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Mark Branson, president of the German financial regulatory authority BaFin, discusses changing financial regulation.
03:06
2 hours ago
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Tag: Banking and credit regulation
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Why hundreds of U.S. banks may be at risk of failure
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Hundreds of small and regional banks across the U.S. are feeling stressed.
“You could see some banks either fail or at least, you know, dip below their minimum capital requirements,” Christopher Wolfe, managing director and head of North American banks at Fitch Ratings, told CNBC.
Consulting firm Klaros Group analyzed about 4,000 U.S. banks and found 282 banks face the dual threat of commercial real estate loans and potential losses tied to higher interest rates.
The majority of those banks are smaller lenders with less than $10 billion in assets.
“Most of these banks aren’t insolvent or even close to insolvent. They’re just stressed,” Brian Graham, co-founder and partner at Klaros Group, told CNBC. “That means there’ll be fewer bank failures. But it doesn’t mean that communities and customers don’t get hurt by that stress.”
Graham noted that communities would likely be affected in ways that are more subtle than closures or failures, but by the banks choosing not to invest in such things as new branches, technological innovations or new staff.
For individuals, the consequences of small bank failures are more indirect.
“Directly, it’s no consequence if they’re below the insured deposit limits, which are quite high now [at] $250,000,” Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corp., told CNBC.
If a failing bank is insured by the FDIC, all depositors will be paid “up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.”
Watch the video to learn more about the risk of commercial real estate, the role of interest rates on unrealized losses and what it may take to relieve stress on banks — from regulation to mergers and acquisitions.
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Generative AI will have four major effects on banks, McKinsey & Company says
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Violet Chung of McKinsey & Company discusses how prepared Asian banks are to adopt generative artificial intelligence.
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We're still constructive on Japanese banks for 2024, Goldman Sachs says
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Makoto Kuroda of Goldman Sachs says “there are positives to potentially lower Fed rates, such as lower dollar funding costs or lower unrealized loss on U.S. Treasurys.”
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Why Fed rate hikes take so long to affect the economy, and why that effect may last a decade or more
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The U.S. economy continues to grow despite the 5.5% benchmark federal funds interest rate set by the Federal Reserve in 2023.
The Fed’s leaders expect their interest rate decisions to eventually slow that growth.
The increase in borrowing costs that stems from Fed decisions does not affect all consumers immediately. It typically affects people who need to take new loans — first-time homebuyers, for example. Other dynamics, such as the use of contracts in business, can slow the ripple of Fed decisions through an economy.
“It might not all hit at once, but the longer rates stay elevated, the more you’re going to feel those effects,” said Sarah House, managing director and senior economist at Wells Fargo.
“Consumers did have additional savings that we wouldn’t have expected if they had continued to save at the same pre-Covid rate. And so that’s giving some more insulation in terms of their need to borrow,” said House. “That’s an example of why this cycle might be different in terms of when those lags hit, versus compared to prior cycles.”
A 1% interest rate increase can reduce gross domestic product by 5% for 12 years after an unexpected hike, according to a research paper from the Federal Reserve Bank of San Francisco.
“It’s bad in the short term because we worry about unemployment, we worry about recessions,” said Douglas Holtz-Eakin, president of the American Action Forum, referring to the paper’s implications for central bank policymakers. “It’s bad in the long term because that’s where increases in your wages come from; we want to be more productive.”
Some economists say that financial markets may be responding to Federal Reserve policy more quickly, if not instantaneously. “Policy tightening occurs with the announcement of policy tightening, not when the rate change actually happens,” said Federal Reserve Governor Christopher Waller in remarks July 13 at an event in New York.
“We’ve seen this cycle where the stock market moved more quickly in some cases, more slowly in other cases,” said Roger Ferguson, former vice chair of the Federal Reserve. “So, you know, this question of variability comes into play, as in how long it’s going to take. We think it’s a long time, but sometimes it can be faster.”
Watch the video above to see why the Fed’s interest rate hikes take time to affect the economy.
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Moody's downgrading of Hong Kong's credit outlook may be a 'temporary crisis': FII Institute
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Richard Attias, CEO of FII Institute, says the city's "fundamentals are good."
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China’s property market: Two of China’s biggest lenders still have a lot of debt issue to resolve, says economist
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Hao Hong, chief economist at Grow Investment Group, discusses China’s economic outlook and Chinese banks’ “very large exposure” to the property sector.
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Zombie firms are filing for bankruptcy as the Fed commits to higher rates
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In the U.S., 516 publicly listed firms have filed for bankruptcy from January through September 2023. Many of these firms have survived for several years with surging debt and lagging sales.
“The share of zombie firms has been increasing over time,” said Bruno Albuquerque, an economist at the International Monetary Fund. “This has detrimental effects on healthy firms who compete in the same sector.”Zombie firms are unprofitable businesses that stay afloat by taking on new debt. Banks lend to these weak firms in hopes that they can turn their trend of sinking sales around.
“A really healthy, well-capitalized banking system and financial sector is one of the most important factors in ensuring that unhealthy firms are wound down in a timely way rather than being propped up,” said Kathryn Judge, a professor of law at Columbia University.
Economists say that zombie firms may become more prevalent when banks or governments bail out unviable firms. But the Federal Reserve says the share of firms that are zombies fell after the Covid-19 emergency stimulus measures were implemented. The Fed says banks are refusing to keep weak firms in business with favorable extensions of credit.
The Fed economists point to healthy balance sheets at U.S. firms, despite the increasing weight of interest rate hikes. The effective federal funds rate was 5.33% in October 2023, up from 0.08% in October 2021.
“The biggest implication of the rapid rise in interest rates that we’ve seen the last five or six quarters, actually, is that it reestablished cash,” said Lotfi Karoui, chief credit strategist at Goldman Sachs. “That actually puts some constraints on risk assets.”
The Fed says it thinks interest rates will remain higher for longer. “Given the fast pace of tightening, there may still be meaningful tightening in the pipeline,” Fed Chair Jerome Powell said at an Economic Club of New York speech Oct. 19.
Watch the video above to learn more about the Fed’s battle with unviable zombie firms in the U.S.
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Despite crackdown on junk fees, this banking surcharge just hit a record high
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eclipse_images | E+ | Getty Images
ATM fees rise while overdraft and NSF fees fall
“ATM fees are biting harder than ever,” said Greg McBride, Bankrate’s chief financial analyst.
The average total fee a customer pays for an out-of-network ATM transaction rose to $4.73, a record high, Bankrate found, based on data from non-interest and interest accounts. This total combines the average fee the out-of-network ATM owner charges, $3.15, with the average fee the customer’s own bank charges the customer for the out-of-network transaction, $1.58.
On the upside, overdraft fees and non-sufficient funds fees are now significantly lower. The average overdraft fee fell 11% to $26.61 from last year’s average of $29.80, while non-sufficient funds fees hit an all-time low of $19.94, on average, according to Bankrate.
However, few banks have done away with them altogether: 91% of banks still charge overdraft and 70% charge non-sufficient funds fees, Bankrate also found.
Last month, the CFPB ordered Bank of America to pay more than $100 million to its customers and $150 million in penalties for double-dipping on overdraft fees, among other violations.
“Despite recent progress in addressing overdraft fees, the job is far from complete,” said Nadine Chabrier, the Center for Responsible Lending’s senior policy counsel, in a statement.
Monthly fees can be hard to avoid
While free checking accounts are widely available, many banking customers are encountering monthly service fees and rising balance requirements, Bankrate found.
More than a quarter of checking account holders, or 27%, are regularly hit with fees, which can add up to an average of $24 per month, or $288 per year, according to another survey from Bankrate.
The average fee on an interest checking account is typically even higher, while the average yield is just 0.05%.
“Avoid accounts that require stranding a balance to avoid [monthly service] fees when you can get a free checking account and move your excess funds into an online savings account at a time when yields exceed 5%,” McBride said. (Here are a few more competitive options worth considering.)
“Consumers can almost always avoid other account fees by using direct deposit, maintaining a minimum balance or limiting the use of ATMs that are not affiliated with their bank,” said Mike Townsend, a spokesperson for the American Bankers Association. “If you must use an ATM outside of your bank’s network, consider a larger withdrawal to avoid having to go back multiple times or using the free cash-back feature on debit card purchases.”
Some banking interest groups countered that offerings such as overdraft protection provide a much-needed safety net.
Without the option of overdraft protection, “people are more likely to turn to predatory lenders, hurting the same people the administration seeks to help,” Jim Nussle, president and CEO of the Credit Union National Association, said in a statement.
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Federal watchdog cracks down on Bank of America but ‘junk fees’ aren’t going anywhere, expert says — it’s a ‘game of whack-a-mole’
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What are junk fees?
Junk fees are additional, often hidden, charges that can come from a range of lenders. They are not typically included in the initial price of a transaction but are tacked on at the time of payment.
“Consumers are encountering these ‘surprise’ charges more often than they might expect, in everything from concert ticket surcharges to airline seat selection fees, credit card late fees, bank overdraft fees, hotel resort fees and more,” according to Ted Rossman, senior industry analyst at Bankrate.
Yet even if these fees were capped or even banned entirely, it’s unlikely that consumers would save money as a result, he said.
Overdraft fees are a good example of a ‘game of whack-a-mole’ when it comes to fees.
Ted Rossman
senior industry analyst at Bankrate
“Overdraft fees are a good example of a ‘game of whack-a-mole’ when it comes to fees,” Rossman said.
When many financial institutions lowered their overdraft and non-sufficient funds fees or eliminated them altogether, the average overdraft fee fell while ATM surcharges jumped to a record high, Bankrate found.
In most cases, even with more transparency, the all-in cost to consumers would likely remain the same, according to Rossman.
Cracking down on junk fees
President Joe Biden has said his administration would crack down on junk fees — including those from banks, as well as hotels, airlines and other service providers.
“Junk fees may not matter to the very wealthy, but they matter to most other folks in homes like the one I grew up in, like many of you did,” Biden said in his State of the Union address earlier this year. “They add up to hundreds of dollars a month.”
Biden also called on Congress to pass the Junk Fee Prevention Act, which will reduce unexpected charges, such as airline booking fees; service fees for concert tickets; early termination fees for TV, phone and internet services; “resort fees” at hotels; and “excessive” credit card late fees.
Last year, the CFPB said it was scrutinizing certain fees that catch customers by surprise — and are “likely unfair and unlawful,” according to the agency.
The consumer watchdog proposed a new rule prohibiting banks from charging surprise overdraft fees on debit transactions and reducing typical late fees from roughly $30 to $8, saving consumers as much as $9 billion a year, according to the White House.
“Despite recent progress in addressing overdraft fees, the job is far from complete,” Nadine Chabrier, the Center for Responsible Lending’s senior policy counsel, said in a statement.
“The Consumer Financial Protection Bureau took a big step by banning surprise overdraft fees,” she said. “We are encouraged that the consumer bureau announced it will take additional steps, and we urge the bureau to place strong limits on the size and frequency of these fees.”
More than a quarter of checking account holders, or 27%, are regularly hit with fees, which can add up to an average of $24 per month, or $288 per year, according to a another survey from Bankrate.
The average overdraft fee costs $29.80, Bankrate’s research found, while the average nonsufficient funds fee is $26.58.
Some banking interest groups countered that offerings such as overdraft protection provide a much-needed safety net.
“The president’s use of the term ‘junk fee’ is overly broad and ignores the needs of low-income and middle-income consumers who depend on these services to resolve short-term financial difficulties,” Jim Nussle, president and CEO of the Credit Union National Association, said in a statement.
“It does not consider the costs involved in providing needed financial services that consumers depend on.”
Without the option of overdraft protection, “people are more likely to turn to predatory lenders, hurting the same people the administration seeks to help,” Nussle said.
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House Democrats release wave of bank reform bills
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WASHINGTON — House Democrats on Wednesday will release a slate of reform bills in response to the recent bank failures that triggered the worst crisis for the sector since 2008.
Members of the House Financial Services Committee, led by ranking member Rep. Maxine Waters, D-Calif., are seeking an expansion to federal regulatory authorities and more oversight for bank executives, including clawbacks on compensation, fines and the closure of loopholes that allowed some banks to escape standards established under the 2010 Dodd-Frank Act.
The committee has closely scrutinized the actions of the Treasury Department, the Federal Deposit Insurance Corporation, or FDIC, and other federal regulators along with executives of Silicon Valley Bank and Signature Bank leading up to and in the aftermath of the banks’ collapse.
Waters urged committee Republicans to follow the lead of the Senate Banking Committee and work with Democrats to advance bipartisan legislation to protect the economy from future harm.
“The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank make clear that it is past time for legislation aimed at strengthening the safety and soundness of our banking system and enhancing bank executive accountability,” she said.
Here are the bills to be considered:
Failed Bank Executives Accountability and Consequences Act: This bill would expand regulatory authority on compensation clawbacks, fines and banning executives who contribute to a bank’s failure from future work in the industry. President Joe Biden called for these actions shortly after the FDIC took over SVB and Signature Bank in March. The bill is cosponsored by Waters and fellow Democratic Reps. Nydia Velazquez, of New York; Brad Sherman and Juan Vargas, both of California; David Scott, of Georgia; Al Green and Sylvia Garcia of Texas; Emanuel Cleaver, of Missouri; Joyce Beatty and Steven Horsford, both of Ohio; and Rashida Tlaib, of Michigan. Some Republicans have expressed support for this act, which is similar to the bipartisan bill the Senate Banking Committee is considering.
Incentivizing Safe and Sound Banking Act: This measure would expand regulators’ authority to prohibit stock sales for executives when banks are issued cease-and-desist orders for violating the law. It would also automatically restrict stock sales by senior executives of banks that receive poor exam ratings or are out of compliance with supervisory citations. The bill would have prevented SVB bank executives from cashing out after repeated warnings by regulators, according to Democrats. It is cosponsored by Waters, Velazquez, Sherman, Green, Cleaver, Beatty, Horsford and Tlaib.
Closing the Enhanced Prudential Standards Loophole Act: This will aim to close loopholes surrounding the Dodd-Frank Act’s enhanced prudential standards for banks that do not have a bank holding company. Neither Signature Bank nor SVB had a bank holding company before they collapsed. The bill would ensure that large banks with a size, complexity and risk equal to that of big banks with holding companies will be subject to similar enhanced capital, liquidity, stress testing, resolution planning and other related requirements. It is cosponsored by Waters, Velazquez, Sherman, Green, Cleaver, Beatty, Vargas, Garcia and Tlaib.
H.R. 4204, Shielding Community Banks from Systemic Risk Assessments Act: This measure would permanently exempt banks with less than $5 billion in total assets from special assessments the FDIC collects when a systemic risk exception is triggered, which was done to protect depositors at Silicon Valley Bank and Signature Bank. The FDIC would be allowed to set a higher threshold while requiring a minimal impact on banks with between $5 billion and $50 billion in total assets. It is sponsored by Green.
H.R. 4062, Chief Risk Officer Enforcement and Accountability Act: This measure would have federal regulators require large banks to have a chief risk officer. Banks would also have to notify federal and state regulators of a CRO vacancy within 24 hours and provide a hiring plan within seven days. After 60 days, if the CRO position remains vacant, the bank must notify the public and be subject to an automatic cap on asset growth until the job is filled. The bill is cosponsored by Sherman, Green, and fellow Democratic Reps. Sean Casten, of Illinois; Josh Gottheimer, of New Jersey; Ritchie Torres, of New York; and Wiley Nickel, of North Carolina.
H.R. 3914, Failing Bank Acquisition Fairness Act: This bill would have the FDIC only consider bids from megabanks with more than 10% of total deposits if no other institutions meet the least-cost test. This would ensure smaller banks have a chance to purchase failed banks, according to Democrats. It is sponsored by Rep. Stephen Lynch, D-Mass.
H.R. 3992, Effective Bank Regulation Act: This legislation would require regulators to expand stress testing requirements. Instead of two stress test scenarios, the bill would require five. It would also ensure that the Federal Reserve does stress tests for situations when interest rates are rising or falling. It is sponsored by Sherman.
H.R. 4116, Systemic Risk Authority Transparency Act: This bill would require regulators and the watchdog Government Accountability Office, or GAO, to produce the same kind of post-failure reports that the Federal Reserve, FDIC and GAO did after Silicon Valley Bank’s and Signature Bank’s failure. Initial reports would be required within 60 days and comprehensive reports within 180 days. It would be applicable to any use of the systemic risk exception of the FDIC’s least cost resolution test. The bill is sponsored by Green.
H.R. 4200, Fostering Accountability in Remuneration Fund Act of 2023, or FAIR Fund Act: The legislation would require big financial institutions to cover fines incurred after a failure and/or executive conduct through a deferred compensation pool that would be funded with a portion of senior executive compensation. The pool would get paid out between two and eight years, depending on the size of the institution. The bill is sponsored by Tlaib.
Stopping Bonuses for Unsafe and Unsound Banking Act: This measure would freeze bonuses for executives of any large bank that doesn’t submit an acceptable remediation plan for what’s known as a Matter Requiring Immediate Attention, or MRIA, or a similar citation from bank supervisors by a regulator-set deadline. It is sponsored by Brittany Pettersen, D-Colo.
Bank Safety Act: Large banks would be prevented from opting out of the requirement to recognize Accumulated Other Comprehensive Income, or AOCI, in regulatory capital under this bill. AOCI reflects the kind of unrealized losses in SVB’s securities portfolio. It is sponsored by Sherman.
Correction: This story was updated to reflect that the bills are being released Wednesday.
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Senate Banking Committee to consider bipartisan bill to claw back executives’ pay when banks fail
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Chairman Sherrod Brown, D-Ohio, left, and ranking member Sen. Tim Scott, R-S.C., arrive for the Senate Banking, Housing and Urban Affairs Committee hearing discussing recent bank failures, April 27, 2023.
Tom Williams | Cq-roll Call, Inc. | Getty Images
WASHINGTON — Members of the Senate Banking Committee on Wednesday will consider a bill that would aim to hold banking executives accountable in the wake of the collapse of several big banks.
The Recovering Executive Compensation from Unaccountable Practices Act, known as the RECOUP Act, would give regulators power to claw back compensation for executives of failed banks, institute penalties for misconduct and direct banks to beef up corporate governance, according to the committee.
Sens. Sherrod Brown, D-Ohio, chairman of the committee, and ranking member Tim Scott, R-S.C., announced an agreement on the legislation last week. Brown is up for reelection next year, and Scott is running for the 2024 Republican presidential nomination.
What’s in the RECOUP Act
The bill aims to:
- Allow regulators to remove senior banking executives who demonstrate misconduct in oversight, including failures to apply risk controls and breaches of fiduciary duty. It would also give regulators the discretion to ban these executives from the industry.
- Require banks to adopt enforcement of responsible management bylaws, including allowances for the bank’s board or the Federal Deposit Insurance Corporation to claw back compensation an executive received in the two years before a bank’s failure.
- Boost regulatory control over penalties for executives who break the law and increase the maximum civil penalty for the worst violations.
- Define a “senior executive” as those who are among a bank’s senior leadership and certain directors.
Scott said the bill is a “commonsense solution to address executive accountability.”
Brown said, “It’s time for CEOs to face consequences for their actions, just like everyone else.”
The RECOUP Act is one of several bills introduced in recent months targeting regulatory and management lapses that led to failures like those of Silicon Valley Bank and Signature Bank earlier this year.
Sen. Elizabeth Warren, D-Mass., a member of the Senate Banking Committee, spearheaded a bipartisan clawback bill with Democratic Sen. Catherine Cortez Masto, of Nevada, and Republican Sens. Josh Hawley, of Missouri, and Mike Braun, of Indiana.
Released in March, the bill calls for clawbacks of all or part of the compensation received by bank executives during the five years preceding a bank failure, compared with two years of clawbacks under the RECOUP Act.
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Expect more issues in the banking sector, but not a full-blown crisis, strategist says
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Sue Trinh, co-head of global macro strategy at Manulife Investment Management, discusses the outlook for the banking sector, saying that there are few indicators for a widespread banking crisis.
04:39
Thu, Apr 20 20235:56 AM EDT
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President Biden calls on Congress to crack down on ‘junk fees’
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In his State of the Union address, President Joe Biden said his administration is cracking down on “junk fees” — including those from banks as well as hotels, airlines and other service providers.
The president said these unnecessary or hidden fees are weighing down families’ budgets and causing financial harm.
“Junk fees may not matter to the very wealthy, but they matter to most other folks in homes like the one I grew up in, like many of you did. They add up to hundreds of dollars a month,” Biden said in the annual speech before Congress.
What are junk fees?
Junk fees are additional, often hidden charges that can come from a range of lenders. They are not typically included in the initial price but tacked on at the time of payment.
To stop this practice, Biden called on Congress to pass the Junk Fees Prevention Act, which will reduce unexpected charges, such as airline booking fees; service fees for concert tickets; early termination fees for TV, phone, and internet; “resort fees” at hotels; and “excessive” credit card late fees.
“Americans are tired of being — we’re tired of being played for suckers,” Biden said Tuesday.
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Last fall, the Consumer Financial Protection Bureau said it was scrutinizing certain fees that catch customers by surprise — and are “likely unfair and unlawful,” according to the agency.
The consumer watchdog proposed a new rule earlier this month prohibiting banks from charging surprise overdraft fees on debit transactions and reducing typical late fees from roughly $30 to $8, saving consumers as much as $9 billion a year, according to the White House.
“Despite recent progress in addressing overdraft fees, the job is far from complete,” Nadine Chabrier, the Center for Responsible Lending’s senior policy counsel, said in a statement.
“The Consumer Financial Protection Bureau took a big step by banning surprise overdraft fees,” she said. “We are encouraged that the consumer bureau announced it will take additional steps, and we urge the bureau to place strong limits on the size and frequency of these fees.”
More than a quarter of checking account holders, or 27%, are regularly hit with fees, which can add up to an average of $24 per month, or $288 per year, according to a recent survey from Bankrate.com.
The average overdraft fee costs $29.80, Bankrate’s research found, while the average nonsufficient funds fee is $26.58.
Some banking interest groups countered that offerings such as overdraft protection provide a much-needed safety net.
“The president’s use of the term ‘junk fee’ is overly broad and ignores the needs of low-income and middle-income consumers who depend on these services to resolve short-term financial difficulties,” Jim Nussle, president and CEO of the Credit Union National Association, said in a statement.
“It does not consider the costs involved in providing needed financial services that consumers depend on.”
Without the option of overdraft protection, “people are more likely to turn to predatory lenders, hurting the same people the administration seeks to help,” Nussle said.
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‘Zombie Debt’: Homeowners face foreclosure on old mortgages
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Rose Prophete thought the second mortgage loan on her Brooklyn home was resolved about a decade ago — until she received paperwork claiming she owed more than $130,000.
“I was shocked,” said Prophete, who refinanced her two-family home in 2006, six years after arriving from Haiti. “I don’t even know these people because they never contacted me. They never called me.”
Prophete is part of a wave of homeowners who say they were blindsided by the start of foreclosure actions on their homes over second loans that were taken out more than a decade ago. The trusts and mortgage loan servicers behind the actions say the loans were defaulted on years ago.
Some of these homeowners say they weren’t even aware they had a second mortgage because of confusing loan structures. Others believed their second loans were rolled in with their first mortgage payments or forgiven. Typically, they say they had not received statements on their second loans for years as they paid down their first mortgages.
Now they’re being told the loans weren’t dead after all. Instead, they’re what critics call “zombie debt” — old loans with new collection actions.
While no federal government agency tracks the number of foreclosure actions on second mortgages, attorneys aiding homeowners say they have surged in recent years. The attorneys say many of the loans are owned by purchasers of troubled mortgages and are being pursued now because home values have increased and there’s more equity in them.
“They’ve been holding them, having no communication with the borrowers,” said Andrea Bopp Stark, an attorney with the Boston-based National Consumer Law Center. “And then all of a sudden they’re coming out of the woodwork and are threatening to foreclose because now there is value in the property. They can foreclose on the property and actually get something after the first mortgages are paid off.”
Attorneys for owners of the loans and the companies that service them argue that they are pursuing legitimately owed debt, no matter what the borrower believed. And they say they are acting legally to claim it.
How did this happen?
Court actions now can be traced to the tail end of the housing boom earlier this century. Some involve home equity lines of credit. Others stem from “80/20” loans, in which homebuyers could take out a first loan covering about 80% of the purchase price, and a second loan covering the remaining 20%.
Splitting loans allowed borrowers to avoid large down payments. But the second loans could carry interest rates of 9% or more and balloon payments. Consumer advocates say the loans — many originating with since-discredited lenders — included predatory terms and were marketed in communities of color and lower-income neighborhoods.
The surge in people falling behind on mortgage payments after the Great Recession began included homeowners with second loans. They were among the people who took advantage of federal loan modification programs, refinanced or declared bankruptcy to help keep their homes.
In some cases, the first loans were modified but the second ones weren’t.
Some second mortgages at that time were “charged off,” meaning the creditor had stopped seeking payment. That doesn’t mean the loan was forgiven. But that was the impression of many homeowners, some of whom apparently misunderstood the 80/20 loan structure.
Other borrowers say they had difficulty getting answers about their second loans.
In the Miami area, Pastor Carlos Mendez and his wife, Lisset Garcia, signed a modification on their first mortgage in 2012, after financial hardships resulted in missed payments and a bankruptcy filing. The couple had bought the home in Hialeah in 2006, two years after arriving from Cuba, and raised their two daughters there.
Mendez said they were unable to get answers about the status of their second mortgage from the bank and were eventually told that the debt was canceled, or would be canceled.
Then in 2020, they received foreclosure paperwork from a different debt owner.
Their attorney, Ricardo M. Corona, said they are being told they owe $70,000 in past due payments plus $47,000 in principal. But he said records show the loan was charged off in 2013 and that the loan holders are not entitled to interest payments stemming from the years when the couple did not receive periodic statements. The case is pending.
“Despite everything, we are fighting and trusting justice, keeping our faith in God, so we can solve this and keep the house,” Mendez said in Spanish.
Second loans were packaged and sold, some multiple times. The parties behind the court actions that have been launched to collect the money now are often investors who buy so-called distressed mortgage loans at deep discounts, advocates say. Many of the debt buyers are limited liability companies that are not regulated in the way that big banks are.
The plaintiff in the action on the Mendez and Garcia home is listed as Wilmington Savings Fund Society, FSB, “not in its individual capacity but solely as a Trustee for BCMB1 Trust.”
A spokeswoman for Wilmington said it acts as a trustee on behalf of many trusts and has “no authority with respect to the management of the real estate in the portfolio.” Efforts to find someone associated with BCMB1 Trust to respond to questions were not successful.
Some people facing foreclosure have filed their own lawsuits citing federal requirements related to periodic statements or other consumer protection laws. In Georgia, a woman facing foreclosure claimed in federal court that she never received periodic notices about her second mortgage or notices when it was transferred to new owners, as required by federal law. The case was settled in June under confidential terms, according to court filings.
In New York, Prophete is one of 13 plaintiffs in a federal lawsuit claiming that mortgage debt is being sought beyond New York’s six-year statute of limitations, resulting in violations of federal and state law.
“I think what makes it so pernicious is these are homeowners who worked very hard to become current on their loans,” said Rachel Geballe, a deputy director at Brooklyn Legal Services, which is litigating the case with The Legal Aid Society. “They thought they were taking care of their debt.”
The defendants in that case are the loan servicer SN Servicing and the law firm Richland and Falkowski, which represented mortgage trusts involved in the court actions, including BCMB1 Trust, according to the complaint. In court filings, the defendants dispute the plaintiff’s interpretation of the statute of limitations, say they acted properly and are seeking to dismiss the lawsuit.
“The allegations in the various mortgage foreclosure actions are truthful and not misleading or deceptive,” Attorney Daniel Richland wrote in a letter to the judge. “Plaintiff’s allegations, by contrast, are implausible and thus warrant dismissal.”
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Associated Press writer Claudia Torrens and researcher Jennifer Farrar in New York contributed to this report.
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‘Zombie Debt’: Homeowners face foreclosure on old mortgages
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Rose Prophete thought the second mortgage loan on her Brooklyn home was resolved about a decade ago — until she received paperwork claiming she owed more than $130,000.
“I was shocked,” said Prophete, who refinanced her two-family home in 2006, six years after arriving from Haiti. “I don’t even know these people because they never contacted me. They never called me.”
Prophete is part of a wave of homeowners who say they were blindsided by the start of foreclosure actions on their homes over second loans that were taken out more than a decade ago. The trusts and mortgage loan servicers behind the actions say the loans were defaulted on years ago.
Some of these homeowners say they weren’t even aware they had a second mortgage because of confusing loan structures. Others believed their second loans were rolled in with their first mortgage payments or forgiven. Typically, they say they had not received statements on their second loans for years as they paid down their first mortgages.
Now they’re being told the loans weren’t dead after all. Instead, they’re what critics call “zombie debt” — old loans with new collection actions.
While no federal government agency tracks the number of foreclosure actions on second mortgages, attorneys aiding homeowners say they have surged in recent years. The attorneys say many of the loans are owned by purchasers of troubled mortgages and are being pursued now because home values have increased and there’s more equity in them.
“They’ve been holding them, having no communication with the borrowers,” said Andrea Bopp Stark, an attorney with the Boston-based National Consumer Law Center. “And then all of a sudden they’re coming out of the woodwork and are threatening to foreclose because now there is value in the property. They can foreclose on the property and actually get something after the first mortgages are paid off.”
Attorneys for owners of the loans and the companies that service them argue that they are pursuing legitimately owed debt, no matter what the borrower believed. And they say they are acting legally to claim it.
How did this happen?
Court actions now can be traced to the tail end of the housing boom earlier this century. Some involve home equity lines of credit. Others stem from “80/20” loans, in which homebuyers could take out a first loan covering about 80% of the purchase price, and a second loan covering the remaining 20%.
Splitting loans allowed borrowers to avoid large down payments. But the second loans could carry interest rates of 9% or more and balloon payments. Consumer advocates say the loans — many originating with since-discredited lenders — included predatory terms and were marketed in communities of color and lower-income neighborhoods.
The surge in people falling behind on mortgage payments after the Great Recession began included homeowners with second loans. They were among the people who took advantage of federal loan modification programs, refinanced or declared bankruptcy to help keep their homes.
In some cases, the first loans were modified but the second ones weren’t.
Some second mortgages at that time were “charged off,” meaning the creditor had stopped seeking payment. That doesn’t mean the loan was forgiven. But that was the impression of many homeowners, some of whom apparently misunderstood the 80/20 loan structure.
Other borrowers say they had difficulty getting answers about their second loans.
In the Miami area, Pastor Carlos Mendez and his wife, Lisset Garcia, signed a modification on their first mortgage in 2012, after financial hardships resulted in missed payments and a bankruptcy filing. The couple had bought the home in Hialeah in 2006, two years after arriving from Cuba, and raised their two daughters there.
Mendez said they were unable to get answers about the status of their second mortgage from the bank and were eventually told that the debt was canceled, or would be canceled.
Then in 2020, they received foreclosure paperwork from a different debt owner.
Their attorney, Ricardo M. Corona, said they are being told they owe $70,000 in past due payments plus $47,000 in principal. But he said records show the loan was charged off in 2013 and that the loan holders are not entitled to interest payments stemming from the years when the couple did not receive periodic statements. The case is pending.
“Despite everything, we are fighting and trusting justice, keeping our faith in God, so we can solve this and keep the house,” Mendez said in Spanish.
Second loans were packaged and sold, some multiple times. The parties behind the court actions that have been launched to collect the money now are often investors who buy so-called distressed mortgage loans at deep discounts, advocates say. Many of the debt buyers are limited liability companies that are not regulated in the way that big banks are.
The plaintiff in the action on the Mendez and Garcia home is listed as Wilmington Savings Fund Society, FSB, “not in its individual capacity but solely as a Trustee for BCMB1 Trust.”
A spokeswoman for Wilmington said it acts as a trustee on behalf of many trusts and has “no authority with respect to the management of the real estate in the portfolio.” Efforts to find someone associated with BCMB1 Trust to respond to questions were not successful.
Some people facing foreclosure have filed their own lawsuits citing federal requirements related to periodic statements or other consumer protection laws. In Georgia, a woman facing foreclosure claimed in federal court that she never received periodic notices about her second mortgage or notices when it was transferred to new owners, as required by federal law. The case was settled in June under confidential terms, according to court filings.
In New York, Prophete is one of 13 plaintiffs in a federal lawsuit claiming that mortgage debt is being sought beyond New York’s six-year statute of limitations, resulting in violations of federal and state law.
“I think what makes it so pernicious is these are homeowners who worked very hard to become current on their loans,” said Rachel Geballe, a deputy director at Brooklyn Legal Services, which is litigating the case with The Legal Aid Society. “They thought they were taking care of their debt.”
The defendants in that case are the loan servicer SN Servicing and the law firm Richland and Falkowski, which represented mortgage trusts involved in the court actions, including BCMB1 Trust, according to the complaint. In court filings, the defendants dispute the plaintiff’s interpretation of the statute of limitations, say they acted properly and are seeking to dismiss the lawsuit.
“The allegations in the various mortgage foreclosure actions are truthful and not misleading or deceptive,” Attorney Daniel Richland wrote in a letter to the judge. “Plaintiff’s allegations, by contrast, are implausible and thus warrant dismissal.”
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Associated Press writer Claudia Torrens and researcher Jennifer Farrar in New York contributed to this report.
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Fed’s top financial regulator urges ‘guardrails’ for crypto
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WASHINGTON — The top U.S. banking regulator at the Federal Reserve is urging Congress to pass legislation that would impose regulation on crypto currencies in the wake of the swift collapse last week of FTX, a leading crypto exchange.
Michael Barr, the Fed’s vice chair for supervision, said in prepared testimony released Monday that “recent events in crypto … have highlighted the risks to investors and consumers associated with new and novel asset classes and activities when not accompanied by strong guardrails.”
Barr, who took office in July, is scheduled to testify before Congress Tuesday for the first time as vice chair. He did not refer specifically to FTX in his written remarks.
Yet his appearance comes after FTX, the third-largest crypto currency exchange, formerly led by Sam Bankman-Fried, filed for bankruptcy Friday. The fall of FTX has rippled throughout the crypto world, with lender BlockFi pausing customer withdrawals.
Barr said “some financial innovations offer opportunities, but as we have recently seen, many innovations also carry risks.” Those include runs on deposits, collapsing asset values, misuse of customer funds, fraud, theft, manipulation, and money laundering, he said.
“These risks, if not well controlled, can harm retail investors and cut against the goals of a safe and fair financial system,” Barr said.
The collapse of FTX occurred outside the banking system, Barr noted, a focus of his oversight.
“But recent events remind us of the potential for systemic risk if interlinkages develop between the crypto system that exists today and the traditional financial system,” he said.
Regarding the banking system overall, most large banks have healthy levels of cash reserves, Barr said, beyond even what is required by regulation.
But with the economy slowing as the Fed rapidly lifts interest rates, banks may come under more stress, he said.
The “economic outlook has weakened,” increasing uncertainty, Barr said. “A weaker economy could put stress on households and businesses and, thus, on the banking system as a whole.”
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As Israel’s far right parties celebrate, Palestinians shrug
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RAMALLAH, West Bank — The apparent comeback of former Prime Minister Benjamin Netanyahu and the dramatic rise of his far-right and ultra-Orthodox allies in Israel’s general election this week have prompted little more than shrugs from many Palestinians.
“It’s all the same to me,” Said Issawiy, a vendor hawking nectarines in the main al-Manara Square of Ramallah, said of Netanyahu replacing centrist Yair Lapid and poised to head the most right-wing government in Israel’s history.
Over the past month, Issawiy had struggled to get to work in Ramallah from his home in the city of Nablus after the Israeli army blocked several roads in response to a wave of violence in the northern West Bank. “I’m just trying to eat and work and bring something back to my kids,” he said.
Some view the likely victory for Netanyahu and his openly anti-Palestinian allies, including ultranationalist lawmaker Itamar Ben-Gvir who wants to end Palestinian autonomy in parts of the occupied West Bank, as a new blow to the Palestinian national project.
The sharp rightward shift of Israel’s political establishment pushes long-dormant peace negotiations even further out of reach and deepens the challenges facing 87-year-old President Mahmoud Abbas, whose autocratic Palestinian Authority already seemed to many Palestinians as little more than an arm of the Israeli security forces.
“If you want to use the metaphor of a ‘nail in the coffin of the Palestinian Authority,’ that was done earlier,” said Ghassan Khatib, a former Palestinian peace negotiator and Cabinet minister. “This election is another step in that same direction.”
During his 12 years in power, before being voted out in 2021, Netanyahu showed scant interest in engaging with the Palestinians. Under his leadership, Israel vastly expanded its population of West Bank settlers — now some 500,000 — and retroactively legalized settler outposts built on private Palestinian land. The measures have entrenched Israel’s occupation, now in its 56th year since Israel captured the territory during the 1967 Mideast war.
Palestinians see successive Israeli governments as seeking to solidify a bleak status quo in the West Bank: Palestinian enclaves divided by growing Israeli settlements and surrounded by Israeli forces.
“We had no illusion that this next government would be a partner for peace,” said Ahmad Majdalani, a minister in the Palestinian Authority. “It’s the opposite, we see a campaign of incitement that began more than 15 years ago as Israel drifted toward extremism.”
The Gaza Strip’s militant Hamas rulers said the election outcome would “not change the nature of the conflict.”
But for the first time, surging support for Israel’s far right has made the Jewish supremacist party of Ben-Gvir the third-largest in the Israeli parliament.
Ben-Gvir and his allies hope to grant immunity to Israeli soldiers who shoot at Palestinians, deport rival lawmakers and impose the death penalty on Palestinians convicted of attacks on Jews. Ben-Gvir is the disciple of a racist rabbi, Meir Kahane, who was banned from parliament and whose Kach party was branded a terrorist group by the United States before he was assassinated in New York in 1990.
On the campaign trail, Ben-Gvir grabbed headlines for his anti-Palestinian speeches and stunts — recently brandishing a shotgun and encouraging police to open fire on Palestinian stone-throwers in a tense Jerusalem neighborhood.
Some Palestinians have found reason for optimism. After Tuesday’s elections, they say, Israel will no longer present to the world the telegenic face of Lapid. A win for extremism in Israel, some say, could bolster the moral case for efforts to isolate Israel, vindicating activism outside the moribund peace process.
“It will lead to some international pressure,” said Mahmoud Nawajaa, an activist with the Boycott, Divestment and Sanctions movement, or BDS, which calls for an economic boycott of Israel as happened to apartheid-era South Africa in the 1980s.
“Netanyahu is more honest and clear about his intentions to expand settlements. The others didn’t say it, even if it was happening,” Nawajaa added.
Lapid and his predecessor, Naftali Bennett, a former settler leader who rebranded himself as a national unifier, had presided over a wobbly coalition of right-wing, centrist and dovish left-wing parties, including the first Arab party to ever join a government.
Foreign leaders who shunned the divisive Netanyahu embraced what appeared to be a less ideological government. Bennett became the first Israeli leader to visit the United Arab Emirates after the countries normalized ties — an honor repeatedly denied to Netanyahu. President Joe Biden, who had a rocky relationship with Netanyahu, basked in Lapid’s warm welcome during his visit to Israel last summer.
But even as Lapid voiced support for the two-state solution during his address to the U.N. General Assembly in September, Palestinians saw no sign he could turn words into action. They watched Israel approve thousands of new settler homes on lands they want for a future state.
Israeli military raids in the West Bank have also surged after a series of Palestinian attacks in the spring killed 19 people in Israel. More than 130 Palestinians have been killed, making 2022 the deadliest since the U.N. started tracking fatalities in 2005. The Israeli army says most of the Palestinians killed have been militants. But stone-throwing youths protesting the incursions and others not involved in confrontations have also been killed.
“In terms of violence, the Lapid government has outdone itself,” said Nour Odeh, a Palestinian political analyst and former PA spokeswoman. “As far as new settlements and de facto annexation, Lapid is Netanyahu.”
Many young Palestinians have given up on the two-state solution and grown disillusioned with the aging Palestinian leadership, which they see as a vehicle for corruption and collaboration with Israel. Hamas and Fatah, the Palestinian party that controls the West Bank, have remained bitterly divided for 15 years.
A mere 37% of Palestinians support the two-state solution, according to the most recent report from Palestinian pollster Khalil Shikaki. In Israel the figures are roughly the same — 32% of Jewish Israelis support the idea, according to the Israel Democracy Institute.
“There is no horizon for a political track with the Israelis,” Odeh said. “We need to look inward … to re-legitimize our institutions through elections, and stand together on a united political platform.”
But on the crowded, chaotic streets of Ramallah on Wednesday, there was only misery and anger over the daily humiliations of the occupation.
“I hate this place,” said Lynn Anwar Hafi, a 19-year-old majoring in literature at a local university. “It’s like the occupation lives inside me. I can’t think what I want to. I can’t go where I want to. I won’t be free until I leave.”
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