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.