November 28, 2020

New Defaults Trouble a Mortgage Program

Banks and other mortgage servicers have accepted $815 million in taxpayer-funded incentives for helping homeowners who have since redefaulted on their home loans, a watchdog for the Treasury Department’s Troubled Asset Relief Program, or TARP, reported on Wednesday.

More than a third of homeowners who received loan modifications under TARP’s mortgage modification program have since stopped paying, but servicers kept the money they received for modifying those loans, according to a report by Christy L. Romero, the special inspector for TARP.

Many of the homeowners received scant relief, with a large majority benefiting from a reduction of less than 10 percent on their monthly payments, according to an analysis by Ms. Romero’s office.

The Treasury has spent only about a fifth of the $38.5 billion allocated to help homeowners under TARP. Any TARP money not spent by the end of 2015 will be returned to the general fund.

“Treasury took extraordinary action to bail out the banks,” Ms. Romero said. “They still have to do the same for homeowners. The idea was not to put money into the banks and then have them fail later, and the same is true for homeowners.”

Treasury officials have defended the mortgage program, called the Home Affordable Modification Program, pointing to data showing that loan modifications under its rules have been longer-lasting, and more favorable to homeowners, than private loan modifications. The Obama administration has also taken a number of steps to improve the program, and more recent modifications show lower default rates after a year than those given in 2009 and 2010.

At first, servicers received $1,000 for every loan modified. Now they are paid $400 to $1,600 for permanent loan modifications, depending on how many months in arrears the homeowner was (a modification made at the first sign of trouble is more effective than one made after many months of failure to pay). They can receive extra money if they reduce the monthly payment more or the loan modification lasts longer.

Timothy G. Massad, assistant Treasury secretary for financial stability, said the loans in question already posed a high risk of default. “While the housing market and the economy are improving, it is important to acknowledge the variety of challenges homeowners faced during the economic crisis, including unemployment and underemployment,” he wrote in a letter to Ms. Romero. “These facts limit the ability to achieve a very low redefault rate by program design alone.”

The Obama administration was criticized for failing to help homeowners enough during the financial crisis, but such complaints have receded as the housing market improves. According to CoreLogic, the national foreclosure rate is still more than double what it was before home prices began to plunge in 2007 and 2008. As many as 9.7 million households, out of roughly 75 million owner-occupied homes, still owe more on their mortgages than their home is worth.

The Home Affordable Modification Program was initially supposed to help three to four million homeowners, but only 1.2 million received permanent modifications, of which about 27 percent have defaulted again.

The report found that the smaller the reduction in payments and overall debt, the more likely the homeowner was to redefault. Those who had low credit scores, owed significantly more than their home was worth or had mortgages less than five years old were also more likely to stop paying.

Ms. Romero said that Treasury had not collected enough information about what was causing loan modifications to fail.

“We’ve been focused on trying to get more people into the program, and Treasury has too,” she said. “And all of a sudden we were thinking, how many people are falling out of the program?”

Of the 865,000 people who have current loan modifications, she said, more than 10 percent are one or two payments behind. Those people may be eligible for help from other federal programs.

“Treasury should require, at the very least, the servicers to reach out to the homeowners,” she said, “and ask ‘What’s going on?’ ”

Article source:

Watchdog: Regulators Bowed to Banks on Bailout

The report was issued Friday by the office of Christy Romero, the acting special inspector general for the $400 billion taxpayer bailout of the financial industry and automakers. It found that regulators, to varying degrees, “bent” to pressure from the banks in late 2009 and relaxed the requirements put in only weeks earlier.

The regulators also were motivated by a desire to cut the government’s stake in the banks it had bailed out in September 2008 when the financial crisis struck, the report says.

Meanwhile, the banks wanted to get out quickly from the so-called Troubled Asset Relief Program, or TARP, because they wanted to avoid its limits on executive compensation and the stigma associated with receiving rescue money, according to the report.

The report focused on the sales of stock to raise capital and bailout repayments by four major banks: Bank of America Corp. and Citigroup Inc., which each received $45 billion from the government; Wells Fargo Co., which received $25 billion; and PNC Financial Services Group Inc., which got $7.6 billion.

Because the regulators failed to enforce the policy for repayments set by the Federal Reserve, the new report says, “the process to review a TARP bank’s exit proposal was … inconsistent.” That policy required banks to issue at least $1 in new common stock for every $2 in bailout money they repaid.

But the banks doggedly resisted the regulators’ demands to issue common stock, seeking instead to use cheaper and “less sturdy” alternatives such as selling assets or issuing preferred stock, the report found. Issuing common stock is a better way to shore up a bank’s capital base, it said.

When Bank of America, Citigroup and Wells Fargo repaid the government in December 2009, only Citigroup fully met the 1-for-2 requirement, the report said.

The regulatory agencies overseeing the banks, which negotiated the repayment terms with them, were the Federal Reserve, the Federal Deposit Insurance Corp. and the Treasury Department’s Office of the Comptroller of the Currency. Treasury itself ran the bailout program, and the report said its involvement in individual banks’ repayment proposals was greater than was previously known publicly.

It said Treasury encouraged the banks to speed repayment, raising the criticism that Treasury officials put that goal ahead of ensuring that the banks were strong enough to exit TARP safely.

“The result was nearly simultaneous repayments by Bank of America, Wells Fargo and Citigroup in an already fragile market,” the report said. The three banks issued a combined $49.1 billion in new common stock as part of their repayments.

Tim Massad, Treasury’s acting assistant secretary for financial stability, said “We’re pleased that the report acknowledges that the nation’s large banks are much stronger today as a result of the actions taken by Treasury.”

Taxpayers will recoup the full amount invested in banks, around $245 billion, and will make an additional $20 billion or so in profit, Massad said in a telephone interview Thursday.

He said the quickened share sales were the best approach to follow. Delaying the banks’ stock offerings and repayments “carried a lot of risk with it,” said Massad, because it’s hard to know what the market for bank shares is going to be like later on, and holding back could dampen investor confidence. “We pushed them to raise as much private capital as they could,” he said.

Robert Stickler, a spokesman for Charlotte, N.C.-based Bank of America, said the bank’s wanting to issue stock “all at once rather than in stages was because of market conditions.”

He rejected the idea that his bank might have pressured the regulators for a quicker exit. The bank’s primary motivation was to remove the stigma of being a TARP recipient, Stickler said, and there also was concern that the restraints on executive pay were making it hard for them to keep executives.

The Federal Reserve said in written comments on the new report that, while it led the process of reviewing banks’ repayment proposals, it consulted with all the agencies. “All agreed with the final decision to allow each” bank to repay, the Fed said.

The Office of the Comptroller of the Currency disagreed with the report’s finding that the bank review process was inconsistent. The flexibility to “deviate somewhat” from the requirements was necessary and produced positive results, the agency said.

PNC, Wells Fargo and Citigroup said the TARP repayments allowed them to focus on their businesses and were in the best interests of taxpayers and shareholders.

Article source:

You’re the Boss: Did Wells Fargo Answer Your Lending Questions?

Marc Bernstein and Douglas Case, the Wells Fargo's two top executives for small-business lending.Peter DaSilva for The New York TimesMarc Bernstein and Douglas Case, Wells Fargo’s two top executives for small-business lending.
The Agenda

Two weeks ago, in tandem with our conversation with two Wells Fargo small-business lending officers, Marc Bernstein and Doug Case, we invited You’re The Boss readers to submit questions for the executives. Today, we present their responses.

We selected the questions from the comments posted by readers. We only forwarded clear questions specifically about small-business lending (and not questions about, say, deposits or complaints about customer service), and we edited them for clarity or space. In some cases, readers posted comments that suggested interesting questions, so we formulated those and sent them to the Wells Fargo executives as well. Their answers have also been edited for space.

Did they answer the questions to your satisfaction? Tell us what you think, using the comment form below.

Q. Reader 7themick is very pessimistic about economic recovery and small business: “The rush to lend to this segment may result in a relapse of portfolio quality, only this time there would be no TARP because the government is out of money.” Does he have a point? If, as some economists are now predicting, we’re heading into a double-dip recession, should that mean less lending, rather than more?

MR. BERNSTEIN: Yes, the economic recovery is slow, but we are lending, and more so than a year ago. We don’t foresee any substantial changes to our current lending criteria even if the economy were to weaken in the near future. But lending could be reduced if, because of the weak environment, small-business owners become more cautious about borrowing to grow their business or to make other investments or if a slower economy reduces revenues and profits for some small businesses, which also reduces their ability to support additional borrowing.

Q. From Shylock: “Smaller businesses, especially those under $1 million in annual sales, are what most people I know consider ’small business.’ What is Wells Fargo doing specifically for these smallest businesses? It seems pretty easy to show an increase in small business lending the larger you make the threshold for ’small.’ Will you provide more detailed information on your lending to businesses under $5 million, under $1 million, and start-ups?” For more specificity, The Agenda suggests percentage changes and total loan dollars for 2009, 2010, and the first quarter of 2011 (compared to the same time last year).

MR. BERNSTEIN: We take great pride in our long history of being a leading lender to America’s smallest businesses. Our industry leadership in small business is why the World Bank Group has invited Wells Fargo to work with banks in developing countries around the world. We’ve worked with banks in Africa, Asia, the Middle East, and elsewhere to help bankers reach out and increase lending to the smallest businesses in their countries.

There are various reports that measure banks’ lending volumes. The most relevant to your question about business size would be the federal government’s Community Reinvestment Act data. C.R.A. uses the dollar amount of the loan to determine whether it is a small business loan. For eight consecutive years, Wells Fargo is America’s No. 1 small-business lender for loans less than $100,000. In 2009 (the most recent C.R.A. data published by the government) we extended more than 630,000 loans with originations of $100,000 or less. The average loan size was about $30,000.

While we do provide many start-ups with credit cards, we do not generally lend larger sums to brand new businesses. Studies show that about half of new start-ups close in their first three years, and it’s difficult to predict up front which businesses will succeed and which will fail. So we require a business to be a minimum of at least two years old before we’ll consider providing a large line of credit or loan, although we do sometimes make exceptions for customers with a strong, long-standing consumer relationship with Wells Fargo.

Q. NathanielB writes that “my recent experiences with the Main Office Commercial Loan Vice President was fraught with delays, procrastinations, and an eventual response that the designated location was declared to be within a ‘no loan’ area and we had spent over three months negotiating this loan.” Does Wells Fargo really have “no loan areas,” and if so, what defines this territory? And if not — since I think no-loan areas are illegal — what do you suppose that banker might have said for this prospective borrower to construe the rejection as red-lining?

MR. BERNSTEIN: We’re committed to doing what is right for our customers and upholding sound underwriting practices. Wells Fargo will only approve an application when we believe the borrower has the ability to repay the loan. We do not have “no loan areas.”

Q. JRG, who seems to have experience in large-bank lending, writes about credit scoring: “Loan scoring is based on complex models that desire a certain return outcome based on assumed risk factors and loan pricing. Likely included in these models are other big picture factors such as industry and geography. A borrower can have good individual credit characteristics but if you are a general contractor in Las Vegas you could get declined for a new loan or asked to leave the bank only because the bank has too much contractor exposure in Las Vegas and want to bring that exposure down. This concept is called ‘portfolio management’ and is similar to managing concentration risk in an investment portfolio.”

In our conversation you acknowledged the role such big-picture factors play in credit scoring, but is our commenter right that they could knock someone with otherwise good credit out of the running for a loan? Does Wells Fargo use credit scoring not (or not just) for determining an individual borrower’s likelihood of default but for managing the risk and return across the portfolio? Is there, in your view, a difference between the two?

MR. BERNSTEIN: When considering an application for credit, we do take into account the challenges facing a given industry and the nature of the economy of a particular region. Continuing with the example in the question, contractors in Las Vegas were indeed having a very difficult time after the housing bubble collapsed – and, before granting a loan to a contractor in Las Vegas, we would want to have reason to believe that the business would be able to repay the loan to offset those very obvious risks. “Concentration risk” is a legitimate concern for lenders; however, Wells Fargo has a diversified portfolio of small-business loans in all 50 states and across hundreds of industries. In the 16 years I’ve managed our lending business for loans under $100,000, we’ve never once declined a small business loan application out of a concern that we have too many loans already in that area or that industry.

Q. Reader beaconps asks, “With all this performance data, does Wells Fargo counsel any of their small business customers? Many start businesses with a skill but that skill is not business finance.” I’ll add to that: What sort of counseling does Wells Fargo make available? Is it ever mandatory?

MR. CASE: Providing financial education and advice is at the center of our work at Wells Fargo. We know many business owners don’t start with a strong understanding of business finance. Our bankers can help business owners understand cash flow and credit so the owners can focus on running their businesses. We recently launched a comprehensive resource center called the Business Insight Resource Center, offering a video library covering topics from taxes and retirement to cash flow and understanding credit. The site also houses hundreds of articles and several webcasts that address a wide range of topics related to running a business.

Q. Rick A recounts trying to get a $7,000 loan from Wachovia a few years ago to buy two computers for his business. “I am a sole proprietor, and in spite of having pumped several million dollars through my Wachovia checking account in the last 15 years, I was told to use my high-interest credit card.” Despite your stated commitment to loans under $100,000, is there a minimum threshold for a loan necessary to justify your bankers’ time and resources? Are standards for credit-worthiness lower, or higher, when it comes to small-dollar loans?

MR. BERNSTEIN: I can’t speak to the experience you had at Wachovia several years back but what I can say is that Wells Fargo welcomes the opportunity to help you with your financial service needs, including potentially credit. Since your business finances are private and confidential, we would welcome the opportunity to connect offline so we can see what we can do to help. There’s no minimum size for us, and we do a lot of very small loans.

Q. Finally, a question from a You’re The Boss colleague, Jay Goltz: “I would like you to do everyone a great service. How about a look behind the curtain? Most people do not know what a bank is looking for when they consider a loan, or they do know but they don’t know the specifics. For instance, The “Five C’s” of credit are pretty well known — character, cash flow, collateral, capital, and conditions. What are the minimal requirements you are looking for? Let’s say someone wants to borrow $100,000. The cash flow, collateral and capital are somewhat objective. That is the easier part. What about character? Does a previous bankruptcy count against them? Credit score? Doesn’t go to their kid’s baseball games? Married four times? What about conditions? From my experience, many people trying to borrow money are not even close to qualified, but they don’t know it. If you answer these questions I believe that many people will have a better idea of where they stand. Perhaps they can work toward improving their situation, or at least stop wasting time. When you answer, can you please, just for a moment, pretend that there are no lawyers or P.R. people to answer to. I’m sure everyone will appreciate it.”

MR. CASE: The Five C’s help us develop a profile of the applicant. There is no specific weighting — the focus is on your ability to repay the loan. If you have derogatories on your application, such as a 60-day payment delinquency, these may hurt your chances of obtaining credit. In this case, you’ll want to work on cleaning up your credit report — both business and personal. There’s no magical formula for capital, but a substantial personal stake will help show that you’ll do everything you can to make the business successful and repay the loan.

You could add a sixth “C” to this list: customer. If you have an existing relationship with us, it allows us to access more information on your character and ability to manage your financial situation. For example, establishing a deposit account with us can be an excellent way to show your cash flow firsthand.

Article source: