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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.
Between January 1 and January 30, 2012, the U.S. Department of Education (department) will offer Special Direct Consolidation Loans, which are designed to help borrowers manage their debt by grouping federal student loans into a single bill with a single payment.
This special short-term consolidation opportunity is available to those who have both:
While a borrower must have both a department-owned loan and a commercial-owned loan to qualify for this program, only the commercial-owned loans will be consolidated.
The eligible commercially-held FFEL loans include:
The loans must be in grace, repayment, deferment, or forbearance to qualify for the program.
The consolidated student loans will receive a 0.25 percent interest rate reduction then take on a fixed rate calculated from the average of all the loans, but cannot exceed 8.25 percent.
The repayment term on the consolidated loan will remain the same as the current terms on the borrowers’ existing loans, but since there will be an interest rate reduction, the total interest payment over the life of the loan will be smaller than a traditional consolidation program would allow.
If eligible, borrowers can still make use of the income-based repayment (IBR) program with these loans.
Finally, by turning commercially-held FFEL loans into Special Direct Consolidation Loans, they become Direct Loans, which allow eligibility for the Public Service Loan Forgiveness Program (PSLF). The PSLF grants full student loan forgiveness after 120 payments from an individual employed in an eligible public service job.
According to a press release by the U.S. Chamber of Commerce, a new survey reveals the majority of Americans would have opposed the creation of the Consumer Financial Protection Bureau (CFPB) if they had more information about the bureau’s power.
Largely in response to the housing crisis, the CFPB was established in 2010 as a result of the Dodd-Frank Act with the purpose of protecting borrowers from abusive or predatory financial practices.
But Harris Interactive, the company hired by the U.S. Chamber of Commerce to conduct the survey, exposes the public’s true feelings about this agency established to protect them.
When the survey revealed to its testing sample that the CFPB “has access to more than half a billion dollars in government funding each year, and does not need congressional approval to spend this money,” 68% said they were less likely to support its creation.
When told “the CFPB is run by a single director confirmed by the Senate for a 5-year term who can only be removed from power by the President in extreme circumstances,” 64% were less likely to support the creation of the CFPB.
According to the survey, this powerful bureau also has the ability to ban features of products or entire products that it deems unfair.
David Hirschmann, president of the Chamber’s Center for Capital Market Competitiveness, said “This poll shows that when the American people learn about the CFPB, they are wary of its broad powers, unaccountability to Congress, and direct funding outside the budget process,” according to the press release.
“For this agency to succeed, it must provide accountability to the American people at a time when jobs and our economy are at stake,” Hirschman continued.
With $500 million at the disposal of a single director who cannot be fired except by the President of the United States, Hirschman’s statement about the American peoples’ attitude may not be that inaccurate.
The extraordinary power this bureau gives a single, unchecked director prompted 44 republican senators to send a letter to President Obama declaring their unwillingness to confirm any nominee to be the director of the CFPB—regardless of party affiliation—according to a press release by Senator Ard Shelby earlier this year.
The current student debt crisis has been centered on the impact it is having on young college-aged borrowers. But despite this emphasis on youth, America’s younger generations are not the only group affected by private and government student loans.
The baby boomer generation, which is now reaching the age of retirement, has been keenly impacted by this debt crisis, yet is rarely mentioned amongst the onslaught of youth-centric student debt news.
The primary culprit in enabling this student debt crisis to hurt the aging baby boomers is The Debt Collection Improvement Act of 1996. That act gave the government the power to withhold a percentage of social security payments for retirees that defaulted on debt owed to the government, including government student loans.
Unfortunately, a good amount of this population borrowed (and are still paying) government student loans.
According to the New American, the federal government cut the social security checks of over 110,000 retirees between January and August of this year. That is almost a doubling of the social security checks cut in all of 2011.
This influx in reduced social security checks not only signifies a problem with our current federal student loan system, but it’s also thrusting our older population into impoverished income levels.
Social security checks cannot be reduced past $750, but, given the debt situation of many, monthly checks of $750 is likely all they will ever see.
“It’s quite extraordinary because normally social security benefits cannot be touched by creditors. When you think about it, $750 a month is less than the poverty line. It’s not a lot of money for people to have,” said Deanne Loonin, an attorney at the National Consumer Law Center in an ABC News interview.
According to a report from the New York Federal Reserve, more than 17 percent of government student lending borrowers are over the age of 50. Student financing, be it from private or government student loans, is exempt from bankruptcy, even for middle-aged adults.
“This is really the only consumer loan out there that people cannot get rid of,” said Smart Money’s AnnaMaria Andriotis in a New American interview.
Retirees struggle to handle their own student debt which was acquired years if not decades ago during their time in college.
“But in most cases, these loans aren’t even their own loans. And that’s what makes this whole situation really sad,” said Andriotis.
The amount of financing lent to parents for the college education of their offspring has risen by 75 percent since the 2005-06 academic year, as reported by Forbes. On average, parents have roughly $34,000 in college-related debt. That number rises to roughly $50,000 over a standard 10-year repayment period.
Recent studies by the Federal Trade Commission (FTC) have shown that 75% of all defaulting loans with co-signers are ultimately repaid by the co-signer, and not the original borrower.
Co-signers clearly are taking the brunt of payment requirements meaning they have fewer funds for the remainder of each month let alone beyond that. This lack of funds is particularly frightening for those on the verge of retirement.
According to the Employee Benefit Research Institute nearly 45 percent of adults aged 48 to 64 will not have enough savings to pay for basic needs and uninsured medical costs upon entering into retirement thanks to private and government student loan debt.
The recession may hold partial blame but so too does the trend of rising tuition costs. In the last two decades, fees have almost tripled, quickly outpacing wage increases. The massive national student debt buckles at an estimated one trillion dollars, 85 percent of which accounts for government student loans.
Retirees, having contributed to our nation’s success long ago, do not need the burden of government student loans to weigh on them in their golden years. Whether they cosigned financing, or simply carried debt past their middle-aged years, it is clear that the protesting youth across the nation are not the sole victims of the student debt crisis. For many of these elderly borrowers salvation may only come with bankruptcy reform laws. Unfortunately, for all too many of these retirees, legal changes may arrive too late.
The Consumer Financial Protection Bureau (CFPB) made a series of recent announcements hinting that the private student loan market may start to see more government oversight.
According to Bloomberg, the CFPB has likened private student loans to the “subprime” loan of the college financing world.
But not all private student loan borrowers are subprime, nor do they need to be treated as such.
“Certain low-risk borrowers probably don’t need to be paying such high rates and paying those high rates is leading them to delay a lot of economic milestones, which have really large consequences and ripple effects for the entire economy, including the housing market,” said Rohit Chopra, the CFPB’s student loan ombudsman.
Those consequences occur when students who are riddled by tens of thousands of dollars in college-related debt refuse to pursue common “rites of passage,” including moving out of mom and dad’s, getting married and buying homes.
While the $1 trillion in outstanding student loan debt includes federally-backed financing as well, it’s the private sector that’s hitting students with the highest and most volatile interest rates.
“During the financial crisis, we had seen the Fed try and ensure that capital markets were functioning and used certain authorities to make sure that asset-backed securities, whose underlying assets were private student loans, were able to be made,” Chopra told Bloomberg in an interview. “It seems that there are some places where the market is not working. You have a lot of responsible borrowers paying very high interest for several years now, but they’re unable to refinance that debt.”
While regulation of the private student loan industry appears to be imminent, an actual long-term solution has yet to be found.
“We can’t begin to [regulate] this all at the federal level,” said Education Secretary Arne Duncan on the Bloomberg radio program. “We need states to continue to invest, and we saw 40 states cut funding to higher education this past year. You need universities to keep costs down, [to] keep tuition down in tough economic times.”
A widespread government shutdown impacted mortgage loan applications more than interest rates did this week.
Rate reports provided by loans.org show that mortgage loan interest rates declined minimally for the week ending Oct. 3, 2013.
The 30-year fixed-rate mortgage averaged 4.08 percent, down from 4.15 percent last week.
The 15-year FRM averaged 3.11 percent, another decrease from 3.18 percent reported last week.
The final rate, the 5/1 adjustable shifted down only four basis points. The rate went from 2.96 percent last week to 2.92 percent this week.
Don Frommeyer, president of the National Association of Mortgage Brokers (NAMB), said that despite the shutdown, business is as usual in the housing market except for three areas dealing mainly with information verification.
First, lenders can’t confirm potential borrower’s tax information via the IRS 4506 verification. Secondly, the shutdown extends to the Social Security offices, leaving identification information inaccessible. Finally, Frommeyer said that any government employee in the mortgage loan application process will likely have to wait for the government to reopen so their employer can verify their employment status.
The shutdown will also impact housing agencies that are already late. Frommeyer said that the USDA was already 57-60 days behind schedule before the shutdown and it will only worsen.
“I would like the government to go back to work so everything can be straightened out,” he said.
Although the shutdown could have an impact on mortgage loan interest rates if it continues for several weeks, Frommeyer said the debt ceiling is a greater concern. If the debt ceiling is not raised, it could have a sweeping impact on the bond market and the stock market.
“If we are still down and they don’t do something about this debt ceiling, who knows what’s going to happen,” he said.
Other housing professionals believe that the shutdown has impacted the housing market more significantly. Bruce Taylor, president of ERA Key Realty Services, said it has been “pretty horrendous” on mortgages and interest rates.
But the total impact depends solely on the length of the shutdown.
“One week, no problem. One month, big problem,” Taylor said.
Freddie Mac’s weekly mortgage loan interest rate survey, which is used by housing experts across the country, was not released due to the shutdown. These reports, in addition to jobless claims, are required in order to determine the market’s direction.
Taylor said there are multiple things that consumers and economists get from government reporting systems and without them, it will create uncertainty.
“If it goes on for many weeks, it’s going to wear every little corner of the financial market,” he said.
Home loan interest rates remained calm amid news that the government would re-open and avert a debt ceiling crisis.
Rate reports provided by loans.org show that all three interest rates changed minimally for the week ending Oct. 17, 2013. The 30-year fixed-rate mortgage averaged 4.13 percent, a miniscule increase from 4.11 percent seen last week.
The 15-year FRM did not change and remained at 3.15 percent.
The final interest rate reported, the 5/1 adjustable-rate mortgage, declined this week. It dropped from 2.89 percent to this week’s rate of 2.84 percent.
Despite a fear that the shutdown would have an all-encompassing impact on the mortgage industry, the housing market was not harmed greatly.
One fear for the market was a decline in mortgage loans due to a lack of financial information, such as Social Security verification. But a recent report by the Mortgage Bankers Association (MBA) found that mortgage applications grew for the second consecutive week.
The MBA attributed the growth to an increase in refinancing, but other experts believe that an openness from lenders helped keep the market stable.
Jonathan Hyer, senior managing consultant for American Financing Corporation, said many investors remained lenient and allowed loans to be processed without the normally-required documentation. For example, instead of a confirmation by the Social Security office, many investors accepted new mortgage loans as long as the borrower provided Social Security cards as proof.
Another expert looked past the shutdown’s impact and has instead found a rising trend.
Over the past year, home loan interest rate have increased about 1.5 percent. This change has altered the buyers in the housing market drastically, according to Daren Blomquist, vice president of RealtyTrac.
Research from RealtyTrac shows that as interest rates grew from 2012 to 2013, the rise in cash sales has also increased.
On a national scale, when interest rates were 3.60 percent in August of 2012, cash sales accounted for 30 percent of all home purchases. In August of 2013, when RealtyTrac noticed an average 30-year interest rate of 4.46 percent, cash sales comprised 45 percent of all purchases.
In a year’s time, the frequency of cash sales has increased from about one-in-three to about one-in-two. Investors that have sufficient funds to purchase a property with cash are pricing financed buyers out of the market, Blomquist said.
“There’s a plethora of cash buyers out there interested in buying real estate,” he said. “It has started to make it less affordable for those financed borrowers.”