Top 7 Things You Should Know about Financial Regulation Overhaul

July 19, 2010

With final Senate passage of the broadest overhaul of financial regulation since the Great Depression, the hard work really starts. Regulators must fill in the blanks in the legislation, and a new agency to protect consumers must be erected from scratch. The landmark legislation will bring lots of changes. Here are some answers to common questions about the changes that will come about under the overhaul of financial regulation, and how it will address some root causes of the deep financial crisis.

Question: What does the legislation do for ordinary folk?
Answer: The most significant change is the creation of a Bureau of Consumer Financial Protection, which will be independent but housed in the Federal Reserve, the nation’s central bank. This new bureaucracy will have a single mission: consumer protection for credit products such as mortgages and credit cards. That responsibility had rested with multiple bank regulators, none of whom treated it as a priority.

Q: What does that mean for home buyers?
A: The law includes a number of provisions that restrict predatory lending. The question is how aggressively the new bureau oversees mortgage lending. For example, will it set ironclad limits on so-called “liar loans,” in which there was no income verification for mortgages? Will it ban adjustable-rate mortgages with low teaser rates that allowed borrowers to get into homes they couldn’t afford? The bureau is also expected to force lenders to use clear language about borrowing costs.

Another important change is tough regulation for mortgage brokers. Many borrowers erroneously assumed that these brokers had their best interests at heart, when in fact there was no fiduciary duty to borrowers. Rather, lenders rewarded many brokers for getting borrowers into ill-suited mortgages.

The new law “ends steering payments that put mortgage brokers’ interests out of sync with buyers’ interests,” said Sen. Jeff Merkley, D-Ore. He also authored some of the tough restrictions on what banks can invest in if they’re also investing money on behalf of clients.

The new bureau is expected to be most aggressive on mortgages, after the Fed failed to use the power it’s had since 1994 to rein in reckless mortgage lending.”We can’t have that happen again. We’ve got to be very, very tough and consistent on this point,” said Sen. Jack Reed, D-R.I.

To the ire of consumer advocates, however, the new agency will have only limited powers over auto lending.

Q: Would this legislation have prevented the financial crisis?
A: That’s hard to say for sure, but it certainly would have given regulators the power to break up large failing financial firms, and there would have been transparency about who owes what to whom. The absence of such factors amplified the crisis of September and October 2008.

Q: How does this legislation fix what went wrong?
A: Various federal regulators will sit together on a “systemic risk” council that will police threats to the entire financial system. They’ll also get so-called “resolution authority” that allows them to deconstruct a failing large financial firm in orderly fashion.

During the crisis, bankruptcy was the only option. That would have pitted creditors against shareholders and created panic. The Bush administration orchestrated the fire sale of investment bank Bear Stearns in March 2008, preventing panic. It tried to do the same with Lehman Brothers in September 2008, but when that failed, Lehman went bankrupt.

The ensuing panic nearly caused the collapse of global finance. That was prevented only by a massive government bailout program that was deeply unpopular with voters, and by the Federal Reserve’s direct intervention in financial markets.

Those dark days occurred in an environment of little transparency about complex financial instruments called “derivatives.” Investors, regulators and even CEOs of major financial firms were in the dark about some of these instruments. Absent clear information, everyone ran scared.

Q: We hear about transparency all the time. Why does it matter?
A: The lack of information about complex bets made on the probability of bond defaults was one reason the Federal Reserve stepped in and took majority ownership in insurance giant American International Group (AIG). Trillions of dollars’ worth of private two-way bets were occurring outside regulators’ view, and AIG was the biggest player. Today, taxpayers could still be on the hook for about $162.5 billion, partly due to AIG’s involvement in credit-default swaps.

Under the new law, however, deposit-taking institutions will be forbidden from significant involvement in the market for these swaps, which are bets on the chance of a bond default. Most derivatives transactions will have to occur on an exchange or central clearinghouse. There’ll be real-time information about any given trade and, more broadly, about the swaps market—data that didn’t exist when the meltdown hit in 2008.

Greed or malfeasance won’t disappear from Wall Street, but regulators and investors will have more information than ever before to combat it.

Q: How does the legislation deal with Fannie Mae and Freddie Mac?
A: The Obama administration and congressional Democrats opted to leave Fannie and Freddie out of the bill, ostensibly to address them in separate legislation once the housing market recovers.

Fannie and Freddie buy mortgages originated by banks, then bundle them for sale to investors as bonds. From 2000-2006, Wall Street banks jumped aggressively into this business and out-competed Fannie and Freddie. In 2007, these Wall Street bonds backed by pools of U.S. mortgages began blowing up, and on came the financial meltdown.

Right now, Fannie and Freddie are the only mortgage-bond game in town. The private sector’s secondary market, where Wall Street banks passed on their mortgages, is frozen. When this market revives, banks and other mortgage originators will have to keep a portion of what they generate on their own balance sheets to ensure they have capital at risk. This wasn’t required during the run-up to the crisis. 

Q: Will the bill prevent financial crises?
A: Probably not. The legislation mostly fights the previous crisis, not the next one, and Wall Street always finds innovative new ways to make markets spin. Regulators are empowered with new authority to police for risk. Banks will be required to have more cash on hand to cover losses. This will limit their risk-taking capabilities, and the authorities can order big financial firms to get smaller or face government intervention.

Financial markets are highly complex and ever-innovating. A hard lesson of the financial crisis is that markets are profoundly interconnected, and in unexpected ways.

When Lehman Brothers filed for bankruptcy in September 2008, an unpleasant surprise followed days later.

Investors fled money market funds that pay 2 or 3% interest. To pay that interest, the funds take deposits or contributions and invest them in short-term debt issued by corporations called commercial paper. This sort of activity was always viewed as risk free.

However, Lehman was an issuer of commercial paper, and when it went bankrupt, panic ensued in places no one expected. Big manufacturers such as General Electric suddenly couldn’t find buyers for their short-term debt, and investors frowned on putting savings at risk for the small returns offered in the money market funds that days earlier had been considered as safe as cash.

That’s all to say that linkages are often hard to see. The best the legislation can hope to achieve is to provide regulators with an ample tool box, and it appears to do that. It will be up to the regulators to use the tools wisely.

(c) 2010, McClatchy-Tribune Information Services.

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National 30-Year Fixed Mortgage Rate Falls Back Under 5%

January 18, 2010

The weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for 30-year fixed mortgages decreased six basis points last week to 4.99%, down from 5.05% the week prior, according to the Zillow Mortgage Rate Monitor, compiled by real estate website Zillow.com. Rates for 15-year fixed mortgages fell seven basis points to 4.41% from 4.48%, and 5-1 adjustable rate mortgages fell nine basis points to 4.06%, from 4.15 percent the week prior.

The volume of mortgage requests last week rose 18% from the prior week. Of last week’s requests, 31% were for refinance loans, 66% were for purchase loans and 2% were for home equity loans. The prior week, 32% of requests were for refinance loans, 65% were for purchase loans and 2% were for home equity loans.

Rates for 30-year fixed purchase mortgages had fallen slightly, with the average rate on Zillow Mortgage Marketplace at 4.97%. Thirty-year fixed mortgage rates varied by state. New York mortgage rates and Connecticut mortgage rates decreased the most, from 5.26% to 5.11% in New York and from 5.19% to 5.08% in Connecticut. South Carolina mortgage rates (5.13%) and New York mortgage rates (5.11%) were the highest in the country, while Colorado mortgage rates (4.92%) and Texas mortgage rates (4.93%) were the lowest. California mortgage rates were the most requested among all states.

For more information, visit www.Zillow.com.

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30-Year Fixed Mortgage Rate Increases for First Time Since Mid October

December 10, 2009

The weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for 30-year fixed mortgages increased five basis points last week to 4.67%, up from 4.62% the week prior, according to the Zillow Mortgage Rate Monitor, compiled by real estate website Zillow.com. Rates for 15-year fixed mortgages rose one basis point to 4.20% from 4.19%, while 5-1 adjustable rate mortgages remained flat at 3.74%.

The volume of mortgage requests last week rose 10% from the prior week. Of last week’s requests, 51% were for refinance loans, 48% were for purchase loans and 2% were for home equity loans. The prior week, 49% of requests were for refinance loans, 49% were for purchase loans and 2% were for home equity loans.dollar

Rates for 30-year fixed purchase mortgages were higher, with the average rate on Zillow Mortgage Marketplace at 4.74%. Thirty-year fixed mortgage rates varied by state. Ohio mortgage rates and Michigan mortgage rates increased the most, from 4.63% to 4.78% in Ohio and from 4.6% to 4.72% in Michigan. New York mortgage rates (4.81%) and Illinois mortgage rates (4.81%) were the highest in the country, while Texas mortgage rates (4.58%), Colorado mortgage rates (4.63%) and Minnesota mortgage rates (4.63%) were the lowest. California mortgage rates were the most requested among all states.

For more information, visit www.zillow.com.

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30-Year Fixed Mortgage Rate Continues Rapid Fall

December 2, 2009

The weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for 30-year fixed mortgages decreased seven basis points last week to 4.62%, down from 4.69% the week prior, according to the Zillow Mortgage Rate Monitor, compiled by real estate website Zillow.com. Rates for 15-year fixed mortgages fell four basis points to 4.19% from 4.23%, while 5-1 adjustable rate mortgages increased five basis points to 3.74%, from 3.69% the week prior.Mortgage

The volume of mortgage requests last week fell 17% from the prior week. Of last week’s requests, 49% were for refinance loans, 49% were for purchase loans and 2% were for home equity loans. There was no change in the mortgage type mix from the prior week.

Rates for 30-year fixed purchase mortgages fell further, with the average rate on Zillow Mortgage Marketplace at 4.52%. Thirty-year fixed mortgage rates varied by state. Ohio mortgage rates and North Carolina mortgage rates decreased the most, from 4.79% to 4.63% in Ohio and from 4.72% to 4.60% in North Carolina. New York mortgage rates (4.79%), Missouri mortgage rates (4.72%) and Illinois mortgage rates (4.72%) were the highest in the country, while Texas mortgage rates (4.52%) and Colorado mortgage rates (4.54%) were the lowest. California mortgage rates were the most requested among all states.

For more information, visit www.Zillow.com.

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30-Year Fixed Mortgage Rates Stay Relatively Steady

November 4, 2009

The weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for 30-year fixed mortgages decreased one basis point last week to 4.86%, down from 4.87% the week prior, according to the Zillow Mortgage Rate Monitor, compiled by real estate website Zillow.com. Rates for 15-year fixed mortgages fell one basis point to 4.31% from 4.32%, and 5-1 adjustable rate mortgages fell one basis point to 3.79%, from 3.80% the week prior.

The volume of mortgage requests last week fell 9.5% from the prior week. Of last week’s requests, 43% were for refinance loans, 54% were for purchase loans and 2% were for home equity loans. The prior week, 45% of requests were for refinance loans, 53% were for purchase loans and 2% were for home equity loans.Mortgage

Rates for 30-year fixed purchase mortgages fell, with the average rate on Zillow Mortgage Marketplace at 4.79%. Thirty-year fixed mortgage rates varied by state. Texas mortgage rates and Connecticut mortgage rates decreased the most, from 4.84% to 4.81% in Texas and from 4.96% to 4.94% in Connecticut. New York mortgage rates (5.03%) and New Jersey mortgage rates (5.06%) were the highest in the country, while Texas mortgage rates (4.81%), and California mortgage rates (4.83%) were the lowest.

For more information, visit www.Zillow.com.
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Thirty Year Fixed Mortgage Rates Continue to Decline

October 30, 2009

The weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for 30-year fixed mortgages decreased ten basis points last week to 4.87%, down from 4.97% the week prior, according to the Zillow Mortgage Rate Monitor, compiled by real estate website ZIllow.com. Rates for 15-year fixed mortgages fell six basis point to 4.32% from 4.38%, and 5-1 adjustable rate mortgages fell seven basis points to 3.80%, from 3.87% the week prior.

The volume of mortgage requests last week fell 9.6% from the prior week. Of last week’s requests, 45% were for refinance loans, 53% were for purchase loans and 2% were for home equity loans. The prior week, 47% of requests were for refinance loans, 51% were for purchase loans and 2% were for home equity loans.Mortgage1

Rates for 30-year fixed purchase mortgages rose, with the average rate on Zillow Mortgage Marketplace at 4.92%. Thirty-year fixed mortgage rates varied by state. Missouri mortgage rates, and Illinois mortgage rates decreased the most, from 5.17% to 4.93% in Missouri and from 5.13% to 4.91% in Illinois. New York mortgage rates (5.03%) and Connecticut mortgage rates (4.96%) were the highest in the country, while Oregon mortgage rates (4.83%), Washington mortgage rates (4.84%), California mortgage rates (4.84%) and Texas mortgage rates (4.84%) were the lowest.

For more information, visit www.Zillow.com.

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30-Year Fixed Mortgage Rates Increase Slightly

October 21, 2009

The weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for 30-year fixed mortgages increased two basis points last week to 4.97%, up from 4.95% the week prior, according to the Zillow Mortgage Rate Monitor, compiled by real estate website Zillow.com. Rates for 15-year fixed mortgages rose one basis point to 4.38% from 4.37%, and 5-1 adjustable rate mortgages rose four basis points to 3.87%, up from 3.83% the week prior.

The volume of mortgage requests last week fell 9.9% from the prior week. Of last week’s requests, 47.1% were for refinance loans, 50.8% were for purchase loans and 2.1% were for home equity loans. The prior week, 52.4% of requests were for refinance loans, 45.6% were for purchase loans and 2% were for home equity loans.Mortgage1

Rates for 30-year fixed purchase mortgages dropped significantly, with the average rate on Zillow Mortgage Marketplace at 4.83%. Thirty-year fixed mortgage rates varied by state. Ohio mortgage rates, Connecticut mortgage rates, and Georgia mortgage rates increased the most, from 5.06% to 5.16% in Ohio, from 4.98% to 5.05% in Connecticut, and from 4.91% to 4.98% in Georgia. Ohio mortgage rates (5.16%) and New York mortgage rates (5.15%) were the highest in the country, while California mortgage rates (4.91%), Virginia mortgage rates (4.92%) and Texas mortgage rates (4.92%) were the lowest.

For more information, visit www.Zillow.com.

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Bankruptcies’ Slowdown a Good Sign, But Is It Good Enough?

October 14, 2009

In another promising sign of economic recovery, the torrid pace of personal and business bankruptcies slowed during the third quarter of 2009.

BankruptIn the first quarterly decline since the overhaul of bankruptcy laws in 2005, commercial, or business, bankruptcy filings fell 4.5% to 22,710 in the third quarter from 23,782 in the second quarter, according to data compiled by Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company.

The 7,405 business petitions filed in August 2009 and the 7,215 in September 2009 were the first back-to-back monthly declines since November and December of 2006, AACER data show.

According to AACER, consumer bankruptcy filings from July to September continued a streak of 15 consecutive quarterly increases dating back to enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act in October 2005.

However, the third-quarter increase — up 2% from the second quarter — was smaller than the 15.4% spike from the first quarter to the second quarter of 2009. The third-quarter increase also was the smallest quarterly increase since AACER began tracking the data in 2006.

The ebb in filings doesn’t mark an end to the recession — not with unemployment approaching 10%, commercial credit still tight, a new round of adjustable-rate mortgages that reset next year and tepid consumer spending amid continuing job losses. When coupled with rising home mortgage applications and a slowdown in new jobless benefit claims, however, the bankruptcy slowdown offers more hope that the economy is starting to stabilize.

“It’s certainly not bad news that they’re leveling off,” said Robert Lawless, a law professor at the University of Illinois and a bankruptcy expert. “When filings are going down it’s an indication that things are probably doing better. But if you want to use bankruptcy filings as an indicator of the economy, we have to recognize they’re a weak indicator and a lagging indicator at that.” Lawless said the moderation in third-quarter filings was less impressive because the filing rate for all bankruptcies still hovers at about 6,000 a day. That rate has held fairly steady since March 2009.

Personal bankruptcies, which topped 1 million for the year in September, dominate the filings; commercial bankruptcies account for only about 350 filings a day. For the first nine months of the year, personal bankruptcies are up more than 34% over 2008.

Along with the credit squeeze and tight economy, Lawless said this year’s higher bankruptcy rates stem from the 2005 law, which made it harder for people to write off their debt. That law led to a rush of filings in 2005, which artificially depressed filing rates in 2006 and 2007. “The story since then has been that bankruptcy filings have been going back to their natural level before the law was enacted,” Lawless said. Lawless and other experts expect more than 1.4 million personal and commercial filings this year, which is about the same level as it was in the late 1990s and prior to the 2005 law, he said.

For the year, commercial bankruptcy filings are up 45%, from 46,122 filings in 2008 to 66,967 through September, AACER data show. The business bankruptcy filings reported by AACER are typically higher than official government figures.

AACER President Mike Bickford said his company records any filing as a commercial bankruptcy if, instead of a Social Security number, the petition is filed with a taxpayer identification number or with some other indication that it’s a commercial case, such as the phrase “doing business as.” Included in these filings are many sole proprietors whose bankruptcy petitions wouldn’t be considered business filings under government tallies.

Thirteen states showed a decline in total filings from August to September, led by North Dakota and Texas, down 17% and 16% respectively. Georgia followed with an 11% reduction, and Nevada’s September filings dipped 8% from August. Nevada led the nation in filings per capita, at more than 11 per 1,000 residents. Tennessee was next with nearly eight, while Georgia, Indiana and Alabama averaged more than 7 per 1,000 residents. Nevada also had the greatest year-to-year increase in per-capita filings, followed by Arizona, California, Utah and Michigan. Alaska had the lowest filing rate: just over one per 1,000 residents. The District of Columbia was next at nearly two per 1,000. South Carolina, Texas and South Dakota averaged just over two filings per 1,000. Arizona led the nation with a 72% increase in average filings per month from a year earlier. Nevada was next, up 59%, followed by Wyoming’s 57% increase. Utah and California were next with increases of 54% and 53% respectively.

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