And the technology for that is there. |
1 | 26 |
GOVERNOR OLSON: We will get back to you. |
2 | 26 |
Daniel Lindsey, again if you just |
3 | 26 |
identify yourself and then five minutes. |
4 | 26 |
MR. LINDSEY: Thank you. Thank you for |
5 | 26 |
allowing me to testify this morning. My name is |
6 | 26 |
Dan Lindsey, I work for the Legal Assistance |
7 | 26 |
Foundation of Metropolitan Chicago. I'm the |
8 | 26 |
supervisor attorney of the Homeownership |
9 | 26 |
Preservation Project, which was formed about ten |
10 | 26 |
years ago when we started to see an epidemic rise |
11 | 26 |
in foreclosure rates in Chicago. In an effort to |
12 | 26 |
try to deal with that, rates going from two |
13 | 26 |
thousand by 2000 to tens of thousands per year. |
14 | 26 |
Over the past ten years we have |
15 | 26 |
provided legal counsel and advice to thousands of |
16 | 26 |
homeowners and represented hundreds of those |
17 | 26 |
homeowners in court, mostly defending them in |
18 | 26 |
foreclosures. |
19 | 26 |
Most of our clients have been victims |
20 | 26 |
of predatory lending. My quick definition of what |
21 | 26 |
that means is simply fraudulence, or at least |
22 | 26 |
irresponsible peddling of subprime high cost |
23 | 26 |
mortgage loans, or push marketing, as Thomas said, |
24 | 26 |
of those products. And despite the fact that we |
1 | 27 |
have been able to help many homeowners stay in |
2 | 27 |
their homes over the past ten years, I would offer |
3 | 27 |
the perhaps controversial statement, and in some |
4 | 27 |
cases it sounds different from one thing Thomas |
5 | 27 |
said, but my heartfelt condition is that there has |
6 | 27 |
never been and still to this day is not meaningful |
7 | 27 |
and effective protections for consumers for |
8 | 27 |
homeowners from high cost home loan abuse. |
9 | 27 |
Now, how can I say that? After all, |
10 | 27 |
this is the HOEPA, HOEPA was passed in 1994, ten |
11 | 27 |
years ago. Well, HOEPA was important in the sense |
12 | 27 |
that it introduced some very important concepts to |
13 | 27 |
the subprime mortgage market. Adding disclosures |
14 | 27 |
for high cost loans, substantial restrictions on |
15 | 27 |
some of the more onerous loan terms in the context |
16 | 27 |
of those loans, and asking for liability. |
17 | 27 |
However, HOEPA never covered more |
18 | 27 |
than a small fraction of loans. And after the year |
19 | 27 |
2000, and especially in 2001, in states like |
20 | 27 |
Illinois where our own first regulations and then |
21 | 27 |
statutes were put into place, it's almost not an |
22 | 27 |
overstatement to say nobody makes HOEPA loans |
23 | 27 |
anymore. |
24 | 27 |
In 2001, our state regs came into |
1 | 28 |
place, later codified. As Tom mentioned, borrowing |
2 | 28 |
from the HOEPA model, there are fees and interest |
3 | 28 |
rate triggers above which many restrictions are put |
4 | 28 |
in place. The singular effect of that law has been |
5 | 28 |
to bring fees and interest rates down so that |
6 | 28 |
lenders don't have to make loans that have to |
7 | 28 |
comply with the regulations, with the laws. |
8 | 28 |
Now, in a sense that's good. Fees |
9 | 28 |
and interest rates have come down. But the dark |
10 | 28 |
underbelly of that is that many of the same |
11 | 28 |
predatory practices that existed 15 years ago, 10 |
12 | 28 |
years ago, and 5 years ago, still exist in |
13 | 28 |
abundance today. |
14 | 28 |
Case in point, I now talk about my |
15 | 28 |
pet peeve, my bet noire, stated income loans and |
16 | 28 |
the abuse thereof in the subprime market. |
17 | 28 |
We had a client, Ms. A, 73 years old, |
18 | 28 |
African-American, widow. She was pushed marketed a |
19 | 28 |
loan that she obviously could not afford from the |
20 | 28 |
get-go. Her true income, a thousand dollars from |
21 | 28 |
Social Security, $700 from part-time housekeeping |
22 | 28 |
work for a couple down the street. |
23 | 28 |
What did her loan application say? |
24 | 28 |
It said that she made $7,000 a month as a |
1 | 29 |
housekeeping supervisor for a large institutional |
2 | 29 |
employer. Ridiculous, right? Of course it's |
3 | 29 |
ridiculous. But the loan went through, because it |
4 | 29 |
was a stated income loan, a no-doc loan. |
5 | 29 |
There is no true underwriting on such |
6 | 29 |
loans. They are an invitation for broker fraud. |
7 | 29 |
In the industry itself there is the wink-wink, |
8 | 29 |
nudge-nudge, and the term that has developed, which |
9 | 29 |
is probably going to be mentioned in the |
10 | 29 |
deposition, of a liar loan. This product invites |
11 | 29 |
fraud. |
12 | 29 |
Certain lenders I'm told up to a |
13 | 29 |
quarter of their subprime loan products involve the |
14 | 29 |
use of stated income loans. Obviously this leads |
15 | 29 |
to default and foreclosures. Our client was never |
16 | 29 |
able to make a single payment. She came to us. |
17 | 29 |
Fortunately we were able to help her. But there |
18 | 29 |
are thousands of borrowers out there who do not |
19 | 29 |
receive such help. |
20 | 29 |
And one reason I focus on this |
21 | 29 |
particular pernicious loan product and its use in |
22 | 29 |
the subprime market is, first of all, how |
23 | 29 |
devastating it is. Second of all, it just shows |
24 | 29 |
that there is no real underwriting for this and |
1 | 30 |
many other types of loans. Third, it shows the |
2 | 30 |
problem that without accountability and liability |
3 | 30 |
up the chain, there can be no effective regulation |
4 | 30 |
and protection for consumers. |
5 | 30 |
With these products, really the only |
6 | 30 |
legal hope we have now is directly against the |
7 | 30 |
broker who orchestrates the deal. In this |
8 | 30 |
particular case I mentioned, we were able to bring |
9 | 30 |
the broker in and that helped us get satisfaction. |
10 | 30 |
But many times the homeowner is not able to do |
11 | 30 |
that, even with lawyers. And many times lenders |
12 | 30 |
are able to evade responsibility because they |
13 | 30 |
simply point at the broker, or worse, point to |
14 | 30 |
borrowers. For those kinds of issues, we need |
15 | 30 |
protection, underwriting, and asking liability. |
16 | 30 |
GOVERNOR OLSON: Geoff Smith, you're next. |
17 | 30 |
MR. SMITH: Thanks for the invitation to |
18 | 30 |
testify at today's hearing. My name is Geoff Smith |
19 | 30 |
and I'm the project director of the Woodstock |
20 | 30 |
Institute. Woodstock Institute is a nonprofit |
21 | 30 |
Chicago-based research and policy organization that |
22 | 30 |
for over 31 years has worked locally and nationally |
23 | 30 |
to promote reinvestment and economic development in |
24 | 30 |
lower-income and minority communities. Woodstock |
1 | 31 |
has been extremely active conducting research that |
2 | 31 |
illustrates the scope of and harm caused by abusive |
3 | 31 |
mortgage lending practices and the impact that |
4 | 31 |
concentrated foreclosures have on individuals, |
5 | 31 |
neighborhoods, and cities. We have also worked to |
6 | 31 |
develop and promote local, state and federal policy |
7 | 31 |
that addresses the problem of predatory mortgage |
8 | 31 |
lending. |
9 | 31 |
There is substantial evidence showing |
10 | 31 |
continued abusive lending practices and significant |
11 | 31 |
disparities in access to prime mortgage credit for |
12 | 31 |
minority borrowers. Concentrated subprime lending |
13 | 31 |
to minority communities remains a major concern. |
14 | 31 |
High cost mortgages have been shown to frequently |
15 | 31 |
contain predatory features such as unnecessarily |
16 | 31 |
high fees and interest rates, restrictive |
17 | 31 |
prepayment penalties, and other onerous terms. |
18 | 31 |
These loans often contain terms confusing to |
19 | 31 |
borrowers, are poorly underwritten, with minimal |
20 | 31 |
and even fraudulent documentation of borrower |
21 | 31 |
income. |
22 | 31 |
The release of the 2004 Home Mortgage |
23 | 31 |
Disclosure Act, HMDA, data for the first time made |
24 | 31 |
available information on the pricing of high cost |
1 | 32 |
loans. Analysis of these data has confirmed that |
2 | 32 |
there are substantial disparities in mortgage |
3 | 32 |
pricing by borrower race. |
4 | 32 |
For example, in 2004 in the Chicago |
5 | 32 |
area, over 40 percent of conventional single-family |
6 | 32 |
mortgages to African-American borrowers were high |
7 | 32 |
cost. Over 25 percent of similar mortgages to |
8 | 32 |
Hispanic borrowers were high cost. Only 10 percent |
9 | 32 |
of such loans to whites were high cost. These |
10 | 32 |
disparities widen as income level increases. |
11 | 32 |
In the Chicago area, low-income |
12 | 32 |
African-American borrowers were just over three |
13 | 32 |
times more likely to receive a high cost loan than |
14 | 32 |
a low-income white borrower. However, an |
15 | 32 |
African-American borrower earning at least twice |
16 | 32 |
the area median income was over five times more |
17 | 32 |
likely to receive a high cost loan compared to a |
18 | 32 |
comparable white borrower. In fact, a high income |
19 | 32 |
African-American borrower earning twice AMI was |
20 | 32 |
over twice as likely to receive a high cost loan as |
21 | 32 |
a low-income white borrower earning half AMI. |
22 | 32 |
Patterns of concentrated subprime |
23 | 32 |
lending to minority borrowers and neighborhoods can |
24 | 32 |
be seen across the Chicago region, the state of |
1 | 33 |
Illinois, and the rest of the country. Recent |
2 | 33 |
research to be discussed at a later panel will show |
3 | 33 |
that these pricing disparities cannot be explained |
4 | 33 |
by differences in borrower credit risk alone. |
5 | 33 |
Concerns about concentrated subprime |
6 | 33 |
lending remain tied directly to the wave of |
7 | 33 |
foreclosures that have continued to plague cities, |
8 | 33 |
and in particular minority neighborhoods, since the |
9 | 33 |
1990s. In the Chicago region foreclosures have |
10 | 33 |
been a staggering problem and have long been a |
11 | 33 |
leading housing issue for local government and area |
12 | 33 |
community development organizations. |
13 | 33 |
In the Chicago region foreclosures |
14 | 33 |
increased by over 160 percent between 1995 and |
15 | 33 |
2004. This rapid increase has been driven by |
16 | 33 |
increases in foreclosures of conventional mortgages |
17 | 33 |
in minority communities. In 2004 census tracks, |
18 | 33 |
greater than 80 percent minorities accounted for 37 |
19 | 33 |
percent of all regional foreclosures. These same |
20 | 33 |
tracks accounted for less than 15 percent of all |
21 | 33 |
single family properties in the region. |
22 | 33 |
Woodstock Institute research has |
23 | 33 |
shown the primary driver of rising foreclosure |
24 | 33 |
rates has been increased levels of subprime |
1 | 34 |
lending. Woodstock Institute research has also |
2 | 34 |
shown that foreclosures have a significant impact |
3 | 34 |
on local economic development. Our research |
4 | 34 |
estimates that in Chicago, the cumulative impact of |
5 | 34 |
lost or suppressed property values due to |
6 | 34 |
foreclosure to homeowners not part of the actual |
7 | 34 |
foreclosure is greater than $600 million annually. |
8 | 34 |
It is clear to us that there is a |
9 | 34 |
foreclosure epidemic in the Chicago region. The |
10 | 34 |
epidemic has been largely concentrated in highly |
11 | 34 |
minority communities and fueled by high levels of |
12 | 34 |
subprime lending in these neighborhoods. These |
13 | 34 |
foreclosures continue to have a devastating impact |
14 | 34 |
on neighborhoods and cities and individuals. |
15 | 34 |
The Federal Reserve Board has the |
16 | 34 |
authority to implement a number of changes that |
17 | 34 |
would help curb many abuses in the subprime market. |
18 | 34 |
The Board can use its regulatory authority to limit |
19 | 34 |
some of the most abusive practices currently seen, |
20 | 34 |
such as no income documentation loans or onerous |
21 | 34 |
prepayment penalties. The Board can place |
22 | 34 |
increased emphasis on enforcing fair lending laws, |
23 | 34 |
particularly as they relate to mortgage pricing. |
24 | 34 |
In this regard it is critical to increase |
1 | 35 |
transparency and make more public information |
2 | 35 |
available on fair lending examination processes. |
3 | 35 |
Additionally, encourage coordination |
4 | 35 |
among regulatory agencies. The complex nature of |
5 | 35 |
bank holding companies makes it essential that |
6 | 35 |
regulatory agencies coordinate fair lending |
7 | 35 |
enforcement efforts in order to better monitor |
8 | 35 |
steering among prime and subprime affiliates of |
9 | 35 |
large bank holding companies. |
10 | 35 |
Finally, further enhance data |
11 | 35 |
collected under HMDA. Include information on |
12 | 35 |
applicant credit risk and origination channel. |
13 | 35 |
This will add transparency to the mortgage pricing. |
14 | 35 |
Better ensure that all borrowers are receiving |
15 | 35 |
fairly priced loans. |
16 | 35 |
GOVERNOR OLSON: Okay. I suspect we will have |
17 | 35 |
something of a different slant now as we move to |
18 | 35 |
the other side of the panel. |
19 | 35 |
Jim Nabors is our next presenter. |
20 | 35 |
And, Jim, would you also introduce yourself. |
21 | 35 |
MR. NABORS: Thank you. My name is Jim Nabors, |
22 | 35 |
I'm president of the National Association of |
23 | 35 |
Mortgage Brokers who represent over 25,000 mortgage |
24 | 35 |
brokers in all 50 states. Thank you for inviting |
1 | 36 |
us to speak on Federal and State predatory lending |
2 | 36 |
laws and developments of subprime lending. |
3 | 36 |
I want to say right up front I'm a |
4 | 36 |
practicing mortgage broker. I'm not a staffer and |
5 | 36 |
I'm not an attorney. I make loans and deal with |
6 | 36 |
customers every day. |
7 | 36 |
NAM is committed to assuring that |
8 | 36 |
abusive lending does not destroy the dream of |
9 | 36 |
homeownership. We believe that five critical steps |
10 | 36 |
are needed to curb this practice. |
11 | 36 |
One, financial literacy needs to play |
12 | 36 |
an important part to help consumers make the right |
13 | 36 |
decisions. |
14 | 36 |
We also believe that every single |
15 | 36 |
mortgage originator, just not mortgage brokers but |
16 | 36 |
anyone who will be dealing with the consumer, |
17 | 36 |
should have a thorough background check and |
18 | 36 |
continuing education and testing requirements, and |
19 | 36 |
that they need to understand the products that they |
20 | 36 |
are offering. |
21 | 36 |
Three, we think that every single |
22 | 36 |
mortgage broker's criminal background check will |
23 | 36 |
help remove the bad actors that are committing the |
24 | 36 |
fraud that we're hearing about. |
1 | 37 |
Four, we think it's important to |
2 | 37 |
create and implement well-designed and well-tested |
3 | 37 |
consumer disclosures that are uniform, consistent |
4 | 37 |
and meaningful to the consumers that read them. |
5 | 37 |
When I started in the business a |
6 | 37 |
consumer 30 years ago signed their name eight times |
7 | 37 |
on six pages to borrow a mortgage, back in 1976. |
8 | 37 |
They now, as you pointed out, sign 70 to 80 times |
9 | 37 |
in the effort to increase their knowledge and make |
10 | 37 |
sure that they get a better deal. |
11 | 37 |
And the problem is the disclosures |
12 | 37 |
aren't written for consumers, they are written for |
13 | 37 |
attorneys. They don't help the consumer. There |
14 | 37 |
should be fewer disclosures, simpler disclosures, |
15 | 37 |
that lay out exactly what the deal they are getting |
16 | 37 |
is. But the consumer ultimately has the right to |
17 | 37 |
make that decision. |
18 | 37 |
We also believe that the good faith |
19 | 37 |
estimate needs to mirror the HUD 1, so that a |
20 | 37 |
consumer at closing can take their document and put |
21 | 37 |
it down next to the actual closing document and |
22 | 37 |
compare costs. And it will be the easier thing for |
23 | 37 |
a consumer to compare what they were promised as |
24 | 37 |
compared to what they got. |
1 | 38 |
The number one consumer complaint |
2 | 38 |
that I hear is, "I didn't get the deal I was |
3 | 38 |
promised." And yet the disclosures -- they didn't |
4 | 38 |
have the ability to question the disclosures |
5 | 38 |
because they are too confusing. |
6 | 38 |
We must be careful not to rob an |
7 | 38 |
innovative and dynamic industry of their ability to |
8 | 38 |
grow and offer these new products. Homeownership |
9 | 38 |
is at a record high. Mortgage brokers go into |
10 | 38 |
communities that banks won't service. |
11 | 38 |
Some would say not everybody should |
12 | 38 |
have the right to own a home. Some would say there |
13 | 38 |
are record foreclosures. But I don't think those |
14 | 38 |
record foreclosures come because of the interest |
15 | 38 |
rate, points and fees. While at the same time the |
16 | 38 |
government takes an easy out, not taking into |
17 | 38 |
effect how the economy is performing. When people |
18 | 38 |
lose their jobs and are blue collar workers -- I'm |
19 | 38 |
from Cleveland, Ohio. When a company goes out of |
20 | 38 |
business it doesn't matter what their income was, |
21 | 38 |
they don't have the ability to make a payment. |
22 | 38 |
And I think studies that ignore |
23 | 38 |
exactly those factors: marriage problems, credit |
24 | 38 |
problems, employment problems; and just focus on |
1 | 39 |
points, fees and interest rate, aren't doing the |
2 | 39 |
customer the benefit. |
3 | 39 |
I think that our biggest concern is, |
4 | 39 |
as we say, this is an underused market. |
5 | 39 |
Nontraditional products are coming in, more |
6 | 39 |
education needs to be done at every level. Not |
7 | 39 |
only every originator needs to be educated, |
8 | 39 |
consumers need to be educated to make the right |
9 | 39 |
decision. |
10 | 39 |
But ultimately we should not decide |
11 | 39 |
for people you can't have the option to succeed. |
12 | 39 |
If you get a hundred people in your office a year |
13 | 39 |
that fail, what about the two thousand under the |
14 | 39 |
same situation that succeeded? Don't rob them of |
15 | 39 |
the ability to have the American dream of |
16 | 39 |
homeownership. |
17 | 39 |
GOVERNOR OLSON: That was well timed. That was |
18 | 39 |
a good summary of your presentation. |
19 | 39 |
Michael Williams, you're next. |
20 | 39 |
MR. WILLIAMS: Thank you, Governor Olson, Fed |
21 | 39 |
staff. Thank you for giving us the opportunity to |
22 | 39 |
present here. It's a very important topic. |
23 | 39 |
My name is Mike Williams, I represent |
24 | 39 |
the Bond Market Association. The Association is a |
1 | 40 |
collection of broker/dealers who make markets in |
2 | 40 |
fixed income products, and for purposes of this |
3 | 40 |
particular hearing we make markets in mortgage |
4 | 40 |
backed securities. |
5 | 40 |
Now, we have been involved in this |
6 | 40 |
issue of high cost lending, predatory lending, |
7 | 40 |
alternative mortgage products. The name changes, |
8 | 40 |
but the issues seem to stay the same. We have been |
9 | 40 |
involved here for a good part of 70 years on a |
10 | 40 |
state-by-state basis where we have gone into |
11 | 40 |
various states where we have testified and we |
12 | 40 |
worked with the legislatures and governors and |
13 | 40 |
staffs on particular pieces of legislation that |
14 | 40 |
they were trying to implement to address the issue |
15 | 40 |
of high cost lending and abusive lending. |
16 | 40 |
Now, what I've found in all of those |
17 | 40 |
instances were stories that we have heard from the |
18 | 40 |
first four panelists. Now, when you listen to |
19 | 40 |
those things, they are true. Obviously they are |
20 | 40 |
true, and obviously those people were negatively |
21 | 40 |
impacted. The question always comes back to what |
22 | 40 |
do you do to address it. Is there an identifiable |
23 | 40 |
problem, right? Is there a definition of predatory |
24 | 40 |
lending? Is there a way that you can essentially |
1 | 41 |
cut that cancerous growth out of the system without |
2 | 41 |
destroying the system. |
3 | 41 |
And we have gone back and forth on |
4 | 41 |
this issue, and I have to be honest with everyone |
5 | 41 |
here, our position has evolved over the past seven |
6 | 41 |
years. It's not always been well, assigning |
7 | 41 |
liability is not such a bad thing. It evolved from |
8 | 41 |
why us? This is not our problem. We are so far |
9 | 41 |
removed from this process that, you know, we don't |
10 | 41 |
have -- it's a hands-off approach. |
11 | 41 |
That's not where we are right now. |
12 | 41 |
Where we are is essentially there needs to be |
13 | 41 |
responsibility and culpability in every step of the |
14 | 41 |
process. Starting obviously with the consumer, |
15 | 41 |
because that's where you go. The consumer decides |
16 | 41 |
they need a loan, there needs to be adequate |
17 | 41 |
disclosures, there needs to be adequate education |
18 | 41 |
to understand the products. |
19 | 41 |
Then you go to the brokers. And I |
20 | 41 |
think Jim just laid out perfectly that there needs |
21 | 41 |
to be background checks. You need to make sure you |
22 | 41 |
have responsible people who are pushing those |
23 | 41 |
products, that they understand the product and that |
24 | 41 |
they are actually operating aboveboard. |
1 | 42 |
Then you get to the lender who is |
2 | 42 |
going to fund the loan. The same needs to apply. |
3 | 42 |
You need to ensure that you are taking |
4 | 42 |
responsibility for the money that you are doling |
5 | 42 |
out and that you're getting a good product. And |
6 | 42 |
that the person who is selling you this product, |
7 | 42 |
the broker who is now representing you, is actually |
8 | 42 |
pushing a good product. |
9 | 42 |
Then it comes to the secondary market |
10 | 42 |
participation. The secondary market participant |
11 | 42 |
needs to be responsible and look at the information |
12 | 42 |
that they are given. One the first panelists, and |
13 | 42 |
I can't remember who it was at this point, |
14 | 42 |
mentioned the notion of the extraordinary amount of |
15 | 42 |
information that Wall Street gets versus the |
16 | 42 |
consumer. And I don't think that is fair at all. |
17 | 42 |
Fraud is fraud, and if there is bad information |
18 | 42 |
that is given to the consumer and given to the |
19 | 42 |
broker and given to the lender, then that bad |
20 | 42 |
information is going to pass through the system and |
21 | 42 |
go to the secondary market as well. |
22 | 42 |
And what we try to do is eliminate |
23 | 42 |
risk. We try to assess it as much as possible so |
24 | 42 |
we are giving the end investor a product that they |
1 | 43 |
can rely on that is actually going to perform. |
2 | 43 |
There is no incentive from our |
3 | 43 |
perspective to give investors a bad product. |
4 | 43 |
Because if we do that, they are not going to want |
5 | 43 |
to come back and invest with us. So we are trying |
6 | 43 |
to eliminate as much as risk as possible as well. |
7 | 43 |
But we need to have that information and we will |
8 | 43 |
take responsibility for the things we do wrong. |
9 | 43 |
What we won't do and what you shouldn't do as |
10 | 43 |
regulators is impose responsibility on areas where |
11 | 43 |
the expertise does not exist. |
12 | 43 |
GOVERNOR OLSON: Wright Andrews, you're next. |
13 | 43 |
MR. ANDREWS: I'm Wright Andrews, Washington |
14 | 43 |
counsel to the National Home Equity Mortgage |
15 | 43 |
Association, and actually I enjoy being here at the |
16 | 43 |
Chicago Fed. During law school I worked at the |
17 | 43 |
Atlanta Fed. That was a long time ago, but I tell |
18 | 43 |
you if your food here is half as good as it was |
19 | 43 |
then and is as well priced, I almost wanted to |
20 | 43 |
become a Fed lifetime employee for that. |
21 | 43 |
GOVERNOR OLSON: You just divulged one of other |
22 | 43 |
important secrets. |
23 | 43 |
MR. ANDREWS: I think that is probably true. |
24 | 43 |
I have written comments for the |
1 | 44 |
record, but today I'm just going to highlight a few |
2 | 44 |
points here. |
3 | 44 |
First, so you know who HEMA is, the |
4 | 44 |
HEMA, National Home Equity Mortgage Association, |
5 | 44 |
represents about 250 mortgage companies that |
6 | 44 |
generate about 80 percent of the nonprime mortgage |
7 | 44 |
loans. In 2005, there was about a trillion dollars |
8 | 44 |
in nonprime mortgages outstanding, over 600 billion |
9 | 44 |
originated in that year alone. And this was |
10 | 44 |
roughly 25 percent of the overall housing market. |
11 | 44 |
Now, about 40 percent of those |
12 | 44 |
nonprime loans were for home purchases. Showing |
13 | 44 |
that this is a very important issue that you have |
14 | 44 |
to take into account as far as this industry goes. |
15 | 44 |
This is putting a lot of people in homes. |
16 | 44 |
Now, HEMA has long recognized that |
17 | 44 |
there have been problems in the industry. HEMA has |
18 | 44 |
supported toughening legislation over the years. |
19 | 44 |
HEMA has supported additional education for |
20 | 44 |
borrowers, best practices, et cetera. I can say |
21 | 44 |
that in my comments today, I agree on a couple of |
22 | 44 |
points that Tom and Dan made, and I'm going to |
23 | 44 |
focus my remarks on -- I disagree with some, too, |
24 | 44 |
but focus my remarks on the state laws. |
1 | 45 |
I'm going to say that the state laws' |
2 | 45 |
main positive benefit probably has been to increase |
3 | 45 |
the awareness of many of the major nonprime |
4 | 45 |
lenders. I think you will find that many of the |
5 | 45 |
lenders today have shifted and employed practices |
6 | 45 |
that reflect a lot of what is in state laws and |
7 | 45 |
apply them to all home loans. |
8 | 45 |
I think there have also been |
9 | 45 |
negativity aspects of the state laws. I don't |
10 | 45 |
think many people recognize perhaps how weak they |
11 | 45 |
might be. Just say many states still don't have |
12 | 45 |
them. Many of those that do have a law that is |
13 | 45 |
little more than a mirror of the current HOEPA, |
14 | 45 |
which I think most parties would say is weak. |
15 | 45 |
Others we think go too far the other way and are |
16 | 45 |
over-restrictive. And even in those states that |
17 | 45 |
have the so-called tough laws, you have many |
18 | 45 |
borrowers who borrow from federal depositories who |
19 | 45 |
are exempt from whatever protections they may |
20 | 45 |
provide. |
21 | 45 |
Now, with respect to the state laws, |
22 | 45 |
we feel that the big thing, I suppose, that has |
23 | 45 |
happened is that the points and fees trigger has |
24 | 45 |
been the primary focus of state laws in terms of |
1 | 46 |
impact it seems to us. By lowering the trigger in |
2 | 46 |
most cases to 5 percent, and then in many cases |
3 | 46 |
adding either YSP or adding prepayment penalties in |
4 | 46 |
or both, that changes the dynamics greatly. |
5 | 46 |
Many have said in the past this makes |
6 | 46 |
it apply to a lot more loans. I guess where I |
7 | 46 |
agree with Tom and Dan, I think they were both in |
8 | 46 |
there referencing this, is that in many ways it |
9 | 46 |
really doesn't. What happens I think in the |
10 | 46 |
marketplace, as was mentioned earlier, almost no |
11 | 46 |
lenders are intentionally making high cost loans |
12 | 46 |
today. Some will make them under the current |
13 | 46 |
HOEPA, but certainly not under most of the state |
14 | 46 |
laws. |
15 | 46 |
What happens is that lenders shift |
16 | 46 |
their pricing on the loans. They do more pricing |
17 | 46 |
in putting things more in the rate. They are, |
18 | 46 |
because of the way the triggers are structured, |
19 | 46 |
unable or often to offer a prepayment penalty, |
20 | 46 |
which many of the advocates here feel is, I |
21 | 46 |
suppose, not a good thing. I think the issue on |
22 | 46 |
prepay is it can be abusive, it can be very |
23 | 46 |
beneficial. It's how you regulate it. And we |
24 | 46 |
would submit that that needs to be regulated |
1 | 47 |
properly. |
2 | 47 |
In any case, what you get I think is |
3 | 47 |
the bottom line with many of the state laws is that |
4 | 47 |
a borrower ends up with a loan that is not subject |
5 | 47 |
to most of the protections, and it also does not |
6 | 47 |
allow them to provide -- to opt for flexible |
7 | 47 |
financing. So there are problems in those laws. |
8 | 47 |
GOVERNOR OLSON: Thank you very much, Wright. |
9 | 47 |
Thank you to each of the panelists. |
10 | 47 |
We will now get some questions from |
11 | 47 |
our panel. I would like to start out by asking a |
12 | 47 |
couple of questions. |
13 | 47 |
One of the questions that I have not |
14 | 47 |
yet had a good answer to, is the extent to which |
15 | 47 |
the foreclosure process has a check on abusive |
16 | 47 |
lending. |
17 | 47 |
Let me go beyond that. As a lender |
18 | 47 |
we would do almost anything to avoid foreclosure. |
19 | 47 |
We would rewrite the loan, we would make |
20 | 47 |
accommodations, because the foreclosure process |
21 | 47 |
assures that at the end of the day we would lose |
22 | 47 |
money on that transaction. |
23 | 47 |
The fact that you have a plethora of |
24 | 47 |
new products, the fact that you have a more |
1 | 48 |
aggressive secondary market doesn't change, I don't |
2 | 48 |
think, the state laws with respect to foreclosure. |
3 | 48 |
And so I would be interested to hear |
4 | 48 |
why that hasn't been more of a deterrent in the |
5 | 48 |
underwriting. |
6 | 48 |
MS. THOMPSON: If I may, I have some thoughts |
7 | 48 |
about it, although I think it is a complicated |
8 | 48 |
question. |
9 | 48 |
The first thing I think about that |
10 | 48 |
process is that the state processes vary |
11 | 48 |
dramatically. Illinois has one of the most |
12 | 48 |
protective ones. We still don't, even in areas |
13 | 48 |
like Chicago or where we are, where we have |
14 | 48 |
aggressive homeownership preservation projects, we |
15 | 48 |
are representing less than a tenth of the borrowers |
16 | 48 |
in foreclosure. The process is extremely |
17 | 48 |
cumbersome. It's very difficult to explain to the |
18 | 48 |
judge what is wrong with these loans. Judges tend |
19 | 48 |
to not understand the defenses, homeowners tend to |
20 | 48 |
not understand the defenses. So it's not something |
21 | 48 |
that without representation is going to get |
22 | 48 |
explored in the foreclosure process, even in a |
23 | 48 |
state like Illinois, which is more time consuming |
24 | 48 |
and more cumbersome. |
1 | 49 |
So that is the first piece. That in |
2 | 49 |
terms from the perspective of the community or the |
3 | 49 |
homeowner, you're not necessarily able to use the |
4 | 49 |
foreclosure process to address the abusive |
5 | 49 |
lending. There aren't enough lawyers like me and |
6 | 49 |
Dan to go around. |
7 | 49 |
But the other question I think is |
8 | 49 |
your broader question about it costs something to |
9 | 49 |
foreclose, so why are lenders still foreclosing. |
10 | 49 |
GOVERNOR OLSON: That is not the question. The |
11 | 49 |
question was because it is expensive to foreclose, |
12 | 49 |
why shouldn't that provide a check on the |
13 | 49 |
underwriter to try to avoid that step of the |
14 | 49 |
process, the foreclosure. |
15 | 49 |
MS. THOMPSON: I do think that the secondary |
16 | 49 |
market in the splitting of the itemization of the |
17 | 49 |
loan makes a big difference in this. So that the |
18 | 49 |
incentives about how the loan performs gets split |
19 | 49 |
up and are not necessarily rationally -- for |
20 | 49 |
example, many servicers, depending on how they get |
21 | 49 |
their fees, may actually generate more fee income |
22 | 49 |
to themselves if the loan goes into foreclosure |
23 | 49 |
than if the loan stays performing. |
24 | 49 |
Pooling and servicing agreements may |
1 | 50 |
also tie the hands and requirements by investors |
2 | 50 |
may tie the hands of servicers in terms of doing |
3 | 50 |
work-out agreements. |
4 | 50 |
It's not uncommon when you're trying |
5 | 50 |
to work out a foreclosure to be told by the |
6 | 50 |
servicer we would love to do that, but the investor |
7 | 50 |
will not sign off on it, it's too complicated. |
8 | 50 |
It's easier for us to let it go into foreclosure |
9 | 50 |
than to try to get this loan removed from the pool |
10 | 50 |
and substitute another loan. |
11 | 50 |
I do think that the securitization |
12 | 50 |
process and the atomization of the interest in the |
13 | 50 |
loan has made that foreclosure process -- has not |
14 | 50 |
aligned the interest in the way you would expect. |
15 | 50 |
GOVERNOR OLSON: Tom, from your perspective do |
16 | 50 |
you have anything to add to that? |
17 | 50 |
MR. JAMES: I think she's right on. It's the |
18 | 50 |
stratification of the risks, the warranty |
19 | 50 |
agreements, the prepurchase agreements. And also |
20 | 50 |
the way regulators view -- |
21 | 50 |
GOVERNOR OLSON: But come back to my |
22 | 50 |
fundamental question. If a loan is foreclosed |
23 | 50 |
upon, somebody experiences a loss in that |
24 | 50 |