2 Big Banks Exit Reverse Mortgage Business

Wells Fargo, the largest provider, said on Thursday that it was leaving the business, following the departure in February of Bank of America, the second-largest lender. With the two biggest players gone — together, they accounted for 43 percent of the business, according to Reverse Market Insight — prospective borrowers may find it more difficult to access the mortgages.

Reverse mortgages allow people age 62 and older to tap what may be their biggest asset, their home equity, without having to make any payments. Instead, the bank pays the borrowers, though they continue to be responsible for paying property taxes and homeowner’s insurance.

But the loans have increasingly become a riskier proposition. Banks are not allowed to assess borrowers’ ability to keep up with all their payments, and more borrowers do not have the wherewithal to stay current on their homeowners’ insurance and property taxes, both of which have risen in many parts of the country. At the same time, borrowers have been taking the maximum amount of money available, often using it to pay off any remaining money owed on the home. Yet home prices continue to slide.

“We are on new ground here,” said Franklin Codel, head of national consumer lending at Wells Fargo. “With house prices falling, you reach a crossover point where they owe more than the house is worth and it creates risk for us as mortgage servicers and for HUD.” He was referring to the Department of Housing and Urban Development, whose Federal Housing Administration arm insures the vast majority of these loans through its Home Equity Conversion Mortgage program.

As a result, banks are seeing a rise in what are known as technical defaults, when homeowners fall behind on their taxes or homeowner’s insurance, both of which are required to avoid foreclosure. According to Reverse Market Insight, about 4 to 5 percent of active reverse mortgages, or 25,000 to 30,000 borrowers, are in default on at least one of those items.

Bank of America, meanwhile, said that declining home values made fewer people eligible for reverse mortgages. So it decided to redeploy at least half of those working on the mortgages to its loan modification division, which has been criticized for failing to help enough homeowners on the brink of foreclosure.

For Wells Fargo, however, the inability to assess borrowers’ financial health was the biggest factor for exiting the business. Anyone over the age of 62 with enough home equity can take out a reverse mortgage, regardless of their other income. The amount of money received is determined by the borrower’s age, the amount of equity in the home and prevailing interest rates.

“We are not allowed, as an originator, to decline anyone,” added Mr. Codel of Wells Fargo. We “worked closely with HUD to find an alternative solution and we were unable to find one with them, which led to this outcome.”

Reverse mortgage borrowers are required to pay premiums for mortgage insurance, which protects the lender if the homes are ultimately sold for less than the mortgage value, since the government is required to pay the difference to the lender. The premium rates were increased last October to account for declining home values (though one sizable upfront mortgage premium was eliminated to make the loans more attractive to certain borrowers).

But lenders are responsible for making tax and insurance payments on behalf of delinquent borrowers until they submit an insurance claim to HUD, at which point the agency would be responsible since it provided the insurance against default.

In January, HUD sent a letter to lenders and reverse mortgage counselors that provided guidance on how to report delinquent loans to the agency, and what steps the lenders could take to get borrowers back on track, like establishing a realistic repayment plan that could be completed in two years or less, or getting a HUD-approved mortgage counselor involved to help come up with a solution. If one cannot be reached, the lenders must begin foreclosure proceedings.

Both Wells Fargo and Bank of America have said they have not foreclosed on any borrowers to date.

The National Reverse Mortgage Lenders Association, the industry group, said it has been working with HUD to come up with procedures that would allow lenders to assess a prospective borrower’s income and expenses, or at least require homeowners to set aside money to pay for taxes and insurance. A spokeswoman for HUD said the guidance is still being drafted.

As it stands now, borrowers are required to see a HUD-approved lender before they can apply for a reverse mortgage. As part of that process, consumers are educated on the nuts and bolts of how the loans work and what their responsibilities are, including that they need to be able to continue to pay taxes, insurance and keep the property in good repair.

“We don’t tell consumers what decision to make, but we do try to give them the tools to make a decision,” said Sue Hunt, director of reverse mortgage counseling at CredAbility, a nonprofit consumer credit counseling agency. She added that their sessions last about an hour and 15 minutes, on average. The counselors also look at the consumer’s budget to see if it is sustainable with the mortgage, as well as what circumstances might arise that could throw the borrower off track.

“Outside factors are affecting people who thought five or six years ago that they were in pretty good shape,” she added. “The world has changed a bit around them.”

In days past, the borrower would get the reverse mortgage, and equity would continue to build, experts said, which would provide borrowers with more options — like refinancing — should they fall on hard times. Declining home values have changed that calculus for both bankers and consumers. Borrowers have not been able to pull out as much money. At the same time, the government has also tightened its withdrawal limits.

There were a total of more than 50,000 reverse mortgages, totaling $12.66 billion, made industrywide since last October, according to HUD.

Both Wells Fargo and Bank of America will continue to service their existing reverse mortgages. And the reverse mortgage association has said it will work with its members to ensure that senior citizens who need the loans can get them, though some experts said that less competition could increase certain fees.

“There is a certain amount of the business done by Wells and Bank of America that happens because of their bank branches, brand names and large sales forces,” said John K. Lunde, president of Reverse Market Insight. “We would expect something more than half of their volume to be absorbed by the rest of the industry, with something less than half not happening.”

Wells Fargo, which said that reverse mortgages represented 2.2 percent of its retail mortgage business, employs about 1,000 reverse mortgage workers. They are being given a chance to find other positions at the bank. Bank of America said that about half of its 600 workers have been reassigned within the bank. MetLife, the third-largest provider of reverse mortgages, declined to comment on its business.

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European Regulators Investigate Banks for Credit Swaps

European regulators in Brussels announced two sweeping antitrust investigations into the world’s largest banks on Friday, opening a second front in the battle to rein in a $600 trillion business that until now has operated mostly in the shadows. The regulators are focusing on whether the banks have shut out competitors in recent years in a bid to keep profit margins high.

The European investigations mirror one already under way by the United States Department of Justice, and follow an examination of derivatives market last year by The New York Times that highlighted efforts by large banks to control this lucrative corner of finance.

The European officials said they were investigating whether financial institutions, including international giants like Barclays, JPMorgan Chase and Deutsche Bank, used important industry committees to influence pricing and rules for a product known as a credit-default swap. These swaps provide a type of insurance against the risk of corporations or other borrowers being unable to pay off their debts.

The concern, the European Commission said, was that the banks had “an unfair advantage” in this largely opaque market. None of the banks cited by the European regulators commented on the inquiry.

“Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules,” the European Union competition commissioner, Joaquín Almunia, said in a statement. “I hope our investigation will contribute to a better functioning of financial markets and, therefore, to more sustainable recovery.”

Antitrust rules in Europe tend to be tougher in these types of cases than in the United States, experts said, and the efforts in Europe may increase the pressure on Washington to open this marketplace up to more competition. The investigations also differ from other prominent antitrust cases recently because they involve many big players in the industry, rather than a single company, and the outcome will be determined by laws covering collusion rather than monopolies.

“Our big time, famous antitrust cases over the past couple years have involved a single dominant firm, like Microsoft,” said Keith N. Hylton, a professor of law at Boston University. “This is a story of a secretive group that controls the market and they’re excluding competitors.”

The result of the investigations could affect broad swaths of the economy, because banks dominate the market for many sorts of derivatives, not just credit-default swaps.

As in Europe, American regulators have expressed worries that buyers are paying higher prices for these complex instruments than they would in a more competitive market. That can affect products like airline tickets that include the cost of hedges on oil prices or local tax bills that reflect the fees cities pay to manage the risk of swings in interest rates.

The investigation announced on Friday was twofold.

One part focuses on a larger set of banks — 16 in total — that work with a data provider called the Markit Group, based in London, designing pricing procedures and indices related to these swaps. Many of the banks also hold stakes in Markit.

Markit, which the European regulators are also looking at, said in a statement that it “has no exclusive arrangements with any data provider and makes its data and related products widely available to global market participants.” And, the company said, it was “unaware of any collusion by other market participants as described by the commission.”

The second part of the investigation centers on nine banks that play a major role in a procedure called clearing that regulators in the United States and Europe have promoted for several years as a better way to manage the risks posed by derivatives.

The nine banks gained power in part through regulators’ efforts in 2008 to improve transparency in the market. At the time, the Federal Reserve Bank of New York ordered the banks to help build clearing houses for derivatives.

In return for partnering with the Intercontinental Exchange, a publicly traded company, the banks got a favorable deal with ICE that persists today. Not only did they get a major say in ICE’s rules on derivatives, the banks also share in ICE’s profits from clearing and enjoy a cap on the fees they pay for clearing.

The European Commission said the deal between ICE and the nine banks might be unfair to other players in the market. In particular, the commission criticized the cap on clearing fees. The banks are not obligated to pass on the benefits of the caps to their customers and could use part of their savings to undercut bids from new competitors.

“This could potentially constitute an abuse of a dominant position by ICE,” the commission said in a statement.

ICE declined to comment. But officials inside the banks say privately they are entitled to the caps on the fees at ICE because as part of their partnership, they sold a jointly owned clearing business to ICE. The caps, they argue, are part of the payment for that deal.

Alisa Finelli, a spokeswoman for the Justice Department in Washington said on Friday that the department’s investigation of the derivatives market was still underway. Last fall, she said the department was focused on “the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries.”

Also late last year, Christine A. Varney, assistant attorney general in the department’s antitrust division, urged the Securities and Exchange Commission and the Commodities Futures Trading Commission to create regulations that spur more competition in the derivatives market.

The banks named in the ICE clearing investigation are JPMorgan, Bank of America, Barclays, Citigroup, Crédit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS. In addition to those nine, the Markit inquiry also includes Wells Fargo, BNP Paribas, Commerzbank, HSBC, Royal Bank of Scotland, Crédit Agricole and Société Générale.

 

F.D.I.C. Closes 5 Banks, Pushing the Total for the Year to 39

The Federal Deposit Insurance Corporation seized First National Bank of Central Florida, based in Winter Park, with $352 million in assets, and Cortez Community Bank of Brooksville, Fla., with $70.9 million in assets.

The agency also took over First Choice Community Bank of Dallas, Ga., with $308.5 million in assets; Park Avenue Bank, based in Valdosta, Ga., with $953.3 million in assets; and Community Central Bank in Mount Clemens, Mich., with $476.3 million in assets.

The Miami-based Premier American Bank agreed to assume the assets and deposits of First National Bank of Central Florida and Cortez Community Bank. Bank of the Ozarks, based in Little Rock, Ark., is acquiring the assets and deposits of First Choice Community Bank and Park Avenue Bank. Talmer Bank & Trust, based in Troy, Mich., agreed to assume the assets and deposits of Community Central Bank.

In addition, the F.D.I.C. and Premier American Bank agreed to share losses on $270 million of First National Bank of Central Florida’s loans and other assets, and on $51.3 million of Cortez Community Bank’s assets.

The agency and Bank of the Ozarks are sharing losses on $260.7 million of First Choice Community Bank’s assets and $514.1 million of Park Avenue Bank’s assets. Talmer Bank & Trust is sharing with the F.D.I.C. $362.4 million of Community Central Bank’s assets.

The failure of First National Bank of Central Florida is expected to cost the deposit insurance fund $42.9 million. The failure of Cortez Community Bank is expected to cost $18.6 million; that of First Choice Community Bank $92.4 million; Park Avenue Bank, $306.1 million; and Community Central Bank, $183.2 million.

Florida and Georgia have been the hardest-hit states for bank failures. Twenty-nine banks were shuttered in Florida last year and 16 in Georgia. Counting the shutdowns on Friday, four Florida banks have been closed this year, and 10 in Georgia.

California and Illinois also have had large numbers of bank failures.

In 2010, authorities seized 157 banks that succumbed to mounting soured loans and the hobbled economy. It was the most in a year since the savings-and-loan crisis two decades ago.

The F.D.I.C. has said that 2010 most likely would be the peak for bank failures.

 

UK retail banks 'need protecting'

 11 April 2011 Last updated at 06:27 ET Watch: Sir John Vickers calls for 'retail ring-fence'

UK banks' retail operations should be "ring-fenced" from their investment banking arms, the Independent Commission on Banking has recommended.

However, in its interim report the commission stopped short of recommending the two should operate as separate entities.

It also said more competition was needed in retail banking, including the sell-off of more Lloyds branches.

The commission's final recommendations will be published in September.

The banking commission was set up by the government last June to review UK banks after the financial crisis.

However, the government is under no obligation to implement its recommendations.

Bank shares reacted positively to the report, with Barclays shares up 3.2% and Royal Bank of Scotland 2.4% higher in morning trade.

Critics insisted that the commission had been too timid, but Sir John Vickers, the chairman of the commission, denied this.

"I absolutely reject any notion that we bottled it," he said at a press conference.

"In no sense at all are these half measures... these are absolutely far-reaching reforms."

Cash reserves Continue reading the main story

On its analysis, even if big banks such as HSBC or Barclays were to move their respective head offices abroad in protest at the reforms, the loss of tax revenue and the damage to the success of the City of London would be limited”

End Quote Robert Peston Business editor, BBC News The report said that, in the build-up to the crisis, lenders and borrowers took on "excessive and ill-understood risks".

It added that implicit taxpayer support for the banks encouraged "too much risk taking".

The commission said that banks needed to hold more cash in reserve to protect against future crises, and that creditors, not taxpayers, should be liable for any losses.

It said it was looking at forms of "retail ring-fencing", under which retail banking would be carried out by a separate subsidiary within a wider banking group.

The report recommended that banks should have 10% of their capital set aside to cover potential losses, higher than the 7% set out in new European regulations.

However, the commission said it was not proposing that UK investment banks should hold higher capital ratios than their international rivals.

Continue reading the main story Retail banks should be ring-fenced from investment banksThey should have their own capital reservesBanks should hold more capital to withstand potential lossesTaxpayers should not be liable for future lossesDepositors should get their money back before creditorsLloyds Banking Group should sell more branches to increase competition.It should be much easier for customers to move their accounts.'Allowed to fail' Sir John told the BBC that "total separation [of retail and investment banking] is not necessary".

"UK retail banking can be protected by its own capital cushion," he said. "Other parts of the bank should be allowed to fail."

This would lead to additional costs to the banks, some of which would fall on the wider economy, he said.

"The cost of capital is going to go up," Sir John said, but the costs to investment banks would be greater than those to retail banks.

Without an implicit government guarantee, which banks currently enjoy, lenders would view investment banks as more risky, and therefore charge more for their money.

Banks would also be less likely to take excessive risks without this implicit guarantee, the commission said.

These costs, however, would be more than offset by the benefits of "materially reducing the probability and impact of financial crises", the report said.

Analysts said that banks might have to increase retail charges to pay for the measures outlined in the report, should they be implemented.

"Rising financial capital cushions are likely to be paid for by increased banking charges, whilst the rise of an army of new alternative banks still looks to be a lifetime away," said Keith Bowman at Hargreaves Lansdown.

Market power The report also recommended that Lloyds Banking Group, which has about 30% of current accounts in the UK, should sell more of its branches in order to increase competition on the High Street.

Lloyds is already in the process of selling about 600 branches, but Mr Vickers said competition in High Street banking would benefit from further branch sales.

Consumer groups questioned whether the commission's recommendations went far enough.

"The financial crisis has increased the market power of the largest banks, leading to a worse deal for consumers," said Peter Vicary-Smith, chief executive of Which?.

"We're pleased the commission recognised this, but need to consider whether the recommendations will go far enough to address the parlous state of competition in the UK."

Sir John said far-reaching reforms that would go beyond its focused recommendations had not been ruled out.

"Strict separation and much, much higher capital requirements - those options are not off the table," he said.

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