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As more seniors rely on reverse mortgages, troubles beckon for heirs

A new government report shows many seniors are taking out reverse mortgages on their homes without fully understanding the ramifications, leading to foreclosures among borrowers and a tangle of problems for heirs after the borrower dies.

“Consumer complaints tell us that the complex terms of reverse mortgages continue to be misunderstood,” said Richard Cordray, director of the Consumer Financial Protection Bureau, which just released a report highlighting the top complaints the agency received about reverse mortgages over the last three years.

A reverse mortgage is a type of loan that allows homeowners age 62 and older to tap a portion of the equity in their homes. The money typically is paid out in a lump sum or in regular fixed payments, with fees and interest added to the balance each month. Unlike a home equity loan, the money does not have to be repaid until the borrower dies, moves out or sells the home.

The loans can be a life line for house-rich, cash-poor seniors struggling with daily living expenses. Reverse mortgages also have been used to help retirees improve their lifestyles, allowing them to buy the summer home they had always dreamed about, for example.

But problems and confusion are expected to continue as more baby boomers retiring with little or no savings turn to the loans for help getting by.

The Consumer Financial Protection Bureau cited a 2010 Federal Reserve report concluding that in the 55-to-64 age group, 41 percent had no retirement savings. Even among those who had a nest egg, the average balance was only $103,200, the report said.

Many complaints that the protection bureau received showed people were confused about the way reverse mortgages work.

“Many consumers struggle with understanding how quickly their loan balance will go up and their home equity will fall,” the report said. As a result, many borrowers who wanted to refinance their loans were frustrated because there wasn’t enough remaining equity in their homes.

One of the most common types of complaints involved the inability of a borrower’s family members to assume the loan in order to keep the house when the borrower died, according to the report.

Reverse mortgages prohibit loan assumptions because actuarial tables are used to help determine the loan amounts. Adult children may keep the home only by paying off the loan or by paying 95 percent of the current appraised value of the house.

Those rules can present problems for multigenerational households when family members are living in the home at the time of the borrower’s death.

Heirs also complained about what they believed were inflated appraisals that required them to pay more than they expected, the report said.

Another common complaint involved the shock of having to sell a home or face foreclosure when a spouse died because the surviving spouse’s name was not on the reverse mortgage. Some couples were advised to take a reverse mortgage in the older spouse’s name to qualify for a bigger loan.

“Some consumers report that their loan originator falsely assured them they would be able to add the other spouse to the loan at a later date,” the report said.

To help more seniors stay in their homes, the U.S. Department of Housing and Urban Development — which insures most reverse mortgages through its Home Equity Conversion Mortgage program — implemented a new rule allowing surviving spouses who meet certain conditions to remain in the home regardless of their borrowing status.

The rule only applies to reverse mortgages originated through HUD’s program after Aug. 4, 2014.

The financial protection bureau also reported a number of complaints from borrowers who faced foreclosure or who lost their homes because they did not keep up with payments for property taxes and homeowners’ insurance, which under terms of a reverse mortgage must be kept current.

“Some consumers describe unsuccessful attempts to halt foreclosure proceedings by paying overdue taxes in full or through payment plans,” the report said.

In an effort to stem such defaults, lenders making loans under HUD’s program after March 2 will be required to make certain financial assessments of a prospective borrower. Currently, loan qualifications primarily are a borrower’s age and the amount of equity in a home.

The financial protection bureau recommends three steps that homeowners with reverse mortgages should take to protect their heirs. The advisory, “Three Steps You Should Take If You Have a Reverse Mortgage,” is available at consumerfinance.gov/blog.

The steps involve verifying who is on the loan, and planning ahead for the non-borrowing spouse and for any family members living in the home.

The advisory also has links to a consumer guide for people considering a reverse mortgage and a question-and-answer tutorial.

Consumers can submit a complaint to the protection bureau at ConsumerFinance.gov, or by calling toll-free 1-855-411-2372.

Patricia Sabatini: psabatini@post-gazette.com or 412-263-3066.

[…]

Federal Home Loan Bank of Seattle Announces 2014 Unaudited Preliminary Financial Highlights

SEATTLE–(BUSINESS WIRE)–

Today, the Federal Home Loan Bank of Seattle (Seattle Bank) announced preliminary financial highlights for the year ended December 31, 2014, reporting $60.2 million of net income, compared to $61.4 million in 2013, and an increase in its retained earnings balance to $346.4 million as of December 31, 2014, from $287.1 million as of December 31, 2013.

Based on the bank’s fourth quarter 2014 financial results, the Seattle Bank’s Board of Directors declared a $0.025 per share cash dividend, to be paid on February 23, 2015. Dividends will be paid based on average Class A and Class B stock outstanding during fourth quarter 2014. In addition, the bank announced that it will repurchase up to $100 million of excess capital stock during first quarter 2015. The Seattle Bank repurchased $396.9 million of excess capital stock during the year ended December 31, 2014.

Based on its 2014 net income, the bank will contribute $6.9 million to its Affordable Housing Program (AHP) for awards in 2015.

“Our 2014 results build on our significant progress in returning the Seattle Bank to financial health. We are pleased to have strengthened our capital position, continued to repurchase and pay dividends on our stock, and as a result of our 2014 earnings, contributed nearly $7 million to our Affordable Housing Program,” said Seattle Bank President and CEO Michael L. Wilson. “Although we have grown our advances with certain segments of our membership, changes in our industry and membership continue to constrain our ability to prosper as a stand-alone Federal Home Loan Bank without relying on investments as a source of income. Our proposed merger with the Federal Home Loan Bank of Des Moines offers an opportunity to create a Federal Home Loan Bank cooperative with a more diverse membership and greater economies of scale—and well-positioned to meet member needs now and for years to come.”

Key features of the Seattle Bank’s operating results for the year ended December 31, 2014, included:

Higher net interest income. Net interest income after provision (benefit) for credit losses for the year ended December 31, 2014, increased to $146.3 million from $138.5 million for 2013, primarily due to increased interest income on investments and lower cost of funding, partially offset by lower interest income on mortgage loans held for portfolio and advances. The changes in interest income on investments and advances were primarily yield driven. In addition, lower prepayment fees on advances contributed to a decrease in interest income. The change in interest income on mortgage loans held for portfolio was primarily driven by the continued decline in the average balances outstanding during the year ended December 31, 2014, as the remaining mortgage loans in the portfolio continued to pay down. Lower non-interest income (loss). Non-interest income decreased by $8.7 million for the year ended December 31, 2014, compared to the previous year. Non-interest income (loss) was negatively impacted by higher credit-related losses on other-than-temporarily impaired private-label mortgage-backed securities and lower gains on early debt extinguishments during the year ended December 31, 2014, compared to the previous year. Higher other non-interest expense. The Seattle Bank’s other non-interest expense increased by $374,000 for the year ended December 31, 2014, compared to 2013, primarily due to an increase in operating expenses from $5.7 million of merger-related costs for the year ended December 31, 2014, partially offset by a decrease in other expenses, including the impact of a one-time $4.0 million write-off of software in 2013 without similar activity in 2014.

Other Financial Information

Total assets decreased to $35.1 billion as of December 31, 2014, from $35.9 billion as of December 31, 2013, primarily due to a decrease in advances and mortgage loans outstanding. Advances outstanding decreased to $10.3 billion as of December 31, 2014, from $10.9 billion as of December 31, 2013, primarily due to the maturity of advances with Bank of America, N.A., in the first quarter of 2014, partially offset by an increase in advances with various members during the remainder of 2014. Mandatorily redeemable capital stock decreased by $293.2 million as of December 31, 2014, compared to December 31, 2013, primarily due to the Seattle Bank’s quarterly repurchases of excess capital stock during 2014, partially offset by a redemption request resulting from a merger between two member banks. Accumulated other comprehensive income (loss) improved to a gain of $1.6 million as of December 31, 2014, from a loss of $71.8 million as of December 31, 2013, primarily due to improvements in the market values of the bank’s available-for-sale securities including those previously determined to be other-than-temporarily-impaired. Total capital increased to $1.2 billion as of December 31, 2014, from $1.1 billion as of December 31, 2013. The Seattle Bank paid cash dividends (including interest on mandatorily redeemable capital stock) totaling $2.6 million during the year ended December 31, 2014. During the six months ended December 31, 2013, the Seattle Bank paid cash dividends of $1.4 million. No cash dividends were paid during the first half of 2013.

Unaudited Selected Financial Data ($ in thousands)

Selected Statements of Condition Data As of December 31, 2014 As of December 31, 2013 Advances $ 10,313,691 $ 10,935,294 Investments (1) 24,046,403 22,545,976 Mortgage loans held for portfolio, net 647,179 797,620 Total assets 35,129,197 35,870,314 Consolidated obligations 31,790,607 32,402,896 Mandatorily redeemable capital stock 1,454,473 1,747,690 Total capital stock 858,083 922,977 Retained earnings 346,375 287,090 Accumulated other comprehensive income (loss) 1,552 (71,768 ) Total capital (2) 1,206,010 1,138,299 For the Years Ended December 31, Selected Statements of Income Data 2014 2013 Net interest income $ 146,860 $ 137,334 Provision (benefit) for credit losses 584 (1,149 ) Net interest income after provision (benefit) for credit losses 146,276 138,483 Non-interest income (loss): Other-than-temporary impairment credit loss (4,840 ) (1,837 ) Derivatives and hedging activities 4,211 4,774 Other non-interest income (3) 1,707 6,867 Other non-interest expense 80,288 79,914 Total assessments 6,877 6,927 Net income $ 60,189 $ 61,446 Selected Performance Measures As of December 31, 2014 As of December 31, 2013 Regulatory capital (4) $ 2,658,931 $ 2,957,757 Risk-based capital surplus (5) $ 1,375,172 $ 1,483,070 Regulatory capital-to-assets ratio 7.57 % 8.25 % Leverage capital-to-assets ratio 11.24 % 12.21 % Market value of equity (MVE) to par value of capital stock (PVCS) ratio 114.29 % 107.67 % Return on PVCS vs. one-month London Interbank Offered Rate (LIBOR): Return on PVCS (6) 2.38 % 2.26 % Average annual one-month LIBOR 0.16 % 0.19 % Core mission activity (CMA) assets to consolidated obligations (7) 40.90 % 41.51 % (1) Consists of securities purchased under agreements to resell, federal funds sold, available-for-sale securities, and held-to-maturity securities. (2) Excludes mandatorily redeemable capital stock, which totaled $1.5 billion and $1.7 billion as of December 31, 2014 and 2013. (3) Depending upon activity within the period, may include the following: gain (loss) on sale of available-for-sale or held-to-maturity securities, gain (loss) on financial instruments held under fair value option, gain (loss) on early extinguishments of consolidated obligations, service fees, and other non-interest income. (4) Includes total capital stock, retained earnings, and mandatorily redeemable capital stock. (5) Defined as the excess of the bank’s permanent capital (which consists of Class B capital stock, including Class B capital stock classified as mandatorily redeemable, and retained earnings) over its risk-based capital requirement. (6) Return on PVCS is computed as net income divided by average PVCS, for the year. (7) Defined as advances, acquired member assets (such as mortgage loans), and certain housing finance agency obligations as a percentage of consolidated obligations.

The Seattle Bank expects to file its 2014 annual report on Form 10-K with the Securities and Exchange Commission (SEC) on or around March 16, 2015.

Proposed Merger with the Des Moines Bank

On September 25, 2014, the Seattle Bank and the Federal Home Loan Bank of Des Moines (Des Moines Bank) entered into a definitive agreement to merge the two banks (the Merger Agreement). Further, by letter dated December 19, 2014, the banks received approval of their merger application submitted to the Federal Housing Finance Agency (FHFA). Following receipt of the FHFA’s approval, on January 12, 2015, the banks distributed the Joint Merger Disclosure Statement and voting materials to their members seeking ratification of the Merger Agreement by the members of both banks through a voting process that is expected to be completed by February 23, 2015. Material details of the Merger Agreement and the Joint Merger Disclosure Statement are included in the banks’ related Form 8-K filings with the SEC and should be reviewed in connection with consideration of the proposed merger. If a majority of the votes cast by members of each of the banks are cast for ratification of the Merger Agreement and all other conditions set out in the Merger Agreement are satisfied, the merger is expected to become effective on May 31, 2015.

The proposed merger between the Seattle Bank and the Des Moines Bank will not impact the Seattle Bank’s 2015 offering of AHP. In the event that the proposed merger is finalized during 2015, the Seattle Bank’s allocation of AHP funding and the program’s requirements will continue to be governed by the Seattle Bank’s 2015 AHP Implementation Plan.

Consent Arrangement

The Seattle Bank continues to address the requirements of the Consent Order issued by the FHFA, effective November 22, 2013 (collectively, with related understandings with the FHFA, the Amended Consent Arrangement), which superseded the previous Consent Order and related understandings put in place in October 2010 (2010 Consent Arrangement). In addition to continued compliance with the terms of the plans and policies adopted and implemented to address the 2010 Consent Arrangement, the Amended Consent Arrangement requires Board of Directors’ monitoring for compliance with the terms of such plans and policies, development and implementation of a plan acceptable to the FHFA to increase advances and other CMA assets as a percentage of the bank’s consolidated obligations, and securing non-objection from the FHFA prior to repurchasing or redeeming any excess capital stock or paying dividends on the bank’s capital stock. With FHFA non-objection, the Seattle Bank has repurchased up to $25 million of excess capital stock on a quarterly basis since the third quarter of 2012 and paid modest quarterly dividends to its shareholders based on the bank’s quarterly net income since July 2013. In addition to the four quarterly repurchases of up to $25 million of excess capital stock, with FHFA non-objection, during 2014, the Seattle Bank redeemed an additional $299.6 million of excess capital stock on which the redemption waiting periods had been satisfied and repurchased $2.3 million of excess Class B stock that had been purchased by members on or after October 27, 2010, for activity purposes. The FHFA reviews the bank’s requests to repurchase and pay dividends on its capital stock on a quarterly basis.

About the Seattle Bank

The Seattle Bank is a financial cooperative that provides liquidity, funding, and services to enhance the success of its members and support the availability of affordable homes and economic development in the communities they serve. The Seattle Bank’s funding and financial services enable our member institutions to provide their customers with greater access to mortgages, commercial loans, and funding for affordable housing and economic development.

The Seattle Bank is one of 12 Federal Home Loan Banks in the United States. The Seattle Bank serves Alaska, Hawaii, Idaho, Montana, Oregon, Utah, Washington, and Wyoming, the U.S. territories of American Samoa and Guam, and the Commonwealth of the Northern Mariana Islands. Members include commercial banks, credit unions, thrifts, industrial loan corporations, insurance companies, and non-depository community development financial institutions.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including preliminary highlights of financial statements and information as of and for the year ended December 31, 2014, and on which the Seattle Bank’s external auditor has not completed its audit, and information regarding a proposed merger with the Des Moines Bank. Forward-looking statements are subject to known and unknown risks and uncertainties. Actual financial performance and condition for the year ended December 31, 2014, and other actions or transactions, including those relating to the ability of the Seattle Bank and the Des Moines Bank to obtain member approvals relating to the proposed merger, the completion of the proposed merger, the Amended Consent Arrangement, and payments of dividends and repurchases of capital stock, may differ materially from those expected or implied in forward-looking statements because of many factors. Such factors may include, but are not limited to, finalization of the financial statements, regulatory and legislative actions and approvals (including those of the FHFA relating to the stock repurchases and dividends and acceptance of final merger documentation), changes in general economic and market conditions (including effects on, among other things, U.S. debt obligations and mortgage-related securities), demand for advances, changes in the bank’s membership profile or the withdrawal of one or more large members, shifts in demand for the bank’s products and consolidated obligations, business and capital plan and policy adjustments and amendments, competitive pressure from other Federal Home Loan Banks and alternative funding sources, the Seattle Bank’s ability to meet adequate capital levels, accounting adjustments or requirements (including changes in assumptions and estimates used in the bank’s financial models), interest-rate volatility, changes in projected business volumes, the bank’s ability to appropriately manage its cost of funds, changes in the bank’s management and Board of Directors, and hedging and asset-liability management activities. Additional factors are discussed in the Seattle Bank’s most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q, and other filings made with the SEC. The Seattle Bank does not undertake to update any forward-looking statements made in this announcement.

Members of the Seattle Bank have been provided the Joint Merger Disclosure Statement in connection with the merger. Members are urged to read the disclosures therein.

FinanceInvestment & Company Informationcapital stockinterest incomeSeattleFederal Home Loan Bank Contact:

Federal Home Loan Bank of Seattle

Connie Waks, 206-340-2305

cwaks@fhlbsea.com […]

Government Loans: Risky Business for Taxpayers

Obtaining a loan from the government now seems perfectly normal to most Americans, be the loans for education, business, healthcare, or whatever else.

Examples include Small Business Administration loans, where a potential business owner goes to the government to get startup cash, and student loans, where a college student borrows money for tuition or even living expenses. These loans can often be paid back with interest over the course of what is often several decades.

Other examples might include Federal Housing Administration (FHA), Veterans Administration (VA), or Rural Housing Services (RHS) loans, which differ from the former in the sense that they are government insured loans, yet the fundamental principle behind them remains the same: government is taking upon itself (via taxpayers) the risk behind making the loan.

Of course, private loans are also available, though those that do not employ government insurance or other subsidies usually come with higher interest rates. The higher interest rates in the purely-private sector come from the fact that the private entity making the loan must take on all the risk, instead of externalizing it to the taxpayers.

So, the reality of lower interest rates in government and government-subsidized loans means they are vitally necessary, right?

First of all, the government doesn’t “make money,” in the way that private entities do. There is only one way in which states initially accumulate revenue, and that is through taxation. This extorted wealth is originally made in the private sector. So, in order for a government to make a loan back to the private sector, that money must first be removed from the private sector via taxation.

Government Knows How To Best Spend Your Money

For private entities, however, when they make a loan and determine who qualifies for it, and at what interest rate, the private firm making the loan is basically determining at what price (i.e, interest rate) the firm feels adequately compensated for the risk of lending out this money, and for giving up direct control over that money for the duration.

To claim, therefore, that the government should be in the business of making loans because private loans are generally too costly or too inaccessible for buyers, is no different than saying that government must take individual’s money and use it in a way that the original owners (i.e., the taxpayers) themselves would determine to be reckless and irresponsible. While it is true that occasionally a government loan may be paid back with interest at the appropriate time, it would be absurd to suggest that politicians would be more knowledgeable about how a person’s money should be used than the person who originally created and owned the wealth in the first place.

But Government Should At Least Prevent Usury, Right?

Moreover, there are those who will say that private firms making loans should be restricted from charging “excessive” interest on their loans (i.e., usury). This is an example of a very well-meaning, but utterly damaging regulation. It is crucial to note the differences in time preference displayed by both the lender and the borrower. The lender’s time preference (in this case) is lower than that of the borrower’s, meaning that the lender prefers a larger sum of money in the future, and the borrower prefers a smaller sum now. To get money now, however, the borrower must pay for it in the form of interest.

This represents a healthy balance between lenders and borrowers. It is why loans are made. Laws passed that prohibit certain interest rates on loans are far more likely to hurt those who need the loans, than anyone else. As was previously stated, a firm or person making a loan must feel compensated for the risk of making the loan, and that compensation manifests itself in the interest rate. To restrict a firm from charging a certain percentage of interest on their loans will only reduce the amount of loans it gives out.

Taking Away Your Choices

If a potential borrower who is determined to be a rather high risk asks for a private loan, then their interest on that loan will be quite high, but at least in that situation, the borrower has the choice of taking the loan, or to not take the loan. In the end, the borrower will choose what he or she believes will most benefit him or her. Yes, the borrower might miscalculate and the loan might turn out to have been a bad idea, but at least the borrower had a choice.

On the other hand, if the amount of interest that could be charged on the loan were to be forced down via government regulation, then the firm or person making the loan would simply not offer the loan at all, as he or she would not feel their risk is justified by the legally-allowable interest rate.

Faced with a lack of loans, risky borrowers may then look to government and government-subsidized loans as an option, but we find here just another case of government offering itself as the (taxpayer-funded) solution to a problem it caused in the first place.

Image source: iStockphoto.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

[…]

Singletary: What you should know before you take out a reverse mortgage

When you have most of your wealth tied up in your home, it’s referred to as being “house rich, cash poor.”

Many seniors who find themselves in this position may be enticed by the commercials offering salvation. They are wooed by a chance to tap into their home’s equity with a reverse mortgage. Smooth television ads make it appear to be a no-brainer. It’s actually much more complicated.

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.”

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The most appealing quality of this type of loan is that, unlike a traditional mortgage, you don’t have to make monthly payments. The lender doesn’t collect until the homeowner moves, sells or dies. Once the home is sold, any equity that remains after the loan is repaid is distributed to the person’s estate.

To qualify, you have to be 62 or older. The reverse-mortgage market isn’t huge — about 1 percent of all mortgages — but reverse-mortgage lenders are likely to pump up the volume in coming years as more seniors retire. For a lot of people, the only source of big money for them is the equity in their homes, the Consumer Financial Protection Bureau says.

In 2013, a typical household had only $111,000 in 401(k) or IRA savings, according to the Center for Retirement Research at Boston College. The center found that too many people are dipping into their retirement accounts during their working years, causing what is called a “leakage.”

But a lot of seniors have equity in their homes — about $3.84 trillion, according to one mortgage-industry survey. They can tap into that equity by selling or taking out a home equity loan or line of credit. But selling isn’t an option if they want to stay put, and they would have to make payments on the line of credit or loan. Given those options, it’s no wonder a reverse mortgage can be appealing.

The CFPB, in a report analyzing 1,200 reverse-mortgage complaints received from 2011 to the end of last year, found that many people are confused about this type of loan.

The fact that counseling is required from a government-approved agency for loans made through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program is an indication of the complexity of this financial product. Still, many seniors don’t understand what they are getting into.

People complained to the CFPB about their loan terms, the loan servicing companies and not being able to add a borrower. Adult children complained that lenders refused to add them as an additional borrower or allow them to “assume” the loan for an aging or deceased parent, the report said.

To help, the CFPB has issued some tips about reverse mortgages. Here are the three important things the agency says you or your relatives should know:

?Double check that your loan records accurately reflect who is on the mortgage.

?Be sure to understand the risks of not including a spouse on the loan. Often an older spouse will take out a reverse mortgage in his or her name only, because older homeowners are able to borrow against a greater percentage of the home’s equity.

“Non-borrowing spouses submit complaints distraught that they are facing foreclosure and about to lose their home after their husband or wife dies,” the report said. “Other non-borrowing spouses submit complaints worried about their ability to remain in their home should the older spouse die first.”

If you decide it’s financially better for just one spouse to take out a reverse mortgage, be sure to have a plan for the non-borrowing spouse. Can a surviving spouse stay in the home? The Department of Housing and Urban Development has attempted to address the issue of non-borrowing spouses. Under certain conditions, some spouses may be able to stay, but others may not get that protection.

The CFPB recommends that if only one spouse is on the mortgage, you should find out whether the loan servicer will permit the non-borrowing spouse to qualify for a repayment deferral allowing him or her to remain in the home.

?Talk to your heirs. If you have adult children or other relatives living in the house, be sure they understand what could happen if the reverse mortgage becomes due.

Go to the CFPB Web site at www.consumerfinance.gov and click the link for the agency’s consumer advisory on reverse mortgages.

There are some pros to a reverse mortgage. But the complexity of the product means you better be just as aware of the cons.

Readers may write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or michelle.singletary@washpost.com. To read previous Color of Money columns, go to http://wapo.st/michelle-singletary.

[…]

Rules are coming on payday loans

WASHINGTON — Troubled by consumer complaints and loopholes in state laws, federal regulators are putting together the first rules on payday loans aimed at helping cash-strapped borrowers avoid falling into a cycle of high-rate debt.

The Consumer Financial Protection Bureau says state laws governing the $46 billion payday lending industry often fall short, and that fuller disclosures of the interest and fees — often an annual percentage rate of 300 percent or more — may be needed.

Full details of the proposed rules, expected early this year, would mark the first time the agency has used the authority it was given under the 2010 Dodd-Frank law to regulate payday loans. In recent months, it has tried to step up enforcement, including a $10 million settlement with ACE Cash Express after accusing the payday lender of harassing borrowers to collect debts and take out multiple loans.

A payday loan, or a cash advance, is generally $500 or less. Borrowers provide a personal check dated on their next payday for the full balance or give the lender permission to debit their bank accounts. The total includes charges often ranging from $15 to $30 per $100 borrowed. Interest-only payments, sometimes referred to as “rollovers,” are common.

Legislators in Ohio, Louisiana and South Dakota unsuccessfully tried to broadly restrict the high-cost loans in recent months. According to the Consumer Federation of America, 32 states now permit payday loans at triple-digit interest rates, or with no rate cap at all.

The CFPB isn’t allowed under the law to cap interest rates, but it can deem industry practices unfair, deceptive or abusive to consumers.

“Our research has found that what is supposed to be a short-term emergency loan can turn into a long-term and expensive debt trap,” said David Silberman, the bureau’s associate director for research, markets and regulation.

The bureau found more than 80 percent of payday loans are rolled over or followed by another loan within 14 days; half of all payday loans are in a sequence at least 10 loans long.

The agency is considering options that include establishing tighter rules to ensure a consumer has the ability to repay. That could mean requiring credit checks, placing caps on the number of times a borrower can draw credit or finding ways to encourage states or lenders to lower rates.

Payday lenders say they fill a vital need for people who hit a rough financial patch. They want a more equal playing field of rules for both nonbanks and banks, including the way the annual percentage rate is figured.

“We offer a service that, if managed correctly, can be very helpful to a diminished middle class,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, which represents payday lenders.

Maranda Brooks, 40, a records coordinator at a Cleveland college, says she took out a $500 loan through her bank to help pay an electricity bill. With “no threat of loan sharks coming to my house, breaking kneecaps,” she joked, Brooks agreed to the $50 fee.

Two weeks later, Brooks says she was surprised to see the full $550 deducted from her usual $800 paycheck. To cover expenses for herself and four children, she took out another loan, in a debt cycle that lasted nearly a year.

“It was a nightmare of going around and around,” said Brooks, who believes that lenders could do more to help borrowers understand the fees or offer lower-cost installment payments.

Last June, the Ohio Supreme Court upheld a legal maneuver used by payday lenders to skirt a 2008 law that capped the payday loan interest rate at 28 percent annually. By comparison, annual percentage rates on credit cards can range from about 12 percent to 30 percent.

Members of Congress also are looking at payday loans.

Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking, Housing and Urban Affairs Committee, plans legislation that would allow Americans to receive an early refund of a portion of their earned income tax credit as an alternative to a payday loan.

Sen. Elizabeth Warren, D-Mass., wants the U.S. Postal Service to offer check-cashing and low-cost small loans. The idea is opposed by many banks and seems unlikely to advance in a Republican-controlled Congress.

[…]

Federal regulators plan payday loan rules to protect borrowers

Thumbnail

A payday loans sign in the window of Speedy Cash, London, December 25, 2013. For the first time, the Consumer Financial Protection Bureau plans to regulate payday loans using authority it was given under the Dodd-Frank law. Photo by Suzanne Plunkett/Reuters.

WASHINGTON — Troubled by consumer complaints and loopholes in state laws, federal regulators are putting together the first-ever rules on payday loans aimed at helping cash-strapped borrowers avoid falling into a cycle of high-rate debt.

The Consumer Financial Protection Bureau says state laws governing the $46 billion payday lending industry often fall short, and that fuller disclosures of the interest and fees – often an annual percentage rate of 300 percent or more – may be needed.

Full details of the proposed rules, expected early this year, would mark the first time the agency has used the authority it was given under the 2010 Dodd-Frank law to regulate payday loans. In recent months, it has tried to step up enforcement, including a $10 million settlement with ACE Cash Express after accusing the payday lender of harassing borrowers to collect debts and take out multiple loans.

A payday loan, or a cash advance, is generally $500 or less. Borrowers provide a personal check dated on their next payday for the full balance or give the lender permission to debit their bank accounts. The total includes charges often ranging from $15 to $30 per $100 borrowed. Interest-only payments, sometimes referred to as “rollovers,” are common.

Legislators in Ohio, Louisiana and South Dakota unsuccessfully tried to broadly restrict the high-cost loans in recent months. According to the Consumer Federation of America, 32 states now permit payday loans at triple-digit interest rates, or with no rate cap at all.

The CFPB isn’t allowed under the law to cap interest rates, but it can deem industry practices unfair, deceptive or abusive to consumers.

“Our research has found that what is supposed to be a short-term emergency loan can turn into a long-term and expensive debt trap,” said David Silberman, the bureau’s associate director for research, markets and regulation. The bureau found more than 80 percent of payday loans are rolled over or followed by another loan within 14 days; half of all payday loans are in a sequence at least 10 loans long.

The agency is considering options that include establishing tighter rules to ensure a consumer has the ability to repay. That could mean requiring credit checks, placing caps on the number of times a borrower can draw credit or finding ways to encourage states or lenders to lower rates.

Payday lenders say they fill a vital need for people who hit a rough financial patch. They want a more equal playing field of rules for both nonbanks and banks, including the way the annual percentage rate is figured.

“We offer a service that, if managed correctly, can be very helpful to a diminished middle class,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, which represents payday lenders.

Maranda Brooks, 40, a records coordinator at a Cleveland college, says she took out a $500 loan through her bank to help pay an electricity bill. With “no threat of loan sharks coming to my house, breaking kneecaps,” she joked, Brooks agreed to the $50 fee.

Two weeks later, Brooks says she was surprised to see the full $550 deducted from her usual $800 paycheck. To cover expenses for herself and four children, she took out another loan, in a debt cycle that lasted nearly a year.

“It was a nightmare of going around and around,” said Brooks, who believes that lenders could do more to help borrowers understand the fees or offer lower-cost installment payments.

Last June, the Ohio Supreme Court upheld a legal maneuver used by payday lenders to skirt a 2008 law that capped the payday loan interest rate at 28 percent annually. By comparison, annual percentage rates on credit cards can range from about 12 percent to 30 percent.

Members of Congress also are looking at payday loans.

Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking, Housing and Urban Affairs Committee, plans legislation that would allow Americans to receive an early refund of a portion of their earned income tax credit as an alternative to a payday loan.

Sen. Elizabeth Warren, D-Mass., wants the U.S. Postal Service to offer check-cashing and low-cost small loans. The idea is opposed by many banks and seems unlikely to advance in a Republican-controlled Congress.

[…]

Regulators prepare rules on payday loans to shield borrowers

WASHINGTON (AP) — Troubled by consumer complaints and loopholes in state laws, federal regulators are putting together the first-ever rules on payday loans aimed at helping cash-strapped borrowers avoid falling into a cycle of high-rate debt.

The Consumer Financial Protection Bureau says state laws governing the $46 billion payday lending industry often fall short, and that fuller disclosures of the interest and fees — often an annual percentage rate of 300 percent or more — may be needed.

Full details of the proposed rules, expected early this year, would mark the first time the agency has used the authority it was given under the 2010 Dodd-Frank law to regulate payday loans. In recent months, it has tried to step up enforcement, including a $10 million settlement with ACE Cash Express after accusing the payday lender of harassing borrowers to collect debts and take out multiple loans.

A payday loan, or a cash advance, is generally $500 or less. Borrowers provide a personal check dated on their next payday for the full balance or give the lender permission to debit their bank accounts. The total includes charges often ranging from $15 to $30 per $100 borrowed. Interest-only payments, sometimes referred to as “rollovers,” are common.

Legislators in Ohio, Louisiana and South Dakota unsuccessfully tried to broadly restrict the high-cost loans in recent months. According to the Consumer Federation of America, 32 states now permit payday loans at triple-digit interest rates, or with no rate cap at all.

The CFPB isn’t allowed under the law to cap interest rates, but it can deem industry practices unfair, deceptive or abusive to consumers.

“Our research has found that what is supposed to be a short-term emergency loan can turn into a long-term and expensive debt trap,” said David Silberman, the bureau’s associate director for research, markets and regulation. The bureau found more than 80 percent of payday loans are rolled over or followed by another loan within 14 days; half of all payday loans are in a sequence at least 10 loans long.

The agency is considering options that include establishing tighter rules to ensure a consumer has the ability to repay. That could mean requiring credit checks, placing caps on the number of times a borrower can draw credit or finding ways to encourage states or lenders to lower rates.

Payday lenders say they fill a vital need for people who hit a rough financial patch. They want a more equal playing field of rules for both nonbanks and banks, including the way the annual percentage rate is figured.

“We offer a service that, if managed correctly, can be very helpful to a diminished middle class,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, which represents payday lenders.

Maranda Brooks, 40, a records coordinator at a Cleveland college, says she took out a $500 loan through her bank to help pay an electricity bill. With “no threat of loan sharks coming to my house, breaking kneecaps,” she joked, Brooks agreed to the $50 fee.

Two weeks later, Brooks says she was surprised to see the full $550 deducted from her usual $800 paycheck. To cover expenses for herself and four children, she took out another loan, in a debt cycle that lasted nearly a year.

“It was a nightmare of going around and around,” said Brooks, who believes that lenders could do more to help borrowers understand the fees or offer lower-cost installment payments.

Last June, the Ohio Supreme Court upheld a legal maneuver used by payday lenders to skirt a 2008 law that capped the payday loan interest rate at 28 percent annually. By comparison, annual percentage rates on credit cards can range from about 12 percent to 30 percent.

Members of Congress also are looking at payday loans.

Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking, Housing and Urban Affairs Committee, plans legislation that would allow Americans to receive an early refund of a portion of their earned income tax credit as an alternative to a payday loan.

Sen. Elizabeth Warren, D-Mass., wants the U.S. Postal Service to offer check-cashing and low-cost small loans. The idea is opposed by many banks and seems unlikely to advance in a Republican-controlled Congress.

___

Follow Hope Yen on Twitter at http://twitter.com/hopeyen1

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Low down payment mortgages back for buyers

Potential homebuyers who don’t have a lot of cash to put down now have a cheaper way to get a loan.

Mortgage giants Fannie Mae and Freddie Mac announced guidelines Monday for loans with down payments as low as 3 percent under a new program largely aimed at first-time homebuyers.

“These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” said Federal Housing Finance Agency Director Mel Watt in a release.

Read More The top 10 housing markets for growth in 2015

The loan must be fixed rate, and the home must be a borrower’s primary residence, so this would not apply to investors, according to FHFA officials on a conference call with reporters Monday morning. At Fannie Mae, at least one of the borrowers on the loan must be a first-time homebuyer, defined as not having owned a home in the past three years. Freddie Mac is allowing the low down payment loan for any borrower who meets its underwriting standards.

Full documentation of a borrower’s income and credit history is required, as is mortgage insurance. Freddie Mac will require credit counseling for its borrowers, while Fannie Mae will in certain cases.

Fannie Mae has a 3 percent down payment product already through state housing finance agencies, but this loan may go through any lender interested in the program. At a conference in November, Bank of America CEO Brian Moynihan said his bank would not participate in a low down payment program and reportedly suggested that if borrowers didn’t have 10 percent to put down, they should probably rent. That was before these details were announced.

“[Mr. Moynihan] made those comments several weeks ago as a broad characterization,” said Bank of America spokesman Terry Francisco on Monday. “We will evaluate this program.”

Read More Self-employed? Good luck getting a mortgage

Fannie Mae, which is significantly larger than Freddie Mac, will also offer a cash-out refinance through the program, but only on existing Fannie Mae loans, and the amount of the cash out is limited to the lesser of 2 percent of the loan or $2,000. It is designed to help cover closing costs only. Freddie Mac is offering a no cash-out refinance.

Fannie Mae’s minimum FICO credit score cutoff is 620, while Freddie Mac’s is 660, but both are subject to so-called, compensating factors, so if a borrower has a credit score on the low side, he or she may need to show more assets to mitigate the added risk.

The move to offer these low down payment loans is clearly in response to an industry cry that credit is too tight and stifling demand from first-time homebuyers. These buyers, usually up to 40 percent of the homebuying market, have been stuck at less than a third of today’s market. Income growth has not been keeping pace with rising home prices, and as rents continue to rise, potential buyers are having a much tougher time saving for a large down payment.

Read More Unsteady incomes keep millions behind on bills

Fannie Mae will allow these loans starting Dec. 13, while Freddie Mac will begin underwriting for loans with settlement dates beginning March 23, 2015.

FinanceLoansFreddie MacFannie Mae […]

Avoid reverse mortgage regrets

Lots of people don’t fully understand how reverse mortgages work, and the resulting confusion can leave them with a lot of regrets.

Reverse mortgages were largely created for seniors who are cash-poor but house-rich – they have a lot of equity in their homes. The idea was to allow seniors to remain in their homes by borrowing a portion of their equity to supplement their incomes.

To qualify for a reverse mortgage, you have to be 62 or older. But unlike traditional home loan products, there is no monthly payment. The loan isn’t due until the borrower moves, sells or dies.

The overwhelming majority of borrowers get a reverse mortgage through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program.

I recently wrote about the loan product and many readers had questions and concerns.

One wrote: “It is recommended that the prospective borrower seek the guidance of a counselor. How independent are these counselors? My late cousin had obtained a reverse mortgage to supplement her limited pension. My impression was that the ‘counselor’ essentially presented my cousin with the different options of receiving the reverse mortgage (lump sum, monthly, etc.) rather than the associated costs, requirements and risks.”

Counseling is not recommended, it’s required by the Department of Housing and Urban Development. Borrowers have to use HUD-approved housing counselors, who must discuss not just how a reverse mortgage works and its eligibility requirements but the financial implications of getting this type of loan. They also are supposed to talk about alternatives. Their job is to help guide people to make their own decisions about whether the product is right for them.

Counselors are allowed to charge for counseling, but the agency must tell you about the fee before charging it. Fees are typically about $125, but some agencies charge less. Agencies are also required to waive the counseling fee if a borrower can’t afford it. You can pay the fee directly to the agency or out of your loan proceeds.

Another reader wrote: “A home equity line of credit can serve the same function as a reverse mortgage at much lower costs, and with the potential of being able to withdraw a larger percentage of equity than with a reverse mortgage. Am I missing something?”

The problem with a line of credit for cash-strapped seniors is that they may not qualify for the loan and they have to make monthly payments. The appeal of a reverse mortgage is that no monthly payment is required.

I also received a heart-wrenching note from one senior in Florida whose husband had taken out a reverse mortgage. She had signed over her rights to their home to her husband so that he could get a higher mortgage amount. She was 57 at the time. He was 62.

Some people, who married later in life, never add the spouse to the deed to a home that one spouse owned previously, said Jean Constantine-Davis, senior attorney with AARP Foundation Litigation. “More commonly, the younger spouses are talked into quit-claiming their interest in the home by mortgage brokers to generate higher draw on equity,” she said. “The couples virtually never understand that under the terms of the mortgage, when the borrowing spouse dies, the surviving spouse will be foreclosed on and evicted.”

That’s what happened to the reader.

“They assured me there would be no problem in adding my name back when I turned 62,” she wrote. “They failed to tell us that would require qualifying for a refinance.”

Now they can’t afford to refinance.

[…]

Housing bubble watch? Discounts for all-cash buyers drying up

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A large chunk of buyers are still paying for homes in all cash — but the price discounts they get for doing that are drying up. And if this trend continues, we may be headed for another housing bubble, one expert reveals.

According to data released Thursday by RealtyTrac, all-cash sales accounted for 33.9% of all sales of single-family homes and condos nationwide in the third quarter of 2014. This is down from 36.9% in the previous quarter and a high of 47% in the first quarter of 2012, though it’s still higher than some pre-recession levels (during the same quarter in 2005, the percentage was 28.9%, for example).

While paying all cash for homes certainly has its advantages — you won’t pay interest on a mortgage, for example, which can save you hundreds of thousands of dollars over the years; and you typically pay a lower price for a home than someone who pays with a loan — the sales price advantage you now get for paying cash is disappearing.

Cash buyers in the third quarter only paid an average of about 10% less than the market value of the home they bought (vs. 4% less on average for all buyers). What’s more, in the same quarter just a year ago, this discount was 14%, and two years ago it was 25%. “The 10% is not a hefty discount given that the average going back to 2001 has been a 19% discount,” explains Daren Blomquist, vice president of RealtyTrac.

This discount is drying up in part because “the margin has been largely squeezed out of this housing market for investors and other cash buyers thanks to the strong rebound in home prices over the past two and a half years,” Blomquist explains.

Guilty holiday shopping secrets

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Should we feel bad about cutting corners while holiday shopping?

Perhaps even more troubling, as Blomquist notes, is that this trend “indicates home prices don’t have much headroom to increase going forward.” Indeed, while there’s still an advantage to paying cash, the discount is historically quite low — at least when you look at data since 2001 — and trending downward.

“If we see that discount number go positive and become a premium, it’s a strong indication we may be back in a housing bubble again,” he notes.

[…]