Economic Updates

January, 2011

Economic Forecasts Range from (Relatively) Upbeat to (Exceedingly) Grim

by Nena Groskind

It’s time for New Year’s resolutions and for economic forecasts, which I’ve resolved not to make.  But I’ve compiled a bunch of forecasts others, more confident or more foolhardy, and certainly more prescient than I, have made, and they are all over the lot.  In fact, you can find a forecast to support whatever expectations, hopes, or fears, you have for the coming year.

The optimists, convinced that the economic recovery has become self-sustaining, have found considerable support in recent economic reports, among them:

• Claims for unemployment benefits fell to their lowest level in two years in last week of the year.
• Holiday sales increased by 5.5 percent, as consumers spent more than analysts had expected.
• Manufacturing continues to show signs of strength.
• Auto sales have reached their highest levels since the government’s “cash-for-clunkers” program ended in 2009.
• Surveys indicate that more corporate executives are planning to increase their payrolls this year.

But the pessimists have plenty of ammunition, too – most of  it coming from the unemployment rate (still high and expected to remain elevated through the end of this year) and the housing market, which continues to struggle under the  weight of record foreclosures and uncertainty about when (or whether) home prices will bottom out and begin to recover.

OVERVIEW
Robert Reich, former Labor Secretary in the Clinton Administration.

“What will happen to the US economy in 2011? If you’re referring to profits of big corporations and Wall Street, next year is likely to be a good one. But if you’re referring to average American workers, far from good. The two American economies – the Big Money economy and the Average Working Family economy – will continue to diverge. Corporate profits will continue to rise, as will the stock market. But typical wages will go nowhere, joblessness will remain high, the ranks of the long-term unemployed will continue to rise, the housing recovery will remain stalled, and consumer confidence will sag.”

John Silva, chief economist, Wells Fargo Securities LLC

“The economy is gathering momentum.  The character of the recovery is a little more solid. Job growth will be stronger and that will help the consumer.”

Mark Zandi, chief economist, Moody’s Economy.com

“[The economy] will be off and running….The [public] policy response, in its totality, has been very aggressive, and I think ensures that the recovery will evolve into a self-sustaining expansion early in 2011.”  

N. Gregory Mankiw, chairman of the Council of Economic Advisers under former President George W. Bush.

“Anything that spooks consumers and businesses from spending” could threaten the recovery, including “a worsening of the fiscal crisis in Europe or the increased fear that a similar crisis will soon infect U.S. cities and states.”   

John Schoen, senior producer, msnbc.com, summarizing the results of MSNBC’s annual Economic Roundtable survey of leading economists.

“Sadly, it all adds up to another year of relatively modest growth, not nearly enough to make much of a dent in the painfully high 9.8 percent unemployment rate.”  

EMPLOYMENT

Optimists are focusing on recent signs that the labor markets are improving; pessimists note that the progress is miniscule and slow.  The consensus view holds that the unemployment rate, now 9.7 percent, will still be at or above 9 percent at year-end, and will be above 8 percent 12 months after that.

Jennifer Grasz, CareerBuilder.com.

“There is a higher level of optimism [among employers and staffing firms] going into 2011… “There is more confidence.”   

Charles Purdy, Monster+HotJobs.

“A lot of people who have jobs are considering looking for new work this year.  [More than 80 percent of respondents to a Manpower survey indicated they plan to look for a new job this year, up from 60 percent in the 2009 survey.] I don’t know if we’re going to see a huge uptick in the number of jobs, but I do think we’ll see a huge surge in the number of people looking for work, even among people who are already employed.” 

Alan Krueger, formerly chief economist in the Treasury Department.

 “Historically, unemployment rates come down slowly, so even with 4 percent growth, you would expect to see the unemployment rate come down maybe a percentage point a year, probably less….Given how high the unemployment rate is, that’s going to seem very slow.”  

John Ryding, chief economist, RDQ Economics.

 “If you go back and look at forecasts a year ago, economists generally got growth right, but they got unemployment wrong.  We probably need 5 percent growth to significantly lower unemployment. It’s just a question of how deep a hole we’re digging out of.”  

Ethan Harris, head of developed markets economics at BofA Merrill Lynch.

 “There is some momentum in the job market, but in terms of real healing it’s just an incredibly slow, painful process….I think there is just a tremendous skepticism and lack of confidence in the economy from the business sector.  They just don’t really believe in the recovery. They don’t want to risk over-hiring, and that has a self-fulfilling effect.”   

HOUSING

The optimists say price declines, an improving economy and a stronger employment picture will finally trigger a home buying resurgence.  Affordability will override buyer fears, convincing them that this is a good time to enter the market.  Pessimists say those fears are justified as home prices still have further to fall. With employment growth likely to remain sluggish this year and credit standards tight, pessimists are predicting that a housing recovery, if there is one, will be anemic, at best.  Pessimists point to new and existing home sales, which continue to fall below even modest expectations, the renewed slide in home prices, and the “shadow inventory” of unsold homes created by foreclosures still to come to support their grim view; optimists note the surprising strength in the November pending sales report, signs of an improving labor market and the likelihood that the Fed will keep interest rates low this year to support their brighter outlook.

Charles Lieberman, chief investment officer, Advisors Capital Management

 “The housing market is going to shock people.  Once we get the ball rolling, it becomes easy to roll. The most critical thing the Fed can do, which is not easy, is to promote job growth. If we see job growth we are going to see a very strong housing market.”  

Douglas Duncan, chief economist, Fannie Mae.

“Despite rising mortgage rates, our forecast for home sales is stronger than the previous forecast, given our brighter economic growth and labor market outlook.  We expect modest increases in home sales, despite recent interest rate rises, due in part to modest additional declines in home prices, and we expect people to take advantage of affordability as their employment and income outlook brightens.”

Paul Dales, U.S. economist, Capital Economics, Ltd.

“Housing starts are really at rock bottom.” Housing may not provide the recovery boost it has provided in the past, but “[it’s] not going to be a drag on growth.”  

Scott Sambucci, vice president of data analytics, Altos Research

“Prices are going to go down a little bit more, and if there’s nothing but bad news out there, [which is] what we’re seeing, then that must mean that at some point we are hitting the trough, and we feel that 2011 is finally going to be that point….That doesn’t mean we’re instantly going to bounce out of the trough, [however].  …. “It’s going to be a slow, bumpy ride for the next couple of years.”  

A. Gary Shilling & Co., December investment report

Housing market conditions will get considerable worse before they begin to improve even marginally, because:  Excess inventory, “the mortal enemy of prices” is pushing housing into a double dip. “Housing normally spurs economic growth early in recoveries as this interest rate-sensitive sector responds to earlier rate cuts by the Fed.  This time, it’s been a dud due to the collapse in prices.”

Nouriel Roubini, president of Roubini Global Economics.

“It’s pretty clear [from the October decline in the Case-Shiller home price index] that the housing market has already double dipped. [E]ven a 5 percent fall in home prices will push an extra 8 million homeowners into negative equity with the risk of millions walking away from their home.”

Pete Flint, chief executive, Trulia.com.

“More and more, American homeowners, sellers and buyers are tamping down their expectations for a swift recovery in the housing market and bracing themselves for a long, slow climb back to a healthy real-estate market.”  

OctoberLayoffs are declining, the employment numbers look better, tight credit is getting looser, retail spending forecasts are becoming more optimistic and the service sector shows signs of strengthening. In fact, many indicators suggest the economy is improving – but not fast enough to reduce the unemployment rate nor dramatically enough to lift an increasingly downbeat consumer mood.

Economy Is Improving but the Progress is Slow

Among the many positive – or somewhat positive – October reports:

• Employers increased their payrolls more than expected, adding 151,000 workers for the month, while the Labor Department indicated that September’s job loss was smaller than originally reported.
• The credit freeze showed signs of thawing, as banks increased their lending activity in July, August, and September – the first consecutive lending gains in two years. While the increase in credit availability fell considerably short of overwhelming, at least “lending is no longer collapsing,” Neal Soss, chief economist at Credit Suisse told Business Week.
• The service sector gained more ground than expected, expanding at its fastest pace in the past three months. The manufacturing sector also showed continuing strength, indicating to some analysts that the recovery remains on track and is poised to gain momentum in this year’s final quarter.

October Surprise

The surprising October payroll report was particularly welcome, but it was also tempered by less positive employment data, in particular – an unexpected weekly increase in unemployment claims and statistics indicating that the current “participation rate” (the percentage of adults working or seeking employment) fell to its lowest level in 26 years.

“All in all, the payrolls report was encouraging news, especially for those who got one of the 151,000 jobs,” Rex Nutting, a columnist for Market Watch wrote. “But this economy and this nation are still struggling,” he added.

Consumers, apparently, are focusing less on the encouragement than on the struggle. The key consumer confidence surveys pointed in opposite directions in October – the Conference Board up a little, the Thomson/Reuters survey down a little. Although the gauge of expectations for the next six months rose in both surveys, the view of the current job market was dismal. “Confidence is still very depressed,” Ryan Sweet a senior economist at Moody’s Analytics Inc., told Bloomberg News. “For any, it’s still going to feel like a recession until employment comes back.”

Recovery in the Air?

Despite their uncertainty about the employment outlook, consumers increased their spending in the third quarter, fueling an unexpected increase in economic growth. Although spending trailed off in September, as consumer income declined for the first time in the past 14 months, retail sales increased, leading the National Retail Federation to boost its estimates for holiday spending. “The markets can smell a recovery is coming,” James Paulsen, chief investment strategist for Wells Capital Management asserted in a Bloomberg interview.

Surveys of corporate executives similarly reflect something of a disconnect between what people are saying about the economic outlook and what they are doing or planning to do. Confidence levels for chief executive officers fell to the lowest level in the past 18 months in a Conference Board Survey. Consistent with that view, Moody’s Investors Service estimates that companies have socked away nearly $1 trillion in cash, mirroring the increase in consumer savings rates over the past year.

“It would be naïve to believe that the human side of running a business is insulated from the low confidence that consumers have, John Milne, an asset manager, told Bloomberg. But 31 percent of those nervous executives also said they are planning to increase hiring over the next six months, compared with only 17 percent in the last survey. And a separate survey by the National Association for Business Economics found that more companies are planning to increase spending on new equipment in the next year.

No Relief in Housing

If you’re looking for less ambiguity, you can find it in the housing market reports, but the picture isn’t particularly bright. Although new home sales increased by 6.6 percent in September, the sales pace remains weak and close to a record low. Existing home sales also increased (by 10 percent), but remained near the lowest levels in the past decade. Pending sales and building permits, forward indicators for existing and new home sales, respectively, both declined, and home prices continue to fall.

The Standard & Poor’s/Case-Shiller 20-city index fell by 2 percent in August, as 15 of the cities reported declines, leaving the index nearly 28 percent below its July 2006 peak and leading Karl Case, a co-founder of the index, to conclude, “The recovery that started in 2009 has petered out.” Some analysts are predicting that prices will fall another 8 percent to 10 percent before hitting bottom; housing industry analyst Gary Shilling thinks a 20 percent decline is possible, given the large, foreclosure-driven inventory of unsold homes.

Moody’s Mark Zandi is somewhat less pessimistic. Although he agrees that prices have further to fall, he is confident there will be “no vicious self-reinforcing spiral down.” And he sees a definite ray of light at the end of this tunnel. As the employment picture begins to brighten, he predicts, the housing market will rebound as consumers recognize that home prices are more affordable than they have been in the past decade.

The question, of course, is when that turning point will come – for the housing market and the economy.

July 

Good, Bad, Ugly and Uncertain:

MIXED REPORTS KEEP THE ECONOMIC PICTURE BLURRED

Private sector economists, trade associations, and government agencies are generating mounds of economic data, some of it positive, some of it negative, and much of it, in the aggregate, contradictory and confusing. With investors responding viscerally and instantly to every report, the stock market has been whipsawed for weeks. It is easy to understand why, though the Thomson Reuters/University of Michigan Consumer Confidence Index reached its highest level in two years in June, the Conference Board’s confidence index, released just two weeks later, suggested a collective need for Zoloft.

“Increasing uncertainty and apprehension about the future state of the economy and labor market” is how Lyn Franco, director of the Conference Board Consumer Research Center, explained the unexpected decline in that index from 62.7 in May to 52.9 in June.

Unambiguous economic indicators are hard to find, as recent economic reports reflect a recovery that has gained some traction but not very much momentum.

• The International Monetary Fund (IMF) recently revised its growth forecast for this year upward to 4.6 percent from 4.2 percent in April. But at the same time, the organization warned that the risks threatening the global economic recovery have “risen sharply” because of renewed turbulence in the financial markets.
• The Commerce Department reported that the economy grew at a 2.7 percent annual rate in the first quarter, down from the preliminary estimate of 3 percent.
• New orders for durable goods declined by 1.1 percent in May after increasing by 3 percent in April. Inventories, meanwhile, increased by 0.8 percent – the fifth consecutive monthly increase – suggesting to some economists that economic growth is being driven more by re-stocking of goods than by consumer and business demand for them.
• The Institute of Supply Management’s (ISM’s) manufacturing gauge fell from 59.7 in May to 56.2 in June, still well above the 50 reading indicating continued growth. The ISM’s production index (a measure of new orders) also declined, from 66.6 to 61.4 and the association’s employment gauge dropped to 57.8 from 59.8 in May. 

Encouraged but Worried

Encouraged by continuing signs of recovery, but worried about its fragility, the Federal Open Market Committee left the Federal Reserve’s interest rate target unchanged at its June meeting, explaining in a post-meeting statement: “Information received since…April suggests that the economic recovery is proceeding and that the labor market in improving gradually. Household spending is increasing,” the committee added, “but [it] remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.”

The primary concerns for the Fed and most economists are job creation and the housing market, which is dependent on it. There hasn’t been much good news of late in either sector.

In the housing market, despite near-record low interest rates, sales of new and existing homes plunged in May as the homebuyer tax credit expired, ending what has been a major prop for home sales. Existing sales fell to an annual rate of 5.66 million units ¾ a 2.2 percent decline that was more severe than analysts had expected.

The National Association of Realtors’ pending sales index – an indicator of future sales ¾ plunged by nearly 30 percent in May and new home sales followed the same downward path, falling to an annual rate of 300,000 units – 32.7 percent below the April pace and a new low for the industry. The May new home sales rate also fell 100,000 units short of the consensus forecast for the month.

“We would be lying if we said the size of the drop was not shocking,” Dan Greeenhaus, chief economic strategist for Miller Tabak, wrote in a research note.

Although the foreclosure rate has shown some recent signs of slowing, newly initiated foreclosures increased by 18.6 percent in the first quarter, increasing inventories of unsold homes and continuing the downward pressure on home prices. (Banks had 1.13 million foreclosed homes in their real estate owned inventories in May, 21.2 percent more than they held a year ago.)

The Case-Shiller Index of home prices managed to eke out a 3.8 percent increase in April compared with March, but analysts attributed that gain almost entirely to the tax credit, suggesting, they said, that prices are likely to remain flat, at best, for the remainder of the year, and could fall further. Despite the April increase, prices remain 30 percent lower than at their peak. 

Employment Cure Elusive

The best medicine for what ails the housing market, most agree, is solid job growth, but that cure remains elusive. Hopes that the labor market was digging its way out of the recessionary ditch, buoyed by positive reports earlier this year, were dashed in June, when the end of the Census slashed 225,000 workers from US payrolls. The private sector added only 83,000 employees for the month ¾ well below the 110,000 analysts had expected ¾ for a net loss of 125,000 jobs. The unemployment rate fell to 9.5 percent, the lowest level this year, but that was because 625,000 workers who had been looking for jobs abandoned the search, eliminating themselves from the unemployment rate, but not from the ranks of the unemployed.

Economists say the labor market needs to generate about 200,000 jobs per month to make a meaningful dent in the still painfully high unemployment rate. By that measure, Heidi Shierholz, a labor economist at the Economic Policy Institute, told CNNMoney, “Things are very, very weak and they aren’t expected to strength anytime soon. It’s going to be a long slog,” she predicted.

Reading between the lines of the labor market reports, however, it is possible to fashion a somewhat less pessimistic forecast. Among other factors worth noting: A recent significant decline in the number of announced and planned layoffs and indications that more employers are planning to add workers between now and the end of the year. On that point, 39 percent of the chief executive officers responding to the Business Round Table’s second quarter survey said they intend to expand their payrolls, up from 10 percent in the first quarter survey, and the highest positive response to this question since the second quarter of 2007.

Also encouraging in the Round Table survey ¾ the number of employers planning to scale back their hiring plans fell to 17 percent from 21 percent in the first quarter. A separate survey found that for the first time in the past 15 months, more employees left their jobs voluntarily than were laid off. Some left because they had found new jobs, others because they were confident they would be able to do so. Either way, some analysts say, the survey results indicate that the labor market is improving more than recent employment reports suggest. “There is a century’s worth of evidence that bears out this view that quits rise and layoffs fall as the job market improves,” Steven Davis, an economist at the University of Chicago, told the Associated Press. 

Combine all of these disparate reports – the good, the bad, the ugly and the uncertain – and you probably reach a conclusion close to that of New York Times columnist David Leonhardt: “The overall picture isn’t so much of a double-dip recession as it is of a badly wounded economy recovering at a slow pace.”

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OPTING OUT OR THROWING OUT?

Concerns about the demise of overdraft protection programs, and the loss of fee income for banks resulting from it, may be overstated. After surveying more than 1,300 consumers nationwide, ACTON Market Intelligence found that 58 percent of them will, in fact, opt out of overdraft protection when given the opportunity to do so. But the vast majority of bank customers who use the overdraft service will opt in, the survey found, and they will pay a higher fee, if necessary, in order to continue the service.

Equally significant, the survey found that many of the consumers who do “opt out” will do so by default rather than by design, by failing to read and return the opt-in permission form. (Under new Federal Reserve regulations, financial institutions will have to obtain affirmative permission from existing consumers in order to provide overdraft protection services to them.) When asked what they would do with the forms, 30 percent of current overdraft users said they would handle the forms the same way they handle most of the information they receive from their banks – by throwing it away.

The number of overdraft customers who are “opted out” by failing to respond will far exceed the number who opt out affirmatively, because they don’t want to pay overdraft protection fees, Brian Beach, CEO of ACTON, said in a press statement describing the survey results. “Our research confirms that if a bank or credit union sends out only the opt-in form, without previous info-marketing in place, almost a third of their overdraft customers will likely not respond and will be opted out,” Beach noted. “Since especially heavy overdraft users are predisposed to opt-in,” he added, “getting them to respond is key.”

The ACTON study identified another potential problem many financial institutions have not recognized: Heavy overdraft protection users, who fail to opt in and subsequently have a debit charge denied at the point of sale, will respond by opting in for overdraft protection – at another institution.

“The psychology of overdraft users is such that they are extremely averse to having their debit card transaction denied at retail,” Beach said. “If they begin to be denied, they will not just re-opt-in with their current bank or credit union. Most likely they will cut and run. And it will not necessarily be the better overdraft program of another bank that attracts them – it is the stigma and experience of being denied that they want to escape by moving to another [institution].]” ACTON estimates that up to 5 percent of all debit card users could vote with their feet in that way.

Industry executives worrying about the consumers who will opt-out of overdraft programs are focusing on the wrong issue, Beach said. It is the “non-responses” of heavy overdraft users who want the protection that ought to concern them, accounting for about 30 percent of the overdraft fee losses institutions will incur, ACTTON estimates. “And then the other shoe drops,” Beach warns, “when unprotected customers react and banks lose 5 percent of all their debit card accounts as a result.”

BRACING FOR CHANGE

Restrictions on derivatives, protection for consumers and the role and independence of the Federal Reserve have captured the headlines and dominated the financial reform debate. But the sweeping reform bill, which recently won Senate approval, contains a number of provisions that, though less visible, will require major changes in the way lenders underwrite residential mortgages and how loan originators are compensated.

Both the Senate and House versions of the reform legislation target practices that are blamed for the subprime mortgage crisis and the collateral financial and economic damage it has caused. Key mortgage-related provisions would:

• Ban the yield spread premiums that created an incentive for mortgage brokers and loan officers to originate high-rate loans, even when borrowers could qualify for lower-cost alternatives.
• Ban prepayment penalties on many loans (including adjustable rate, subprime and high-cost mortgages) and limit the prepayment penalties allowed on conventional mortgages. The bill would also ban incentive payments for loans including prepayment penalties.
• Require lenders to document the income of borrowers (eliminating so-called “liar loans”) and verify their ability to repay the mortgages offered to them.
• Require Wall Street firms to retain a 5 percent interest in the loans they syndicate and sell to investors. The House version of the bill requires lenders to retain the 5 percent interest in the loans they originate until the loans are fully repaid. Industry executives prefer the Senate language, which exempts some loans from the risk-retention requirement.

The Mortgage Bankers Association is among the industry trade groups that have vowed to lobby “aggressively” for the Senate version of the bill. “That is number one on our list,” John Courson, the MBA’s chief executive, told the Washington Post. “We do not see the purpose for restrictions on loans that have not posed problems for the marketplace or the consumer.”

Mortgage brokers, for their part, have warned that a “safe harbor” provision in the Senate bill, essentially capping points and fees lenders can charge at 3 percent of the mortgage amount, would “take mortgage brokers completely out of the competitive landscape.”

A Conference Committee will soon begin meeting to reconcile differences between the House and Senate bills, with an eye toward securing final passage and the President’s signature before the July 4^th Congressional recess.

BOOTS AREN’T MADE FOR WALKING

After a flood of articles warning that consumers are increasingly viewing the payment of their mortgage debts more as business calculations than as moral obligations, a new study presents a different view. The study, by Brent White, an associate professor of law at the University of Arizona, found that most homeowners who “strategically default” on loans they can afford to pay do so because they are angry or fearful, not because they have calculated that defaulting is in their financial interests. Most borrowers continue to make their mortgage payments even when the loans are severely underwater, the study found, indicating, White concludes, that “the stigma against default apparently remains robust.

A separate study by RealtyTrac and Trulia.com, reached the same conclusion. More than half (59 percent) of the nearly 2,600 consumers responding to this survey said they would continue making payments on an underwater loan, regardless of how large the disparity between the loan amount and the value of their home. Only 1 percent of the respondents who said they would default also said that would be their first choice; 69 percent said they would try to persuade their lender to modify their loan before considering walking away from it.

Although these studies suggest that the forces pushing against strategic defaults may be somewhat stronger than lenders had feared, they also identify cause for continuing concern about future foreclosures and the success of government efforts to stem that tide. Noting the large number of borrowers in the Realty Trac/Trulia study who said they would try to modify loans they were struggling to repay, Peter Flint, CEO of Trulia, pointed out, “For every borrower who avoided foreclosure last year through HAMP (the Obama Administration’s signature foreclosure prevention program), “another 10 families lost their homes. It now seems clear that the government programs will not reach the overwhelming majority of homeowners in trouble,” Flint told Inman News. That problem, combined with the declining interest in purchasing foreclosed properties (which the Realty Trac/Trulia survey also identified) suggests that “it may take even longer than anticipated to see true health return to the real estate market,” Flint said.

White, the author of the strategic default study, thinks the government loan modification programs, which have been plagued by lengthy delays, inconsistent procedures and confusion, may actually be counter-productive. Although they are supposed to give owners hope of hanging on to their homes, White told the Wall Street Journal, the programs seem “designed to wear homeowners down,” and so may fuel the “anger and hopelessness” that are likely to encourage strategic defaults.

The program rules – targeting aid to borrowers who have defaulted or are at risk of doing so – also may trigger strategic defaults by borrowers who have kept up with their payments “but now feel unfairly let out while the ‘less deserving’ get help,” White suggested.

GOING UP

Reflecting the tighter underwriting standards lenders are applying, the average FICO score on single-family loans purchased by Fannie Mae and Freddie Mac last year increased to 750, up from 715 on loans purchased in 2006 and 2007. Loans originated during that problem period — 2006-2008 – account for most of the losses the two government services enterprises have absorbed as they struggle to regain their financial balance under government conservatorship.

The Federal Housing Finance Agency (FHFA), which regulates the GSEs, highlighted the higher credit scores in its most recent report to Congress. While reducing portfolio risks for Fannie and Freddie, the improved scores have also slashed their income from loan guarantee fees, the report notes. The FHFA report also warns that credit losses attributable to loans originated in the 2006-2008 period “will remain substantial” and notes that future financial results “will be greatly affected by the success or failure of [the Administration’s] loss mitigation initiatives” under the Home Affordable Mortgage Program. Testifying recently at a Congressional hearing, Acting FHFA Director Edward DeMarco said the GSEs will continue to impose “loan level price adjustments” on the non-vanilla mortgages they purchase.

The National Automated Clearing House Association (NACHA) processed 18.76 billion electronic transactions last year, with strong growth in direct deposit, consumer internet and business-to-business transactions as well as in back office check conversion activity, according to NACHA’s annual report.

Despite the increase in transaction volume, unauthorized debits declined by 9.6 percent compared with the previous year. NACHA officials attributed the risk mitigation success to new rules and strengthened enforcement efforts initiated last year. “These results demonstrate the effectiveness of targeted rulemaking and risk-management practices,” Janet Estep, president and CEO of NACHA, said in a press statement.

Among other details, NACHA reported:

• A 4.9 percent increase in direct deposit payments, which totaled $4.45 billion last year, despite the nearly 10 percent unemployment rate.
• A 4.15 percent increase in “native electronic payments, reflecting “an increased preference for non-check, fully-electronic payment options,” NACHA said. Volume in this category totaled 12.19 billion transactions.
• A 3.2 percent increase in business-to-business transactions, totaling more than 2 billion payments. The largest growth was in corporate trade exchange transactions, carrying business remittance information with the payments – up 9.19 percent compared with 2008.
• An 8.75 percent increase (to 2.4 billion payments) in consumer Internet transactions, combined with a 13 percent decline in the number of unauthorized WEB debits.
• A doubling of Back Office Check Conversion volume, resulting in 160.5 million transactions.

REVERSE MORTGAGE COUNSELING 

Responding to concerns that seniors obtaining reverse mortgages are not fully informed about those loans, the Department of Housing and Urban Development (HUD) has issued new requirements for the counseling sessions that are mandatory for FHA-insured Home Equity Conversion Mortgages (HECMs), which represent the lion’s share of reverse mortgage originations.

The new rules, outlined in a mortgagee letter issued last month, require counselors to ask 10 specific questions designed to ensure that borrowers understand the critical issues related to reverse mortgages. These include:

• How the loans are structured;
• How much they cost;
• Alternatives borrowers might consider;
• The financial and tax implications;
• The borrower’s responsibilities; and
• The risks, including the scams reverse mortgages have spawned.

If borrowers are unable to answer at least 5 of the 10 questions correctly, counselors are required to withhold the counseling certificate borrowers must present to lenders in order to obtain a loan. Counselors have several options at that point: They can give the borrower more time to review the loan materials provided before the counseling session; or they can ask if the borrower wants someone to accompany him/her at a subsequent counseling session that can be held either in person or via telephone.

HUD officials have acknowledged that under the new counseling standards, some borrowers may not be able to obtain reverse mortgages or may face delays in the application process. “But perhaps that is best, considering the litigious society we live in,” Sherry Apanay, senior vice president of Generation Mortgages at HUD told Reverse Mortgage News in a recent interview.

HUD’s new counseling rules come on the heels of a study by the General Accounting Office (GAO) that identified multiple problems with HUD-approved counseling programs. Based on an under-cover review of 15 counseling sessions, the study found that while the information counselors provided was generally accurate, none of the counselors covered all the required topics, some “exaggerated” the length of their counseling sessions, almost half (7 of the 15) did not discuss reverse mortgage alternatives (which they are required to do); and some encouraged borrowers to use their reverse mortgage proceeds to purchase inappropriate financial products, such as insurance or annuities. Overall, the GAO concluded, HUD lacked “effective controls” over the reverse mortgage counseling process.

GSE DEBATE BEGINNING 

The much-anticipated, long-deferred debate over the nation’s housing finance system is about to begin. Central to that debate is the question of what role, if any, Fannie Mae and Freddie Mac, the battered mortgage financing giants, should play, how they should be structured, and how large they should be.

So far, several hundred individuals and trade groups have weighed in with comments illustrating what anyone who has been following the rise and fall of the government services enterprises (GSEs) already knows: The issues are complex, the politics are radioactive and consensus is hard to find.

The comment letters, submitted over the past several weeks, responded to a set of questions the Treasury Department published in advance of a conference the department is hosting August 17, to solicit input from “stakeholders” – consumer advocates, community development organizations, and housing industry trade groups.

“The future of our housing finance system is critical not only to our economic recovery, but also to millions of American homeowners in every corner of our country,” Treasury Secretary Timothy Geithner said in a press statement announcing the conference. “Now is the time to build on the foundation we had with the historic Wall Street reform legislation,” he added.

That legislation set a January, 2011 deadline for the Administration to present blueprint for housing finance reform it had initially promised to introduce earlier this year. But Administration officials have made Fannie and Freddie a cornerstone of their efforts to bolster the sagging housing market and have been reluctant to do anything that might upset a recovery that remains slow, fragile and uncertain.

Critics of Fannie and Freddie have long argued that the two quasi-governmental entities should be eliminated or privatized and their implicit federal guarantee severed. But a consensus of sorts seems to be forming around the idea that the federal government must continue to play a role in the housing finance system. Comment letters from several different interest groups proposed variations on a process through which the government would explicitly guarantee some mortgages or securities backed by them.

“The urge to ‘slay the dragon’ should not cause collateral damage that would eliminate or make impossible the beneficial impacts” federal support of the housing markets has provided since the Depression, the Securities Industry and Financial Markets Association argued in its comment letter.

Although Administration officials haven’t offered any details about the options they are considering, Geithner has made it clear that a federal guarantee in some form is likely to be part of any plan they propose.

The Administration “won’t preserve Fannie and Freddie in anything like their current form,” Geithner said in a recent appearance on NBC’s “Meet the Press.” But he also noted that “there is going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee, so, again, homeowners have the ability to borrow to finance a home, even in a very difficult recession.”

WRONG QUESTION 

Home buyers and real estate industry professionals have been complaining for the past two years that increasingly restrictive underwriting policies were preventing many qualified borrowers from obtaining loans. It’s not terribly surprising that some of those complaints have begun to trigger discrimination complaints.

The Department of Housing and Urban Development (HUD) is investigating reports that some mortgage lenders are denying mortgages to pregnant women and to individuals suffering short-term disabilities. Those complaints were reported recently in a New York Times article that detailed several examples of loan officers saying they couldn’t consider a pregnant woman’s income because there was no guarantee that she would return to work after her baby was born.

Federal Housing Administration (FHA) rules require lenders to verify that a borrower can reasonably be expected to continue making mortgage payments for the first three years after obtaining the loan. But fair housing rules also specifically prohibit lenders from asking if borrowers are planning to start a family. If a borrower is on maternity or short-term disability leave at the time of the closing, lenders must document the borrower’s intent to return to work, verify that the borrower has the right to return, and verify that any leave-related reduction in income will not affect the borrower’s eligibility for the loan.

“Lenders have every right to ascertain the incomes of families to determine whether they are eligible for a mortgage loan, but they have no right to use a pregnancy or a short-term disability as a cause to deny that family a mortgage [for which] they would otherwise qualify,” HUD Secretary Shaun Donovan said in a press statement.

Vice President Joe Biden, chair of the White House Task Force on Middle Class Families, also blasted the practice. “Denying a mortgage to people just because they’re having a baby is flat wrong,” he stated. “Mothers on maternity leave have mobs, they have income, and they shouldn’t have to lose their deal to close on a house because they had a baby.”

In addition to launching multiple investigations based on the Times report, HUD officials said they are reviewing Fannie Mae and Freddie Mac’s underwriting guidelines “to determine if they satisfy the Fair Housing Act, including income verification of persons taking parental or disability leave.”

SLEEPLESS NIGHTS 

The rich may be different, but that doesn’t prevent them from staying awake nights worrying about their financial future. More than half of the affluent individuals responding to the Merrill Lynch Affluent Insights Quarterly said one or more financial concerns are keeping them up at night. A major source of pressure for many of the respondents was the responsibility to support a parent or other elderly relative (45 percent) an adult-age child (36 percent) or grandchildren (16 percent). Of those still supporting adult-age children, 40 percent said they were doing so because their child was still in school, but 28 percent were trying to help maintain their child’s standard of living, 27 percent were helping the child pay off significant debt and 21 percent were assisting children unable to obtain employment after graduating from college or graduate school.

“Affluent households are struggling with how to address the financial responsibilities they face today without compromising their family’s current quality of life or future plans,” Sallie Krawcheck, president of Bank of America Global Wealth and Investment Management, said in a press statement. “Additional family obligations, many of which are unforeseen, make it increasingly challenging to stay focused on or on track with their financial goals, such as saving and investing for their children’s education and their own retirement,” she added.

Perhaps because of their own financial stress, more than half of the respondents view teaching their children about financial management issues as just as important as maintaining family ties and more important than selecting the right spouse or being physically fit.

Increasing the financial stress for many households is the failure of husbands and wives to agree on such key issues as:

• Establishing and adhering to a family budget (45 percent); Purchasing luxury items, such as cars, boats, and second homes (33 percent);

Management of credit cards or repayment of debt (28 percent);

Making investment decisions (20 percent);

Formulating retirement savings strategies (19 percent); and

Deciding whether to send their children to public or private schools (15 percent).

RENTAL RECOVERY 

It’s hard to find a silver lining in the dark clouds hanging over the housing industry, but the apartment market may qualify. MPF Research reports that rental occupancy rates jumped in the largest 64 markets in the first half of this year, as landlords filled 215,000 previously vacant units – the largest six-month jump since MPF began tracking these numbers in1992. Vacancy rates meanwhile declined to 6.6 percent in June from 8.2 percent in December, the company reported.

Reflecting increasing investor optimism that a recovering employment market will continue to fuel demand for rental housing, the Bloomberg REIT Apartment Index has increased by 24 percent so far this year, according to a Business Week report. The Standard & Poor’s “Supercomposite Homebuilding Index, by contrast, has declined by 5.4 percent.

The rental market is also benefiting, perversely from the continuing flood of foreclosures which has pushed the nation’s homeownership rate down from its peak of 69.2 percent in the fourth quarter of 2004 to 67.1 percent in the first quarter of this year.

“As homeownership continues to decline, people need to live somewhere,” Henry Cisneros, executive chairman of a Los Angeles-based real estate investment firm, and former Secretary of HUD in the Clinton Administration, told Business Week. With the home purchase market likely to remain anemic for the foreseeable future, Cisneros predicts, “the rental market will be robust for the next few years.”

DÉJÀ VU?

If financial institutions should have learned anything from the financial crisis, it is that lax underwriting is dangerous. But recent reports suggest that some lenders are in the process of repeating history rather than learning from it, as the pressure to increase earnings leads them to offer loans to marginal borrowers much like those whose defaults drove banks and the country to the financial brink three years ago.

“Even as lenders struggle to pull themselves out of the credit crisis, signs of a new and potentially dangerous infatuation with risky borrowers are emerging,” the Wall Street Journal reported recently. “From credit cards to auto loans to mortgages, the hunger for new business as the crisis ebbs is causing some financial institutions to weaken lending standards and woo borrowers who might not be able to pay,” the Journal article warned.

Although lenders remain cautions, and even tight-fisted, on mortgage loans, they are becoming more aggressive in the consumer loan arena, encouraged by recent borrower performance, which has been improving steadily. Among other indicators of this trend, the Journal notes, credit card issuers sent 84.8 million solicitations to subprime borrowers in the first 6 months of this year, up from 43.7 million a year ago. One of the recipients of a Capital One solicitation, the Journal noted, was a consumer Capital One had sued successfully for payment of a previous card balance on which she had defaulted.

Lenders insist they learned their lessons and are using prudent underwriting standards to ensure borrowers can repay their loans. But some industry analysts share the skepticism of the formerly bankruptcy borrower who said she has received six credit card offers since emerging from bankruptcy, even though she still owes more than $70,000 on student loans. “All the offers say, ‘you qualify,’” she told the Journal. “No, I don’t.”

LOOK WHO’S WALKING

We’ve been hearing a lot about borrowers who are walking away from their mortgage loans. Turns out many of them are wearing designer shoes. More than 1 in 7 borrowers with mortgages of more than $1 million are “seriously delinquent” on those loans, a recent study by CoreLogic found. That compares with only 1 in 12 borrowers with mortgages of less than $1 million. The investment home picture is similar – the delinquency rate on properties on which the original mortgage was more than $1 million is 23 percent, compared with 10 percent for less expensive properties.

These statistics suggest that more affluent households are more likely than less affluent borrowers to strategically dump loans they could afford to repay, the New York Times, which commissioned the study, reported.

“The rich are different, they are more ruthless,” Sam Khater, senior economist for CoreLogic, told the Times.

They are also less fearful of the consequences of default, Khater noted, and, as a result, less susceptible both to warnings about the impact on their credit rating and to arguments about the negative consequences their default will have on the property values of their neighbors. They are also more likely to view repayment of their loan as a strategic choice rather than a moral obligation.

Illustrating that point, the rapper Chamillionaire expressed publicly a sentiment that analysts say many affluent borrowers embrace privately. Explaining his decision to default on the mortgage on his $2 million home, the Times reported, Chamillionaire told a television interviewer, “I just didn’t feel like it was a good investment.”