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As I mentioned in a diary last week, Congressman Frank pushed an anti-predatory lending bill through the House Financial Services committee last week and that bill will likely be taken up by the whole House this week. The primary beneficiaries of bad loans, the mortgage brokers, mortgage lenders and the Wall Street securitizers are out in force right now trying to water the bill down and protect their interests. There will be amendments, both to strengthen this bill and weaken it. By weighing in with your Representative today, you can help protect consumers. Using the Democracy in Action web site hosted by the National Community Reinvestment Coalition you can support the good guys in 60 seconds or less.  More of the whys and wherefores over the jump.

There have been several strains of virulent lending that have broken out in this country in the last decade. One that is often focused on at this site are the non-traditional mortgage products used by speculators who were trying to buy more house than they could afford, and then got caught when the housing market down-drafted. Those who reduce the current subprime crisis to this part of the problem, blame the Greenspan Fed for keeping interest rates at an all time low for as long as it did. The proponents of this view have no sympathy for either Wall Street or the borrowers and believe if the Fed just kept interest rates high enough the market would thresh this out.

Far be it from me to defend Greenspan. . . But the problem is more complicated than that. . . and hence finding a sustainable solution is more complicated than letting the market thresh things out.

You say you’re already convinced, you don’t need the background. Go here

Fill in your name, address and other contact information, check either the email or fax button and then click the "submit message" button. If you wish, you can edit and personalize the actual letter on the left hand side of the page. On the basis of the information you have entered, this web site will then email or fax this letter with your name signed on the bottom directly to your Representative.

But if you want the five minute history lesson after all!

Problem #1 Mortgage brokers:  

Forty years ago approximately 80% of all home mortgages were originated by depository institutions like banks and savings and loan institutions, and the person leading the borrower through the process was usually an employee of one of those institutions responding to a request from the consumer. Today approximately 80% of all home loans are sold to borrowers by mortgage brokers who heavily market themselves to potential borrowers and who seldom work for a fixed salary. These mortgage brokers are poorly regulated at the state level and their compensation is usually structured in ways that insure that they get paid on the front end, long before the loan goes bad, and they often get paid more for loans that aren’t in the borrower’s interest than for good loans.

People getting a mortgage loan almost always believe that their mortgage broker is representing their interests, when in fact a mortgage broker under current law has no duty to represent the borrower. Even brokers who engage in outright fraud are seldom criminally prosecuted because there have been few state or Federal resources directed towards investigating and prosecuting mortgage fraud.

Problem # 2 The mortgage securitizers

Fannie Mae has been around since 1938 while Fannie’s younger brother Freddie Mac was founded in 1970. The stated purpose of these two Government-Sponsored Enterprises has been to increase homeownership across the United States. As such they have been a positive force, buying loans from lenders, securitizing them and selling them to investors Although there have always been sub prime loans in the mortgage market, Fannie and Freddie have limited themselves to securitizing prime loans plus a small percentage of Alt A loans which go to the category of borrowers who are slightly less credit-worthy than prime borrowers.

However, in the 1990s some Wall Street companies figured out that they could make big money by packaging sub prime loans. This gave brokers and mortgage lenders the ability and an incentive to do large numbers of subprime loans, because they could quickly pass them up the chain and relieve themselves of most of the risk of carrying these loans on their books.

Problem #3 Lack of good regulation for mortgage lenders

Banks are subject to regular safety and soundness examinations and regular Community Reinvestment Act (CRA) regulations. A free standing mortgage company, which doesn’t take deposits from the public, is not subject to the same standards. Which is why you see almost no depository institutions whose sole focus is sub prime lending. Ameriquest, New Century and most of the other dozens of lenders who have gone out of business in the last year have all been, by and large, free standing mortgage companies. They are not subject to CRA, with very inadequate overall regulation by HUD.

There are other companies like Countrywide, which own a bank, but do most of their lending outside the bank structure. Some of the largest institutions in the country, like Citigroup, HSBC, Wells Fargo are primarily banks, but they also do a significant level of sub prime lending through subsidiaries that are not banks. For instance CitiFinancial engages in sub prime lending all across the country, while CitiBank makes largely prime loans in certain markets. Both of these entities are subsidiaries of Citigroup, but the banking regulators, under current law are paying more attention to what CitiBank is doing than what CitiFinancial is doing in determining whether Citi is lending fairly to low and moderate income neighborhoods.

Now for solutions, which brings us back to the Frank bill.

HR 3915 will create a national registry and standards for mortgage brokers. It will establish a "duty of care" for all mortgage originators, including brokers, which gives each originator an obligation to provide borrowers with a mortgage that is appropriate for them, including for instance a documented ability to repay, not just under the initial interest rate, but with the interest rates that an Adjustable Rate Mortgage can adjust upwards to. The bill would outlaw the ability of a mortgage broker to get paid more for putting a borrower into a higher interest loan than they do for a lower interest loans. (The Yield Spread Premiums which are the subject of so much current abuse) The bill outlaws prepayment penalties for certain high cost loans. (Very few prime loans have prepayment penalties, but over 75% of subprime loans have prepayment penalties, effectively trapping people into staying in a bad loan even if they could refinance.)

On the overall subject of bringing mortgage brokers under some effective regulation HR 3915 does a good job and the associations representing mortgage brokers are fighting back trying to water down the bill.

Where the bill does not do such a good job is in making sure that securitizers fully share the liability for fraudulent and predatory loans that they have securitized.  Mortgage brokers seldom have the financial wherewithal to make their victims whole when things go bad. Even mortgage lenders disappear from the scene, as we have seen so dramatically over the last year or two. In order to put a stop to new forms of predatory lending, once this crisis blows over, the securitizers must be required to share some of the liability if they package fraudulent and predatory loans in order to make certain that they engage in true due diligence before accepting loans.

It is on this point that the bill has to be strengthened. Wall Street has enormous power to sway lawmakers with the threat of drying up credit. Regular readers on this topic will be familiar with the crocodile tears that get shed by industry types who claim that if they are effectively regulated, credit will dry up for minorities and low and moderate income people. In fact African American homeownership rates have been falling steadily since 2004 during the time that there has been a wild proliferation of bad loans marketed at them. Wall Street will not behave without effective, tough regulation.

Finally the bill fails by preempting state law on some of these key questions as well. If a Federal Law is ever to preempt state law, we should all make sure that it is the best law possible. At the moment this bill is an improvement over current Federal law, but it certainly is not so good that it can be used to justify preempting state laws.

This is where we need your help. Either pick up the phone and call your representatives directly. Or if you are not in the habit of doing that, use the NCRC Democracy in Action web site for some sixty second activism.

Fill in your name, address and other contact information, check either the email or fax button and then click the "submit message" button. If you wish, you can edit and personalize the actual letter on the left hand side of the page. On the basis of the information you have entered, this web site will then email or fax this letter with your name signed on the bottom directly to your Representative.

Thanks for taking the time to improve this country’s lending laws.

Originally posted to bankbane on Mon Nov 12, 2007 at 10:31 AM PST.

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Comment Preferences

  •  Bill language (4+ / 0-)
    Recommended by:
    julifolo, kurt, Newzie, SpinyPuffer

    If you would like read the whole bill just go to Thomas
    and click the bill number button and enter HR 3915 under the "Search Bill Text" area.

    "The more they spoke of honor, the more I checked my wallet."

    by bankbane on Mon Nov 12, 2007 at 10:30:10 AM PST

  •  Need a Congressional phone number? (1+ / 0-)
    Recommended by:

    If you’d rather call your Representative directly, but don’t know their phone number, say so, and I’ll send you the number directly

    "The more they spoke of honor, the more I checked my wallet."

    by bankbane on Mon Nov 12, 2007 at 10:31:06 AM PST

  •  The (subprime mortgage) Market Doesn't Work (1+ / 0-)
    Recommended by:

    Because it isn't properly being regulated, with clear and full liability that would give borrowers a right to go after these companies for predatory loans, and would encourage these companies to evaluate and disclose these risky loans. This isn't about risky borrowers -- it's about risky loans. I'd call them "foreclosure loans."

    If we had exploding microwaves, they would have been off the shelf immediately with a full recall. Instead, we have exploding mortgages and nearly two million people may lose their homes. That would be catastrophic, and it's about time the Dems did something about it.

  •  Toxic poison!! Get 'em off the shelves!! (1+ / 0-)
    Recommended by:

    When it comes to accountability for screwing middle America, of course the Republican leadership balks - I agree with puffer, this is a dangerous product that should have been removed from the marketplace years ago.  

    Good for NCRC to take a lead on this and fight back.  I just sent the link to their action to a whole bunch of people.

    •  Thanks for the effort (1+ / 0-)
      Recommended by:

      Yeah, can you imagine if 2 million relatively new cars quit working this year. Would all those libertarians and Bush Republicans be saying "buyer beware" to that.

      "The more they spoke of honor, the more I checked my wallet."

      by bankbane on Mon Nov 12, 2007 at 11:52:08 AM PST

      [ Parent ]

  •  The Biggest Campaign Issue (1+ / 0-)
    Recommended by:

    I also don't understand why this isn't one of the biggest campaign issues right now. Think of it -- over two million people are set to lose their homes over the next 18 months. That's more people displaced than by Hurricanes Katrina, Rita and the recent California fires.

    If the effect on those families doesn't concern you, consider the economic impact: Bloomberg is reporting that subprime losses may reach $400 billion. Some say we're heading for a recession...

    All because of predatory lending practices...but mums the word from Senators Obama and Clinton -- why isn't this a bigger campaign issue?

    •  Campaigns (2+ / 0-)
      Recommended by:
      bankbane, SpinyPuffer

      I get a lot of emails from candidates' campaigns, I haven't ever seen an entire email devoted to abusive lending.

      Its almost like the candidates are afraid to speak you think they have some alliances that are more important than fixing our economy? (note heavy sarcasm).

      This is an issue that really smacks of Family Values and the American Dream.  And it couldn't be further from any of the major presidential hopefuls' agenda.


    •  This is a synopsis of what they've said (1+ / 0-)
      Recommended by:

      Democrats offer fixes to foreclosure crisis
      Tougher laws sought; GOP warns on taxes

      By Marcella Bombardieri, Globe Staff  |  August 8, 2007

      DERRY, N.H. --  Senator Hillary Clinton of New York said she would ban fees that penalize early repayments and create a $1 billion fund to help struggling homeowners avoid foreclosure.

      Former senator John Edwards of North Carolina has called for banning a longer list of controversial lending practices, including balloon loans, in which interest rates grow dramatically over time.

      Senator Barack Obama of Illinois introduced a bill that would impose new penalties on mortgage professionals found guilty of fraud and offer counseling for homeowners to avoid foreclosure. Senator Chris Dodd of Connecticut, chairman of the Senate Banking Committee, is touting his own efforts to combat the problem.

      "The more they spoke of honor, the more I checked my wallet."

      by bankbane on Mon Nov 12, 2007 at 12:07:04 PM PST

      [ Parent ]

  •  Thanks Bankbane for providing a lot of info. (2+ / 0-)
    Recommended by:
    bankbane, SpinyPuffer

    on the mortgage housing market.  I'm glad that people are moving into action on this issue.

    I'm concerned, however, that it may be too late. All the articles I've read indicate that the whole industry has been destroyed by taking too much equity out of it.  There's probably nothing left.

    Could be a case of closing the barn door after the horse has run away.  Don't know.  We'll know in a few months.

    •  You may be right for the short term (1+ / 0-)
      Recommended by:

      But never underestimate the ability of this industry to repeat the same mistakes five years down the road after the economy has righted itself and people have forgotten. This is the time, while people are mad, to get tough legislation passed.

      "The more they spoke of honor, the more I checked my wallet."

      by bankbane on Mon Nov 12, 2007 at 12:09:19 PM PST

      [ Parent ]

    •  We have something to learn from Milton Friedman (3+ / 0-)
      Recommended by:
      bankbane, Cliss, chigh

      From Naomi Klein's new book, The Shock Doctrine:

      In one of his most influential essays, Friedman articulated contemporary capitalism's core tactical nostrum, what I have come to understand as "the shock doctrine". He observed that "only a crisis - actual or perceived - produces real change". When that crisis occurs, the actions taken depend on the ideas that are lying around. Some people stockpile canned goods and water in preparation for major disasters; Friedmanites stockpile free-market ideas. And once a crisis has struck, the University of Chicago professor was convinced that it was crucial to act swiftly, to impose rapid and irreversible change before the crisis-racked society slipped back into the "tyranny of the status quo".

      If we don't pressure the Democrats then industry will knock them over, and this bill will end up being so weak that it just continues an unfair and deceptive system that benefits industry at consumers' expense.

      I don't think it's too late: now's the time; borrow a page from Friedman's book and do some good with it.

  •  One Piece Missing (2+ / 0-)
    Recommended by:
    bankbane, SpinyPuffer

    One of the major problems in this whole mess is that the Wall Street investment banks packaged the risky loans, had them reviewed by their own rating agency that rated the packages as AAA (i.e. "super safe",my term, not theirs) then sold them into the markets.  An additional part of this legislation ought to be that any rating of an investment package; any investment package; be rated for safety by an completely independent rating agency that is not dependent upon the issuer (Wall Street)for its livelyhood.

    •  I think you're right (1+ / 0-)
      Recommended by:

      Legislatively something that deals with the rating agencies probably can't be dealt with by amending Truth in Lending and the Homeownership Equity Protection Act. The independence of the rating agencies is a huge issue that's a lot bigger than just the subprime issue.

      "The more they spoke of honor, the more I checked my wallet."

      by bankbane on Mon Nov 12, 2007 at 12:14:54 PM PST

      [ Parent ]

  •  Hit the Banks (2+ / 0-)
    Recommended by:
    chigh, SpinyPuffer

    Banks just spent $TRILLIONS on loans to people they could have known wouldn't pay it back. Those $TRILLIONS were all borrowed from the Federal government at a low interest rate (approaching 0% for a while), then marked up for profits for the banks. Which the banks have been making in staggering, record amounts, while the rest of us have been stagnating or losing money - enough that many of us can't pay our mortgages.

    Yet of course banks want to get bailed out, even though they deliberately marketed these loans to people who couldn't afford them (that's what "sub prime" means, by definition). Because they expect to get bailed out. They expanded their market into the part that wasn't worth the risk, making all those extra profits, and now want those risks eliminated.

    The banks should take the hit. They're the ones that were supposed to say "no" to subprime borrowers, or at least raise the interest rates to cover those defaulting with those who surprisingly did not. If we don't make them take the hit, then we're simply state capitialism, the flipside of communism's "socialism phase" that shows we're just gearing up for real fascism.

    We can't destroy the entire banking industry - we're hostage to its control of our financial distribution systems. So we should just make a simple change. We should offer the government interest rate on loans to only those banks proven low risk in their retailing the loans. If a bank can't afford the higher government interest rate and still mark it up and be competitive with the other, more reliable banks, then they can borrow the money from those other banks. That way they can maximize their selling power under what's left of their brand. They can use intelligence, rather than guarantees, to serve the riskier borrowers, who will pay higher rates themselves.

    And of course all the people and banks who failed to repay their loans because they bit off more they can chew should lose their collateral and creditworthiness. They demonstrated they're losers in the borrowing/lending business. And many of them took huge profits along the way, which should help pay down much of the damage.

    Or the rest of us, who didn't create the problem, who did the right thing, can just hand them our money. And watch the rest of our system go down the drain. Because next time everyone will just cash in, and there won't be anyone left to pay to clean it up when it inevitably fails.

    "When the going gets weird, the weird turn pro." - HST

    by DocGonzo on Mon Nov 12, 2007 at 12:32:56 PM PST

    •  Most were mortgage companies, not banks (1+ / 0-)
      Recommended by:

      The Mortgage Lender Implode-O-Meter web site does a pretty good job of keeping up with which institutions have shut down and which are in trouble.

      "The more they spoke of honor, the more I checked my wallet."

      by bankbane on Mon Nov 12, 2007 at 12:45:26 PM PST

      [ Parent ]

      •  "Banks" (1+ / 0-)
        Recommended by:

        I use the term "banks" fairly loosely to mean any financial institution to whom you give or get money in exchange for interest. I used to service large financial institutions, including Merrill Lynch, and we all called them "banks".

        FWIW, Washington Mutual is a bank by any definition, as is CitiGroup (most of it, by most definitions), and even GMAC is something of a bank.

        "When the going gets weird, the weird turn pro." - HST

        by DocGonzo on Mon Nov 12, 2007 at 01:37:16 PM PST

        [ Parent ]

        •  I understand, I made the distinction (1+ / 0-)
          Recommended by:

          Because it is easier to influence the banks and thrifts which are more carefully regulated, than it is to hit pure mortgage lenders, or the Wall Street firms who securitize loans but often don't do retail subprime lending themselves.

          Merrill Lynch Bank is a case in point. Until they bought National City's subprime unit First Franklin about a year ago, they were in the business of securiting the bad loans, but not making them themselves on the retail level. As bad as the bank regulators are, it is much more difficult to get the SEC to meaningfully regulate the securitizers than it is to get the Fed, the OCC, the OTS or the FDIC to regulate the retail lending activities in a meaningful way.

          And a simple mortgage lender, like New Century . . . . don't even get me started on how lax their regulation was.

          "The more they spoke of honor, the more I checked my wallet."

          by bankbane on Mon Nov 12, 2007 at 02:01:36 PM PST

          [ Parent ]

  •  Watering Down (1+ / 0-)
    Recommended by:

    Folks this is a common tactic used to disarm a bill they can't beat. Your comments count - please make them.

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