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News Analysis: In Tighter Loan Rules, Wiggle Room for Banks

January 11, 2013 by Leave a Comment

Richard Cordray, director of the Consumer Financial Protection Bureau, at a House panel last year.Win McNamee/Getty ImagesRichard Cordray, director of the Consumer Financial Protection Bureau, at a House panel last year.

Homeowners got their first big chance to judge the fledgling regulator charged with policing abusive lending after the introduction of a broad set of mortgage rules on Thursday.

The regulator, the Consumer Financial Protection Bureau, gets mostly high marks for the policies, which are intended to prevent the practices that fueled the subprime debacle and the foreclosure crisis. But the agency made a few concessions to banks that consumers advocates say could leave borrowers vulnerable.

“While the bureau’s new rules promote” affordable loans and better products, “they still leave the door open for abuses,” said Alys Cohen, a lawyer at the National Consumer Law Center.

The new rules, broadly outlined in the Dodd-Frank regulatory overhaul, will have enormous influence on the mortgage market. They are intended to ensure consumers don’t receive home loans with deceptive terms or onerous debt burdens.

In short, banks have to make affordable mortgages, and if they don’t, they face a greater legal liability. Under the new rules, it will be much harder for banks to give out mortgages without properly checking income, or with interest payments that suddenly jump to much higher levels.

“These rules now require lenders to determine that borrowers have enough income to repay loans,” said Michael D. Calhoun, the president of the Center for Responsible Lending. “This common-sense requirement would have prevented much of the damage of the mortgage and financial crisis.”

Even so, lenders managed to put their stamp on the regulation, winning some important features.

As part of a fervent lobbying effort, banks warned repeatedly that strict regulations could crimp lending at a time when the housing market was just starting to get back on its feet. Regulators seemed to give some credence to that concern. Citing the “fragile state” of the housing market, the bureau said it would allow new mortgages to meet more flexible standards for affordability during a phase-in period of up to seven years.

“It appears the rules are written so that they would not disturb the housing recovery,” said Kathy Kelbaugh, a senior analyst at Moody’s Investors Service who focuses on mortgages.

This concession will have implications for a new product called the qualified mortgage. Such loans, which are expected to be the most common, will have to meet the affordability standards that apply to all mortgages. They will also be subject to a significant additional condition: Borrowers’ combined debt payments cannot exceed 43 percent of income.

But the phase-in period will effectively allow banks to make qualified loans with higher debt burdens for up to seven years if the loans conform to standards set by government mortgage entities like Fannie Mae or the Federal Housing Administration. Such entities have reasonably high standards, but it is a loophole that banks could exploit.

The bureau’s biggest headache was deciding how to devise a required legal shield for banks. Such protection would largely insulate banks from lawsuits when certain loans go into foreclosure.

It seems odd that the banks got this advantage, given the abuses during the housing bust. And such shields don’t exist in other important industries; automakers have to comply with clear standards and don’t get automatic legal relief for doing so.

But Congress provided the shield to encourage banks to write qualified mortgages. Lawmakers felt banks might cut back on lending if they feared the new standards increased their chances of getting sued.

Still, the bureau had some freedom. And in the end, the agency chose to apply two types of shields.

Banks get more protection on prime qualified mortgages — those with lower rates made to borrowers with better credit. The shield on these loans is called a safe harbor. This substantially limits a borrower’s ability to claim in court that a loan was not affordable and therefore ran afoul of the rules.

The banks get less protection on subprime qualified mortgages — those with higher interest rates that will most likely go to borrowers with weaker credit. On these loans, the weaker shield gives borrowers more leeway to contest whether a loan was affordable.

Consumer advocates think that all qualified mortgages, not just the subprime variety, should have had the weaker shield. Some analysts think the banks may have been overstating the need for a legal shield to lend.

“Despite the claim that banks can’t make loans without a safe harbor, they have done so for decades,” Ms. Cohen said.

Officials at the federal agency stress that borrowers can still challenge loans made under the safe harbor shield. For instance, a borrower can sue the bank if it can be shown that a loan didn’t meet the basic debt-to-income requirements, and therefore wasn’t considered qualified.

The rules also allow borrowers to introduce oral evidence to make their cases. A borrower could tell the court about a conversation with a loan officer that suggested a loan was unaffordable from the outset and should not have been made. For instance, a borrower might have told the bank that a big bonus might not re-occur, but the bank assumed the payment would be annual.

But consumer advocates and some industry lawyers say that the safe harbor provision, in practice, will make it difficult for borrowers to pursue an exhaustive legal inquiry. So the safe harbor is seen as a big win for the banks.

“I think the safe harbor is pretty safe,” said Elizabeth L. McKeen, a partner at the law firm, O’Melveny Myers.

Consumer advocates also contend that the bureau overemphasized the debt-to-income ratio. Equally important for some homeowners, they say, is how much money they have after making debt payments. The bureau calls this residual income. A lower-income family might have a debt-to-income ratio of 43 percent or below. Yet the household may not have enough money to meet other living expenses like utilities and grocery bills.

The bureau recognizes that residual income is important for some borrowers. For the subprime qualified mortgages, the bureau explicitly allows the borrower to cite insufficient residual income when legally contesting the mortgage. But this residual income feature doesn’t exist for the prime qualified mortgages, which will probably make up most of the market.

The bureau could have demanded lenders take residual income into account for prime qualified mortgages to lessen the chances they find loopholes in the rules. But such decisions reflect the difficulty the bureau will face in policing the industry. Push too hard, and lenders might cut back on lending. Give too much, and lenders might take advantage of consumers.

“There’s this constant struggle between protection and access to credit,” said Leonard N. Chanin, a partner at Morrison Foerster.

Article source: http://dealbook.nytimes.com/2013/01/10/in-tighter-loan-rules-wiggle-room-for-banks/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

James M. Buchanan, Economic Scholar, Dies at 93

January 9, 2013 by Leave a Comment

James M. Buchanan, a scholar and author whose analyses of economic and political decision-making won the 1986 Nobel in economic sciences and shaped a generation of conservative thinking about deficits, taxes and the size of government, died on Wednesday in Blacksburg, Va. He was 93.

Alex Tabarrok, the director of the Center of Study for Public Choice at George Mason University, which Mr. Buchanan founded, confirmed his death.

Dr. Buchanan, a professor emeritus at George Mason, in Fairfax, Va., was a leading proponent of public choice theory, which assumes that politicians and government officials, like everyone else, are motivated by self-interest — getting re-elected or gaining more power — and do not necessarily act in the public interest.

He argued that their actions could be analyzed, and even predicted, by applying the tools of economics to political science in ways that yield insights into the tendencies of governments to grow, increase spending, borrow money, run large deficits and let regulations proliferate.

The logic of self-interest was nothing new. Machiavelli’s 16th-century treatise “The Prince” detailed cynical rules of statecraft to extend political power. Thomas Hobbes, in his 17th-century book “Leviathan,” held that aggressive self-serving acts were “natural” unless forbidden by law. Adam Smith’s “The Wealth of Nations,” published in 1776, noted that people pursuing their own good also produced benefits for society at large.

But Dr. Buchanan contended that the pursuit of self-interest by modern politicians often led to harmful public results. Courting voters at election time, for example, legislators will approve tax cuts and spending increases for projects and entitlements favored by the electorate. This combination can lead to ever-rising deficits, public debt burdens and increasingly large governments to conduct the public’s business.

Indeed, he said, governments had grown so vast and complex that it was no longer possible for elected officials to make more than a fraction of the policy decisions that genuinely affect the people. Thus, he said, much discretionary power is actually held by civil functionaries who can manipulate priorities, impose barriers to entitlements and pressure legislators for rules and budgets favorable to their own interests.

Dr. Buchanan did not invent the theory of public choice, an idea whose origins are obscure but that arose in modern economics literature in the late 1940s. But from the 1950s onward, he became its leading proponent, spearheading a group of economists in Virginia that sought to change the nature of the political process, to bring it more into line with what the group considered the wishes of most Americans.

In lectures, articles and more than 30 books, Dr. Buchanan amplified on the theory of public choice and argued for smaller government, lower deficits and fewer regulations — a spectrum of policy objectives that were ascendant in the 1980s conservative agenda of President Ronald Reagan.

Over the years since Dr. Buchanan won the Nobel, much of what he predicted has played out. Government is bigger than ever. Tax revenue has fallen far short of public programs’ needs. Public and private borrowing has become a way of life. Politicians still act in their own interests while espousing the public good, and national deficits have soared into the trillions.

Dr. Buchanan partly blamed Keynesian economics for what he considered a decline in America’s fiscal discipline. John Maynard Keynes argued that budget deficits were not only unavoidable but in fiscal emergencies were even desirable as a means to increase spending, create jobs and cut unemployment. But that reasoning allowed politicians to rationalize deficits under many circumstances and over long periods, Dr. Buchanan contended.

In a commentary in The New York Times in March 2011, Tyler Cowen, an economics professor at George Mason, said his colleague Dr. Buchanan had accurately forecast that deficit spending for short-term gains would evolve into “a permanent disconnect” between government outlays and revenue.

Article source: http://www.nytimes.com/2013/01/10/business/economy/james-m-buchanan-economic-scholar-dies-at-93.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Stocks Fall Again on Consumer Data

August 2, 2011 by Leave a Comment

As voting on the debt ceiling moved to the Senate on Tuesday, Wall Street took another step back.

Stock traders were focusing on American consumer spending and income as economists try to gauge the strength of the economy’s ability to bounce back after last week’s disappointing G.D.P report.

In early trading, the Standard Poor’s 500-stock index was down 8.47 points, or 0.66 percent. The Dow Jones industrial average was off 68.64 points, or 0.57 percent, and the Nasdaq index fell 5.56 points, or 0.20 percent.

New data showed that nominal personal income inched up by 0.1 percent in June and personal spending fell 0.2 percent. Wage and salary income, central to the ability of consumers to open their wallets, was unchanged in June from 0.2 percent in May, its smallest rise this year.

“With consumers still facing serious headwinds from a deteriorating housing sector, considerable debt burdens, and high costs for food and energy, the income generated by labor market recovery is absolutely critical,” said Joshua Shapiro, the chief United States economist for MFR, in a research note. “Without significant improvement in the labor market, consumer spending and hence overall real G.D.P. growth will prove disappointing in coming quarters.”

While negotiations on lifting the nation’s borrowing limit have loomed over the markets for weeks, any resolution of the debt ceiling with a Senate vote on Tuesday would still not guarantee the country would retain its sterling credit rating. And the uncertainty is compounded by the nation’s economic challenges, which are also likely to continue to press upon investors.

The broader market as measured by the S.P. index is down more than 4 percent over the last six consecutive days of declines, as of Monday’s close, and the Dow marked seven consecutive trading days of declines that also brought that index down more than 4 percent.

“The challenges that we are facing economically are that the hits just keep coming,” Lawrence Creatura, portfolio manager at Federated Investors, said. “We do have somewhat of a resolution to our budgetary impasse but that does not overwhelm the fact that economically speaking that the data continues to deteriorate.”

Already, some investors were bracing for Friday, when the Labor Department releases its national report on jobs, with estimates that the economy will add 85,000 nonfarm payrolls for its July tally, according to a Bloomberg survey, compared with the 18,000 tacked on to payrolls in June.

“This is a single-variable economy,” said Mr. Creatura. “And that dominant statistic is the jobs data. That is the number that matters, the single number that matters.”

Still, one bright spot might be the corporate sector. Equities have benefitted so far this year because of record profits.

“Repairing our balance sheets as a corporation and as a nation; that process of repair and healing is occurring,” said Mr. Creatura. “The nature of it is that it is slow, and we are all impatient for a full return to a robust economy, but it takes time.”

Early on Tuesday, the benchmark 10-year Treasury was at 2.72 percent, compared with 2.75 percent late on Monday.

Article source: http://feeds.nytimes.com/click.phdo?i=c157c541ecdda8760016846fecd35e05

Filed Under: Business News Tagged With: , ,

In Lifeline to Greece, a Risk for the Rescuers

June 5, 2011 by Leave a Comment

VENICE — As European leaders move toward a second bailout for Greece, some economists are warning that a new rescue will simply kick the country’s problems further down the road, and may not halt an eventual default that could strain the rest of the euro monetary union.

A year after providing an aid package of €110 billion, or $161 billion at current exchange rates, that has failed to help Greece mend its tattered finances, officials are considering whether to lend the country an additional €50 billion or €60 billion to give it more breathing room while it struggles with a deep economic downturn that has made it harder to avoid a restructuring of its debt.

Even if Greece is pulled from danger again, economists say, European leaders are faced with the prospect of providing more aid over the next several years if Greece cannot swiftly overhaul its economy and stoke the necessary growth to get it off a long-term lifeline.

“I don’t see how Greece can eventually avoid some kind of default,” said Martin N. Bailey, a senior fellow at the Brookings Institution and the former chairman of the U.S. president’s Council of Economic Advisers.

“It’s hard to see how you can avoid the need to finance this over the next 5 to 10 years,” he said over the weekend at a conference held in Venice by the Council for the United States and Italy.

His sentiment was echoed widely among economists, politicians and analysts gathered here.

“We were too optimistic about the first bailout for Greece,” said Fabrizio Saccomanni, the director general of the Italian central bank.

Slow economic growth has cut a bigger hole in the Greek budget, leading to a new scramble to find more money as the country remains shut out of financial markets and grapples with one of the largest debt burdens in the world. The government is trying to cut its deficit by €6.4 billion with more spending cuts and tax increases, and raise €50 billion by selling major national assets.

Without those pledges, the International Monetary Fund was wary of releasing a new portion of aid promised in its first loan a year ago, and European leaders were loath to come up with new financing for Greece.

Experts at the conference expected a number of potential international investors — many of whom stockpiled cash after the financial crisis — to look at what Greece is putting up for sale. But the country’s ability to restore economic stability over time would be a major consideration for any deal.

That confidence may be hard to come by. The Greek fiscal crisis worsened after Moody’s Investors Service warned last week that there was a 50 percent chance that the country would default or have to restructure its debts within the next five years.

European leaders want to avoid such an event at all costs. The European Central Bank has warned that a default or restructuring may lead to problems on the order of the collapse of Lehman Brothers, by sparking a panic about the ability of Ireland and Portugal — which have also received European bailouts — to repay their debts. The result, some say, could be a new contagion that engulfs other weak euro zone countries, a number of large European banks and even the E.C.B., which holds large amounts of Greek debt.

Some officials say such warnings are too dire.

“I don’t see a crisis in the euro zone,” Mr. Saccomanni said. “If anything, Europe’s financial conditions are sounder than other economies, although there is a crisis in some euro zone countries.”

But most economists say they see any further trouble in Greece as both a political and economic flash point for the rest of the euro zone. As it is, the inability of heavily indebted countries to stoke their economies will probably broaden an economic divide between those nations and Germany.

The German economy has expanded so quickly that the E.C.B. raised interest rates in April to ward off the specter of inflation in the country, a move that analysts say will further dampen growth in Ireland, Portugal, Spain and other weakened economies.

Article source: http://www.nytimes.com/2011/06/06/business/global/06euro.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,