320,000 students that fall in this category, out of 3.6 million who took out loans at 5,900 different schools.

The increase in students that are unable to pay off their student loans will not only affect the students, but may also cause schools with the highest rates to face federal consequences, such as losing eligibility for federal aid programs.

Based on the data released today, five schools face possible penalties; these schools are those that had a default rate above 25 percent for three consecutive years, a rate that was more than 40 percent in the most recent fiscal year or both. The institutions are: Tidewater Technical, Norfolk, Va.; Trend Barber College, Houston, Texas; Missouri School of Barbering & Hairstyling, St. Louis, Mo.; Sebring Career School, Houston, Texas; and Human Resource Development & Employment – Stanley Technical Institute, Clarksburg, W.Va.

In response to this increase in student default, the U.S. Department of Education has taken new measures to ensure that schools are accurately and extensively informing students about their financial decisions. These protective measures include a college affordability and transparency list, which shows “schools with the lowest and highest tuition and fees, their average net price and those institutions whose prices are rising at a particularly fast rate, and they allow students to compare costs at similar types of institutions,” the press release stated.

In addition to these changes, the department announced that it will begin measuring default statistics based on a three-year period, rather than the two-year one it has employed previously.


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H&R Block Will Not Offer Refund Anticipation Loans this Tax Season

September 13, 2011 – H&R Block, the nation’s largest tax preparer, announced today that it will not be able to offer refund anticipation loans during the 2012 tax season due to an increase in the amount of tax returns the company prepares and the decline in demand for the high-cost loans.

This is the second consecutive year in which the company has not offered these loans, eliminating them last year as a result of an Internal Revenue Service (IRS) regulation that did not allow banks to fund them.

In preparation for the 2011 tax season, the IRS announced that it would no longer provide tax companies with the debt indicator, which was the figure they used to determine the anticipated refund amount.

“Refund Anticipation Loans are often targeted at lower-income taxpayers,” IRS Commissioner Doug Shulman said in a 2010 press release. “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

Last year, only a few smaller tax firms were able to offer the service through a single bank, Republic Bank and Trust in Kentucky. H&R Block expressed concern that regulations were only applied to certain banks and tax preparation agencies, not all.

Regardless, the company maintains that eliminating this service from its offerings did not and will not affect its success.

“We evaluated our options to determine what was best for our clients, the business and our shareholders,” H&R Block President and CEO Bill Cobb said. “Knowing we had a strong 2011 tax season without (refund anticipation loans), our analysis did not present a compelling reason to bring back the product in 2012.”

As evidence of this, the company gained 18.6 percent more first-time clients in 2011.

A refund-backed loan offers the amount of the taxpayer’s federal tax refund with a short-term payback, which was helpful in the times when the IRS took up to eight weeks to issue the refund checks. According to a press release from H&R Block, however, the IRS payments will be issued within a two week period in the 2012 season. This is one reason behind the decrease in demand for the loans.

Another reason H&R Block cited for stopping the service was the high fees associated with the loans. According a release from the Consumer Federation of America, this year the fees for refund anticipation loans were $61 for a $1,500 loan, signifying a 169 percent APR – although it is paid off in just a few weeks.

To compensate for those who would have applied for the loans, the company announced that it would continue to offer other options, such as refund anticipation checks, which allow individuals to use to their refund to pay tax preparation fees.


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Senate Debates Reducing Government Role in Mortgage Market

September 13, 2011 – In its 10th hearing on home finance reform, the Senate Banking Committee today discussed how to reduce the government’s role in the home mortgage industry.

The reform effort came from a plan presented to Congress by the Obama Administration in February that would reduce the government’s role in home loans. One of the main aspects of his plan was to reduce and eventually eliminate Fannie Mae and Freddie Mac, the two mortgage entities the federal government seized during the housing crisis of 2008.

“The Obama Administration believes that, under normal market conditions, the private sector – subject to stronger oversight and standards for consumer and investor protection – should be the primary source of mortgage credit and bear the burden for losses,” a February White House press release stated.

After three years of controlling the two companies, the government now backs nearly nine out of every 10 new mortgages.

Talks in the Senate today furthered this plan, with lawmakers agreeing that Fannie Mae and Freddie Mac must be downsized, but still debating what the scale of the government influence in subsidizing home finance should be.

“I firmly believe that we need to reform our housing finance system but I am concerned about the unintended consequences for our housing market and economy that could result if a government role is eliminated completely,” Senate Banking Committee Chairman Tim Johnson (D-South Dakota) said in his opening statement. “Returning to the housing system we had before the Great Depression would not be an optimal outcome.”

Johnson outlined concerns about eliminating the government role completely, stating that a lack of government regulation would likely increase interest rates and changes in the availability and character of 30-year fixed mortgages.

“The 30-year fixed rate mortgage would also likely take a different form and require substantial down payments and higher interest rates, restricting the number of borrowers to a small number compared to today,” Johnson said.

Although specific legislation regarding the housing reform plan has not yet reached either the House or Senate floor, the first action in reducing Fannie and Freddie’s presence will be on Oct. 1, when the Federal Housing Administration – which regulates the two companies –lowers its loan limits to pre-housing crisis levels.

Obama’s plan for housing finance reform also includes increasing consumer protection to fix fundamental flaws in the mortgage market, heightening transparency for investors and raising underwriting standards.


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Mortgage Rates Reach All-Time Lows

September 15, 2011 – Already at an all-time low, fixed-rate mortgage numbers continue to plummet, having declined by almost 50 percent over the past 10 years.

Freddie Mac announced today the results of its weekly Primary Mortgage Market Survey, which show that fixed mortgage rates remain at their lowest levels in 60 years. The rate for a 30-year fixed mortgage sunk to 4.09 percent, while a 15-year fixed rate now sits at 3.30 percent – both numbers signifying record lows since Freddie Mac began tracking the rates in 1971.

These rates are in their second consecutive week of such declines. Experts cite European financial woes as the source.

“Continued investor concerns over the state of the European debt markets kept U.S. Treasury bond yields low and allowed mortgage rates to ease once more this week,” Vice President and Chief Economist for Freddie Mac Frank Nothaft said.

The 30-year rate has stayed below five percent for the entire past year, except for two weeks. Five years ago, the rate was 6.5 percent, and 10 years ago it was eight percent. The lowest rates in U.S. history were in 1950-51, when the long-term fixed-rate mortgages hit 4.08 percent – notably only .01 percent lower than this week’s average rate.

In spite of historically low rates, the housing industry continues to suffer, with new home sales at their worst in the last half-century and re-sales hitting 14-year lows as well. Freddie Mac attributes this to the fact that rates often come with additional fees that make them higher than they seem. After fees, the 30-year rates are actually closer to 4.25 percent.


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Cash America to Wind Down Online Payday Loans

September 16, 2011 – Pawnshop operator and payday loan provider Cash America International, which is based out of Fort Worth, Texas, announced today that it plans to spin off most of its online lending subsidiary, Enova International.

Enova will now have a common stock in the New York Stock Exchange, signified by the symbol “ENVA.” Cash America will spin off the ownership through a public offering projected at $500 million; however, the company says it plans to maintain 35-49 percent of its stake. Three other companies will be joint underwriters: UBS Investment Bank, Barclays Capital Inc. and Jefferies & Co.

Enova’s services include consumer payday loans of an average of a little over $500, servicing not only the U.S., but also Canada, the U.K. and Australia. Cash America is the world’s largest pawn shop chain, and entered the payday loan business in 1999. Although the company’s focus is the pawn shop business, payday loans made up about 37 percent of Cash America’s income in the first six months of 2011.

Cash America said that problems with the companies’ partnership had arisen because investors were unable to differentiate between the online lending portion and the concrete business. Enova CEO Timothy Ho said separating from Cash America will give Enova its own identity.

Analysts say the move will also help Cash America’s stock ratings, as the harsh regulations associated with payday loans can pose problems for the company. The pawn shop industry is less regulated and is continuing to expand quickly.


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