Pipeline

Comic and Tragic

Two force-placed insurance stories popped up in the last few weeks. One's funny, the other's not, and neither is particularly flattering to banks.

In the first, a goth-music promoter with permanent vampire-teeth implants went on the media circuit after winning an order for a sheriff's sale of a Philadelphia Wells Fargo & Co. branch. The dispute began over Wells' demand that he insure the house for its replacement value, well above the value of the man's mortgage.

In the other, the Florida Times-Union wrote about the case of Myrtle Harrison, a Jacksonville-area woman who gets around in a wheelchair. Harrison stands to lose the trailer home she and her developmentally disabled sister live in because of high force-placed insurance premiums.

While her home's actual value is $19,000, the Times-Union reported, Harrison is being billed $2,400 a year for insurance. JPMorgan Chase & Co. appears to be forcing Harrison to buy insurance on the property her house sits on, in addition to the structure's intrinsic value.

Harrison, who lives on $674 a month, is now $800 in arrears — and recently received a foreclosure notice.

Last year, an investigative report by American Banker found that banks' force-placed insurance programs were beset by conflicts of interest and charged fees as much as 10 times the cost of insurance bought on the open market.

The FHFA has initiated a review of its own policies with the aim of lowering the price of force-placed insurance. And Iowa Attorney General Tom Miller has announced that the 50-state AG task force that he leads would begin an investigation into forced-placed insurance practices.

Call for More 'Skin'

As home lenders fret about a forthcoming regulatory proposal on risk retention, Freddie Mac will soon require a little more skin in the game from their borrowers.

The government-sponsored enterprise said Tuesday that beginning June 1 most borrowers will need at least 5% equity in the home for their loans to be eligible for sale to Freddie.

Freddie currently accepts loans with as little as 3% down. Although such purchases "have been minimal in recent years," the GSE said in a memo to lenders, "the performance of these mortgages has been unacceptable." (Last year, mortgages with down payments of 10% or less made up just 3% of Freddie's purchases, down from a peak of 11% of its purchases in 2007, said Brad German, a Freddie spokesman.)

The lone exception to the new guidelines, Freddie said, will be loans refinanced through the government's Home Affordable Refinance Program, which is designed for borrowers who owe more than their properties are worth.

Fannie Mae still accepts mortgages with loan-to-value ratios up to 97%, according to guidelines on the GSE's website. (By law, neither Fannie nor Freddie can touch a mortgage with equity of less than 20% unless it has private mortgage insurance. Both GSEs are operating under the conservatorship of the Federal Housing Finance Agency.)

Under the Dodd-Frank Act, lenders will be required to retain 5% of the credit risk of a mortgage they securitize, a prospect many banks find unappealing.

Regulators are writing rules that would exempt "qualifying residential mortgages" that meet stricter underwriting criteria from the risk-retention requirement.

One of those criteria would be a down payment of at least 20%. That could discourage lenders from making loans to people who cannot afford to put so much money down, because the originators would have to keep the 5% stake in any loans they sold to investors.

… But Is It Needed?

The Center for Responsible Lending, meanwhile, said that setting a 20%-down threshold for qualifying residential mortgages would materially shrink the market.

The nonprofit consumer group said the desire to "get back to basics" is a response to the housing bubble and the proliferation of subprime loans that did not document a borrower's income or ability to repay. By contrast, loans with low down payments tend to have fixed rates, not teaser rates that dramatically reset after as little as two years, the center said.

Loan performance will improve because of new origination standards in the Dodd-Frank Act, the group said, without having to add higher down-payment requirements.

The nonprofit group cited research from the insurer Genworth Financial Inc. that showed a mandatory down payment of 10% could shrink mortgage originations by 7%-15%.

Mortgage lenders also claim that a 20% down payment could reduce the pool of borrowers who qualify for a loan by as much as 35% and ultimately affect home prices.

While the consumer group claims that limiting low-down-payment loans would close the door to homeownership for some low-income and middle-class families, such borrowers would still have the option of obtaining financing through the Federal Housing Administration.

An estimated 7.5 million homes were purchased or refinanced with low-down-payment loans from 2005 to 2009, excluding loans insured by the FHA, the center said.