FRB: Federal Reserve Bank of Chicago - June 7, 2006 - Transcript

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Chicago
230 South LaSalle Street, Chicago, Illinois 60604
June 7, 2006

Agenda | Transcript

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-225 | 226-250 | 251-267

Transcript	Line	Page
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

McCorkle Court Reporters, Inc., Chicago, Illinois, 312-263-0052

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-225 | 226-250 | 251-267

2006 Hearings

Building Sustainable Homeownership: Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Chicago 230 South LaSalle Street, Chicago, Illinois 60604 June 7, 2006

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Chicago
230 South LaSalle Street, Chicago, Illinois 60604
June 7, 2006