Pipeline

Default Driver?

The easier it is to get around an area without a car, the less likely a homeowner there will default, all other things being equal, an environmentalist group says.

A study released Wednesday by the Natural Resources Defense Council found a direct link between foreclosure rates and the transportation costs in a given area. Lenders, the group said, should change their underwriting practices to give "better borrowing terms" to buyers of homes in compact areas that are well served by public transit and other alternatives to the automobile.

Underwriters could allow higher debt-to-income ratios, lower credit scores or higher loan-to-value ratios for borrowers living in areas where there are many transportation options and lower commuting costs, without raising the probability of default, the study said.

"We wanted to make the connection about how transportation costs are important to determining what people can pay for housing," said Jennifer Henry, the real estate sector manager at the council's Center for Market Innovation.

The study pulled data on 40,000 mortgages in seven Chicago-area counties, four counties in the Jacksonville, Fla., area and in San Francisco proper as well as Census Bureau data on neighborhood conditions, income and car ownership. In all three cities, the study found that the probability of foreclosure increases as vehicle-ownership levels rise.

For example, in a case where two homeowners in different parts of the Chicago area had the same risk characteristics (a credit score of 680, a total debt-to-income ratio of 41% and a loan-to-value ratio of 80%), the study found that the household in the neighborhood where car ownership was one car per $33,000 of income had a greater chance of foreclosure than the household in the area where auto ownership was lower, at one car per $58,000 of income.

Jack Guttentag, a retired professor of finance at the University of Pennsylvania's Wharton School of Business, said the correlation between transportation costs and the ability to pay the mortgage is not entirely surprising.

But it's not necessarily a factor that is practical to incorporate into the underwriting process.

For one thing, doing so could be perceived as discriminatory.

"There was a time when lenders did indeed try to take into account area characteristics — and the practice was decried as redlining and made illegal," Guttentag said.

In addition, the task of incorporating transportation factors "would be enormous," he said. "Who's going to put those numbers together and keep them up-to-date?"

In Strange Company

New York Attorney General Andrew Cuomo is investigating 22 "online retailers," a group that includes GMAC Inc.'s struggling mortgage unit along with such names as Avon.com, 1-800Flowers and Columbia House.

Cuomo said Wednesday he had subpoenaed the retailers for information about their relationships with three Internet marketing firms: Affinion Group Inc., Vertrue Inc. and Webloyalty Inc., all in Norwalk, Conn.

The attorney general said he received numerous complaints from New Yorkers who incurred unauthorized charges on their credit or debit card bills and had a hard time getting refunds from the three marketers.

These consumers had shopped online for products — in the case of GMAC's customers, mortgages — and were presented with a discount or cash-back incentive and directed to a separate Web site offering enrollment in a membership program, Cuomo said. Joining meant agreeing to let the retailer transfer one's credit or debit card information to the marketer, but this important information was "buried in fine print and cluttered text," he said.

Cuomo wants to find out whether and how the 22 subpoenaed companies were compensated by the marketers and whether they knew of any "deceptive solicitations."

Affinion and Vertrue said they had updated their practices and now require that consumers provide credit or debit card numbers when enrolling online in programs. Webloyalty didn't return a call.

A spokeswoman for GMAC offered no comment by press time.

Other retailers dinged by Cuomo's investigation include Barnes & Noble Inc., Orbitz.com, Ticketmaster.com, FTD.com, Priceline.com and Buy.com.

Partnering with membership-program specialists has gotten other financial companies into legal scrapes.

Sixteen state attorneys general sued JPMorgan Chase & Co. and Affinion's Trilegiant Corp. in a lawsuit that the companies settled in 2006.

Son of Mortgage Guaranty

Freddie Mac is close to deciding whether to let MGIC Investment Corp.'s newly created subsidiary write mortgage insurance, which would give the parent company a big cushion, MGIC said.

"From what we're aware, Freddie Mac has been discussing this as recently as this week," MGIC's chairman and chief executive, Curt Culver, told investors and analysts on a conference call Tuesday. "I think the discussions have been positive." A spokesman for Freddie would not discuss the matter.

If approved, MGIC said, it expects the new carrier, MGIC Indemnity Corp., to be up and operating by April 1.

"Writing new business should clearly help MGIC weather the cycle," Mike Grondahl, an analyst at Northland Securities, wrote to clients. "We got the impression that Freddie's blessing is coming in the near term."

MGIC formed MIC out of concern that its main operating subsidiary, Mortgage Guaranty Insurance Corp., could fall short of minimum regulatory capital requirements to write coverage in the future. (See page 6 here.) This week, the parent company, of Milwaukee, posted its tenth straight quarterly loss.

Fannie Mae has already approved MIC as an eligible mortgage insurer, though only through next year.

HELOC Hearings

Florida state Sen. Mike Haridopolos is the latest elected official to excoriate big banks, calling for hearings to investigate claims that such lenders have been fraudulently reducing home equity lines.

The Republican said this week that he will ask homeowners, consumer groups and banks to testify at the hearings, which he hopes to get under way by the end of February.

Specifically, Haridopolos said he is targeting lenders that received federal bailout funds.

His push for the hearings was prompted by numerous complaints from homeowners that their home equity lines of credit were being reduced or terminated under false pretenses. For example, some homeowners said banks cited a decline in income for pulling their lines when their income had not changed.

Federal regulations permit lenders to suspend or reduce HELOCs when financial circumstances take a turn for the worse or when property values tank. However, there are limits. For example, under Regulation Z, which implements the Truth-in-Lending Act, lenders may not broadly terminate accounts in areas where property values have plunged on the whole without assessing the value of each individual home, according to the Office of Thrift Supervision.

Haridopolos, who will become the state Senate president in November, said the issue has special significance in the Sunshine State, an epicenter of the housing crisis.

There have been more than a dozen class actions filed around the country claiming arbitrary terminations or reductions of HELOCs, said Jay Edelson, managing partner of Edelson McGuire, a law firm that is handling several of those cases.

"This has been a huge problem for tens of thousands of homeowners throughout the country," he said, adding that he's seen a disproportionate number of complaints from homeowners in Florida and California.

"Every day, we get at least five to 10 new complaints on this issue," he said.