Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice
Federal Reserve Bank of Philadelphia
10 Independence Mall, Philadelphia, Pennsylvania 19106
June 9, 2006
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| Transcript | Line | Page |
|---|---|---|
| 1 | 1 | |
| 2 | 1 | |
| 3 | 1 | |
| THE FEDERAL RESERVE BOARD | 4 | 1 |
| 5 | 1 | |
| BUILDING SUSTAINABLE HOMEOWNERSHIP: | 6 | 1 |
| RESPONSIBLE LENDING AND INFORMED CONSUMER CHOICE | 7 | 1 |
| 8 | 1 | |
| 10 Independence Mall | 9 | 1 |
| Philadelphia, Pennsylvania | 10 | 1 |
| Friday, June 9, 2006 | 11 | 1 |
| 12 | 1 | |
| 13 | 1 | |
| 14 | 1 | |
| TAKEN BEFORE: Emilie Pakman, Notary Public | 15 | 1 |
| 16 | 1 | |
| 17 | 1 | |
| 18 | 1 | |
| CLASS ACT REPORTING AGENCY | 19 | 1 |
| Registered Professional Reporters | 20 | 1 |
| 1420 Walnut Street, Suite 1212, Philadelphia, PA 19103 | 21 | 1 |
| (215) 928-9760 | 22 | 1 |
| 133 H Gaither Drive, Mt. Laurel, NJ 08054 | 23 | 1 |
| (856) 235-5108 | 24 | 1 |
| 1 | 2 | |
| BOARD OF GOVERNORS: | 2 | 2 |
| MARK W. OLSON | 3 | 2 |
| SAUNDRA BRAUNSTEIN | 4 | 2 |
| LEONARD CHANIN | 5 | 2 |
| MICHAEL COLLINS | 6 | 2 |
| PANEL I: | 7 | 2 |
| JANICE BOWDLER | 8 | 2 |
| DOUGLAS G. DUNCAN | 9 | 2 |
| IRA GOLDSTEIN | 10 | 2 |
| PETER ZORN | 11 | 2 |
| PANEL II: | 12 | 2 |
| IRV ACKELSBERG | 13 | 2 |
| DAVID BERENBAUM | 14 | 2 |
| DAVID BLEICKEN | 15 | 2 |
| JOE FALK | 16 | 2 |
| JACK GUTTENTAG | 17 | 2 |
| PANEL III: | 18 | 2 |
| LORETTA ABRAMS | 19 | 2 |
| BRUCE DORPALEN | 20 | 2 |
| ERIC EVE | 21 | 2 |
| MARK PINSKY | 22 | 2 |
| ERIC STEIN | 23 | 2 |
| 24 | 2 | |
| (Whereupon, the proceedings commenced | 1 | 3 |
| at 8:30 a.m.) | 2 | 3 |
| GOVERNOR OLSON: We will begin. We | 3 | 3 |
| have all but one of our panelists. I understand | 4 | 3 |
| one of the panelists, Ira Goldstein, is in route, | 5 | 3 |
| and we have two of the four representatives from | 6 | 3 |
| the Fed system. I'm sure the other two will be | 7 | 3 |
| here shortly. | 8 | 3 |
| Let me, first of all, thank | 9 | 3 |
| Philadelphia Fed for hosting these meetings this | 10 | 3 |
| morning and providing us with the facilities. | 11 | 3 |
| These are extraordinarily useful sessions. We | 12 | 3 |
| finished the session in Chicago on Wednesday, and | 13 | 3 |
| we're happy to be here today. | 14 | 3 |
| We've got -- just to talk through, if I | 15 | 3 |
| can, in order to make the best use of the time, | 16 | 3 |
| we've asked each of the panelists to give us a | 17 | 3 |
| five-minute opening statement, and after the | 18 | 3 |
| five-minute statement, what you will get, and | 19 | 3 |
| would you show them the signs, so that they know. | 20 | 3 |
| The first is one minute, the second is, time is | 21 | 3 |
| up. There's not a lot of ambiguity in those, and | 22 | 3 |
| we tend to enforce those pretty rigorously, and | 23 | 3 |
| because of that fact, what we've discovered is | 24 | 3 |
| that we still, with an hour and a half on this | 1 | 4 |
| panel, have ample time for discussion and ample | 2 | 4 |
| time for dialogue. | 3 | 4 |
| This panel will go until 10:30. We | 4 | 4 |
| will take a break and come back and have a panel | 5 | 4 |
| from 10:30 to noon. We'll break for lunch. And | 6 | 4 |
| then other another panel and, very importantly, | 7 | 4 |
| beginning at 3 o'clock, we have what we call an | 8 | 4 |
| open mike, and people can, who would care to do | 9 | 4 |
| so, who have a statement they would like to make, | 10 | 4 |
| are invited to participate at that time, and | 11 | 4 |
| people will have a three-minute opportunity to | 12 | 4 |
| speak if they would like to. | 13 | 4 |
| Also, for everybody, panelists and open | 14 | 4 |
| mike participants, if they would like, they have | 15 | 4 |
| up to August 15th, a time allotted to them, to | 16 | 4 |
| give an additional written statement that will | 17 | 4 |
| become part of the permanent record. And we look | 18 | 4 |
| forward to a very full exchange. | 19 | 4 |
| This is part of a -- this is a -- I | 20 | 4 |
| think it was 2000, Sandy, that we did the first | 21 | 4 |
| HOEPA hearings. After, it was determined -- and | 22 | 4 |
| of course those hearings resulted in the HOEPA | 23 | 4 |
| regs that were implemented in 2002. A tremendous | 24 | 4 |
| amount of change has taken place in the mortgage | 1 | 5 |
| industry since that time. And as a result, we | 2 | 5 |
| have a number of reasons for holding the hearings | 3 | 5 |
| today. | 4 | 5 |
| Number one, is that we want to examine | 5 | 5 |
| the extent to which the 2002 HOEPA regs are | 6 | 5 |
| adequate, are appropriate, or should they be | 7 | 5 |
| revised. We also are going to use these hearings | 8 | 5 |
| to determine the extent to which the channels | 9 | 5 |
| which mortgages come through are impacting the | 10 | 5 |
| mortgage process. It is our intent to look and to | 11 | 5 |
| use these hearings to determine whether or not | 12 | 5 |
| there ought to be an amendment for Reg Z as part | 13 | 5 |
| of this. And the more soft results we hope to | 14 | 5 |
| come out of this would be the -- we would look for | 15 | 5 |
| areas where -- we, the Federal Reserve, could | 16 | 5 |
| provide additional education, or, if necessary, | 17 | 5 |
| additional study. | 18 | 5 |
| From the Federal Reserve we have a | 19 | 5 |
| couple people here, Sandy Braunstein, Director of | 20 | 5 |
| Consumer and Community Affairs; Leonard Chanin, | 21 | 5 |
| who is the Associate Director of Consumer and | 22 | 5 |
| Community Affairs; and Mike Collins is with us, | 23 | 5 |
| from the Philadelphia Fed. | 24 | 5 |
| We identify, or at least I identify, | 1 | 6 |
| four separate important groups that have ownership | 2 | 6 |
| in this process and are important to the entire | 3 | 6 |
| mortgage industry, and to the economy for that | 4 | 6 |
| matter. Number one, very importantly, is the | 5 | 6 |
| consumer. In a free society, in a free economy, | 6 | 6 |
| there's an underlying presumption that the | 7 | 6 |
| consumer is responsible for their actions, and the | 8 | 6 |
| consumer undoubtedly, unquestionably, has been the | 9 | 6 |
| beneficiary of many of the changes, many of the | 10 | 6 |
| improvements, that have been taking place in this | 11 | 6 |
| industry. It is remarkable, not simply in the | 12 | 6 |
| mortgage industry, but all credit products for | 13 | 6 |
| that matter, all financial products, the consumer | 14 | 6 |
| has benefited enormously by the improvements and | 15 | 6 |
| the access, but it has been a mixed blessing. | 16 | 6 |
| Another group that has a responsibility | 17 | 6 |
| of course, is the providers and the contacts to | 18 | 6 |
| this meeting, that would be the mortgage | 19 | 6 |
| providers. I have told this story other times; | 20 | 6 |
| let me tell it again, because I think it brings | 21 | 6 |
| home, to me, at least, an important point. Some | 22 | 6 |
| of you know I spent a good share of my life in the | 23 | 6 |
| banking industry. At no point was I primarily a | 24 | 6 |
| mortgage lender, but I think that over the course | 1 | 7 |
| of a 16-year banking career I think I was involved | 2 | 7 |
| in closing more than a hundred mortgage loans, and | 3 | 7 |
| yet, even with that background, I have never been | 4 | 7 |
| involved in the closing of my own loan where I | 5 | 7 |
| haven't felt, somewhat, at a knowledge | 6 | 7 |
| disadvantage, with respect to the process, because | 7 | 7 |
| it was a very daunting process. It requires a lot | 8 | 7 |
| of paperwork, a lot of signatures, a lot of | 9 | 7 |
| documentation, and there is an extraordinary | 10 | 7 |
| knowledge asymmetry. I think that what that | 11 | 7 |
| means, is that there is a very significant | 12 | 7 |
| responsibility that the mortgage lenders have to | 13 | 7 |
| not take advantage of that knowledge asymmetry and | 14 | 7 |
| all of us to try to work to find ways to reduce | 15 | 7 |
| that, or, at least, deal with that. I don't think | 16 | 7 |
| that there is a way; it is impossible that you | 17 | 7 |
| would ever close that gap entirely, but there is a | 18 | 7 |
| recognition that that gap exists and we need to | 19 | 7 |
| deal with it. | 20 | 7 |
| The third group that I think has a very | 21 | 7 |
| important role and interest are the community | 22 | 7 |
| groups and consumer advisory groups. We have | 23 | 7 |
| noted, and many of the people involved in mortgage | 24 | 7 |
| lending have noted, that the best access to the | 1 | 8 |
| minority communes are through the community | 2 | 8 |
| activists and through the community organizers. | 3 | 8 |
| That group provides an access that provides the | 4 | 8 |
| ability to help close that information gap and | 5 | 8 |
| make us aware of where there are individuals or | 6 | 8 |
| institutions, at times, who are taking advantage | 7 | 8 |
| of that knowledge asymmetry, and so I think that | 8 | 8 |
| that partnership is an important one. | 9 | 8 |
| The fourth group, of course, is the | 10 | 8 |
| regulators and that's why we're here. I have said | 11 | 8 |
| at one point in my life I, also, was involved in | 12 | 8 |
| advising financial institutions on regulatory | 13 | 8 |
| affairs and I know from that long experience that | 14 | 8 |
| there was no group that was more at the forefront | 15 | 8 |
| of both developing the education and the | 16 | 8 |
| regulatory construct as was the Federal Reserve. | 17 | 8 |
| And some of my colleagues, Sandy, in particular, | 18 | 8 |
| who has been doing it for many, many years, take | 19 | 8 |
| that role very seriously. | 20 | 8 |
| Because we still have one chair empty, | 21 | 8 |
| we will go counter-clockwise in this meeting. | 22 | 8 |
| We'll ask you to begin, introduce yourself, | 23 | 8 |
| introduce your group, speak for five minutes, be | 24 | 8 |
| mindful of the time, and don't worry, we'll help | 1 | 9 |
| you if you go over. | 2 | 9 |
| Peter Zorn. | 3 | 9 |
| MR. ZORN: I'm Peter Zorn. My | 4 | 9 |
| background, to be explicit, is, I'm an economist | 5 | 9 |
| and researcher. My experience that I'm speaking | 6 | 9 |
| from is from years of looking at the HMDA data as | 7 | 9 |
| well as detailed underwriting data, in terms of | 8 | 9 |
| credit modeling. Also, surveys that we have taken | 9 | 9 |
| for impaired credit and focus groups associated | 10 | 9 |
| with the surveys and just being in the industry, | 11 | 9 |
| as it were, in the secondary industry for the last | 12 | 9 |
| 15 years or so. | 13 | 9 |
| I'd like to make just a couple of brief | 14 | 9 |
| observations. I guess the first, with regards to | 15 | 9 |
| things that I observe, hypotheses of why they are | 16 | 9 |
| what they are. The first is minority borrowers, I | 17 | 9 |
| guess, stating a point that's well-known, are more | 18 | 9 |
| likely to pay more for mortgages. What do I mean | 19 | 9 |
| when I say that? One way of characterizing that | 20 | 9 |
| more explicitly, is that if you look at APR | 21 | 9 |
| distributions about minority borrowers, you will | 22 | 9 |
| see that that distribution is shifted to the | 23 | 9 |
| higher APR for minorities as compared to non | 24 | 9 |
| minorities. | 1 | 10 |
| So, then, the next point I would make | 2 | 10 |
| would be that differences in those prices, those | 3 | 10 |
| APRs are greater across markets than within | 4 | 10 |
| markets. So another way of making that point is, | 5 | 10 |
| if you look at subprime borrowers in the APR | 6 | 10 |
| distribution of subprime borrowers, you would see | 7 | 10 |
| a difference in those distributions for minorities | 8 | 10 |
| and non minorities. That is, in general, | 9 | 10 |
| minorities would have a slightly higher set | 10 | 10 |
| distribution of APRs than non minorities. | 11 | 10 |
| But if you made a different -- looked | 12 | 10 |
| at different distributions, if you look, instead, | 13 | 10 |
| at the APR distributions of minority borrowers in | 14 | 10 |
| the prime market versus the subprime market, you'd | 15 | 10 |
| see a much -- substantially larger difference in | 16 | 10 |
| distributions. That is, there's a much bigger | 17 | 10 |
| difference -- the difference between minority | 18 | 10 |
| borrowers in the prime markets and the subprime | 19 | 10 |
| market, minority borrowers, in the subprime | 20 | 10 |
| market, pay substantially more than in the prime | 21 | 10 |
| market, and that difference between minority | 22 | 10 |
| borrowers in general, the bigger difference, would | 23 | 10 |
| be in the subprime market between minorities and | 24 | 10 |
| non-minority borrowers. | 1 | 11 |
| So that leads to, sort of, another | 2 | 11 |
| observation, which is the, sort of, market | 3 | 11 |
| segmentation matters. Does it matter whether your | 4 | 11 |
| in a prime market or a subprime market, which | 5 | 11 |
| leads to my next observation, which is that risk | 6 | 11 |
| explains a lot, but certainly not all of those | 7 | 11 |
| differences. And by "risk" I mean, all the risk, | 8 | 11 |
| credit risk, interest rate risk, prepayment risk, | 9 | 11 |
| associated with mortgage lending. One way to put | 10 | 11 |
| a little more explicit flavor to that observation | 11 | 11 |
| is that if you do statistical estimations of APR | 12 | 11 |
| -- I try to explain APR as a function of a lot of | 13 | 11 |
| variables, product characteristics, borrower | 14 | 11 |
| characteristics, underwriting characteristics -- | 15 | 11 |
| what you end up with is, explaining much, again, | 16 | 11 |
| but not all, of the differences in APRs, so that | 17 | 11 |
| there is an unexplained difference between | 18 | 11 |
| minorities and non minorities, but it is | 19 | 11 |
| dramatically reduced. | 20 | 11 |
| So, then, I will stop and say that this | 21 | 11 |
| is an essential tendency. So I concede, again, | 22 | 11 |
| I'm an economist and a researcher, so I look at | 23 | 11 |
| central tendencies, so that is the point I want to | 24 | 11 |
| make here, which is, this is a broad central | 1 | 12 |
| tendency, not that there are not differences that | 2 | 12 |
| exist for individual borrowers, and minority | 3 | 12 |
| borrowers can, and sometimes do, pay rates which | 4 | 12 |
| are higher, and that can't be explained by these | 5 | 12 |
| models or these stories. So the question would | 6 | 12 |
| be, why? And so, for me, at least part of that | 7 | 12 |
| explanation is the channel by which borrowers do | 8 | 12 |
| get their mortgage, and so if we conduct, sort of, | 9 | 12 |
| another experiment, which is to try to explain APR | 10 | 12 |
| differences between minority and non-minority | 11 | 12 |
| borrowers by channel. | 12 | 12 |
| So let's look at subprime borrowers. | 13 | 12 |
| Well, I'll stop I guess. Thank you very much. | 14 | 12 |
| GOVERNOR OLSON: Peter, I can assure | 15 | 12 |
| you that, I for one -- you're right at the heart | 16 | 12 |
| of the issue, which is how do we explain the APR | 17 | 12 |
| differences among minority and non-minority | 18 | 12 |
| borrowers and what does that mean. | 19 | 12 |
| Ira, thank you for joining us. In | 20 | 12 |
| order to make full use of all of the time, we got | 21 | 12 |
| started right at 8:30, and we're a little bit | 22 | 12 |
| ahead of the 9:00 start for this panel, but it | 23 | 12 |
| will give us the full opportunity. But we will be | 24 | 12 |
| back, and we'll want to come right back to that | 1 | 13 |
| issue, because there probably is no more -- singly | 2 | 13 |
| more important issue that we can discuss. | 3 | 13 |
| Our next speaker is Doug Duncan, and | 4 | 13 |
| for those of you that think that something has | 5 | 13 |
| gone wrong in your internal body antennae has just | 6 | 13 |
| flipped you over and you are now listening to | 7 | 13 |
| Garrison Keillor, it is because Doug and I are | 8 | 13 |
| from the same hometown in Minnesota and we all | 9 | 13 |
| sound like Garrison Keillor from up there. So | 10 | 13 |
| Doug, if you do keep your accent in check, and | 11 | 13 |
| introduce yourself and then speak for five | 12 | 13 |
| minutes. | 13 | 13 |
| Just as a reminder, this panel group is | 14 | 13 |
| asked to speak on the subprime market and how | 15 | 13 |
| consumers shop for credit. | 16 | 13 |
| MR. DUNCAN: Thank you, and indeed all | 17 | 13 |
| our children are above average. | 18 | 13 |
| Good morning. I'm Doug Duncan, the | 19 | 13 |
| Senior Vice President of Research and Business | 20 | 13 |
| Development and Chief Economist at the Mortgage | 21 | 13 |
| Bankers Association. Governor Olson and other | 22 | 13 |
| members of the Federal Reserve Board, I appreciate | 23 | 13 |
| the opportunity to participate in this very | 24 | 13 |
| important panel. | 1 | 14 |
| MBA members are proud of their | 2 | 14 |
| participation in the subprime market and would | 3 | 14 |
| like to share that success with you. I want to | 4 | 14 |
| make three points. | 5 | 14 |
| First, market compression in subprime | 6 | 14 |
| rates closer to prime rates, lowering the cost of | 7 | 14 |
| mortgage credit for subprime borrowers. Second, | 8 | 14 |
| foreclosure and delinquency rates are not | 9 | 14 |
| indications of predatory lending but of the ever | 10 | 14 |
| improving precision of lenders' ability to assess | 11 | 14 |
| risk; and third, if we want to enable borrowers to | 12 | 14 |
| protect themselves in getting the best deal, we | 13 | 14 |
| have to do the following: Improve borrower | 14 | 14 |
| education in the mortgage process; make simpler, | 15 | 14 |
| more meaningful disclosures; and shop, shop, shop, | 16 | 14 |
| or impress upon the consumers the need to | 17 | 14 |
| comparison shop for mortgages. | 18 | 14 |
| The subprime market has evolved | 19 | 14 |
| dramatically in recent years providing significant | 20 | 14 |
| benefits to consumers. There's little | 21 | 14 |
| distinction, today, between prime and subprime, no | 22 | 14 |
| credit score threshold, or interest rate, or other | 23 | 14 |
| low term specifically defines a loan as subprime. | 24 | 14 |
| Fixed rating examines the securitized | 1 | 15 |
| loans data and noted that the spread is being | 2 | 15 |
| weighted average on loan pools identified by the | 3 | 15 |
| issue as prime. It is only 200 basis points lower | 4 | 15 |
| than pools identified as subprime. In 1999 that | 5 | 15 |
| spread was about 300 basis points. | 6 | 15 |
| There are two major factors accounting | 7 | 15 |
| for this. First, compressionate credit spreads | 8 | 15 |
| across fixed income markets has driven down the | 9 | 15 |
| cost of subprime credit, and second, competition | 10 | 15 |
| has lowered the cost of subprime credit. This | 11 | 15 |
| blurring in the line indicates sustained increased | 12 | 15 |
| competition, which improves service and access and | 13 | 15 |
| lowers consumer cost. I caution against over | 14 | 15 |
| regulation in the market, as it could eliminate | 15 | 15 |
| the benefits subprime markets offers to consumers. | 16 | 15 |
| I'd also like to touch on defaults and | 17 | 15 |
| foreclosures in the subprime market to discard the | 18 | 15 |
| notion that default and disclosure rates are "too | 19 | 15 |
| high" and indicate predatory lending. It's | 20 | 15 |
| important to note that marketplace growth, when | 21 | 15 |
| interpreting delinquency and foreclosure numbers. | 22 | 15 |
| According to the 2000 HMDA data, there are 8.3 | 23 | 15 |
| million loan applications. In 2004, the HMDA data | 24 | 15 |
| showed 9.8 million loan applications. With market | 1 | 16 |
| growth and constant foreclosure rates, the number | 2 | 16 |
| of foreclosures will increase. | 3 | 16 |
| However, too frequently, some market | 4 | 16 |
| analysts point to the increased foreclosures as a | 5 | 16 |
| problem, when it simply reflects a constant or | 6 | 16 |
| even declining foreclosure rate in the context of | 7 | 16 |
| market growth. Subprime borrowers are riskier | 8 | 16 |
| candidates for credit, as demonstrated by their | 9 | 16 |
| past performance, so lenders charge them more on a | 10 | 16 |
| mortgage to offset the risk of nonpayment. This | 11 | 16 |
| increased risk bears itself out in greater default | 12 | 16 |
| and foreclosure rates than in the prime market. | 13 | 16 |
| In the fourth quarter of 2005, the | 14 | 16 |
| prime market had a foreclosure rate of 0.4 | 15 | 16 |
| percent, and the subprime market had a rate of 3.3 | 16 | 16 |
| percent. Compare that to the foreclosure | 17 | 16 |
| inventory rate of subprime loans of 2001 peaking | 18 | 16 |
| at 9 percent. These numbers tell a good story | 19 | 16 |
| about the demand of risk and the wherewithal of | 20 | 16 |
| subprime borrowers. | 21 | 16 |
| While mortgage markets are plunging for | 22 | 16 |
| consumers, borrowers find it challenging to | 23 | 16 |
| understand the mortgage process. While | 24 | 16 |
| overhauling our education system to make financial | 1 | 17 |
| literacy a priority, it is a long-term goal. We | 2 | 17 |
| think three short term steps must be taken to help | 3 | 17 |
| improve borrower understanding. | 4 | 17 |
| First, borrowers have to educate | 5 | 17 |
| themselves in the mortgage process. Second, | 6 | 17 |
| consumers need simpler, more user friendly | 7 | 17 |
| disclosures about mortgage loans that will help | 8 | 17 |
| them shop, and then, third, consumers need to shop | 9 | 17 |
| from lender to lender. | 10 | 17 |
| Our research shows that homebuyers, | 11 | 17 |
| particularly first-time homebuyers, rely on a | 12 | 17 |
| trusted advisor, who may have an adverse | 13 | 17 |
| incentive, to help them through the home buying | 14 | 17 |
| mortgage process. These new buyers, especially | 15 | 17 |
| minority first-time homebuyers, either contact | 16 | 17 |
| only one lender or are referred by a realtor to | 17 | 17 |
| only one lender. While shopping for a mortgage, | 18 | 17 |
| experienced borrowers are more likely to seek | 19 | 17 |
| additional rate quotes. | 20 | 17 |
| We welcome your questions relating to | 21 | 17 |
| any research we've conducted on topics, such as | 22 | 17 |
| predatory lending, HMDA, prepaid penalties, and | 23 | 17 |
| what consumers understand about their credit, | 24 | 17 |
| particularly renters, and we just did a recent | 1 | 18 |
| survey on that. That concludes my comments, and I | 2 | 18 |
| look forward to working with you, and I'll be | 3 | 18 |
| happy to answer your questions. | 4 | 18 |
| GOVERNOR OLSON: Doug, thank you very | 5 | 18 |
| much. The need for simpler disclosures is one | 6 | 18 |
| that we all agree, it's hard to disagree with | 7 | 18 |
| that. The problem is, I think we need to come | 8 | 18 |
| back and talk about where that responsibility is | 9 | 18 |
| and how we can work together. | 10 | 18 |
| Janice Bowdler, same rules, same drill. | 11 | 18 |
| Introduce yourself and your group, and you have | 12 | 18 |
| five minutes for your opening statement. | 13 | 18 |
| MS. BOWDLER: Good morning. My name is | 14 | 18 |
| Janice Bowdler and on behalf of the National | 15 | 18 |
| Council of La Raza I would like to thank the | 16 | 18 |
| Federal Reserve for hosting another round of HOEPA | 17 | 18 |
| hearings. I feel honored to be part of such a | 18 | 18 |
| distinguished panel. | 19 | 18 |
| As a founder of housing counseling, | 20 | 18 |
| NCLR has been working with the mortgage industry | 21 | 18 |
| for nearly ten years to increase Latino | 22 | 18 |
| homeownership. From our perspective, the question | 23 | 18 |
| of how the consumers choose their loan products is | 24 | 18 |
| not only timely, it's critical. | 1 | 19 |
| Borrowers rely on the mortgage | 2 | 19 |
| financing to build home equity that will provide a | 3 | 19 |
| financial safety net through retirement. However, | 4 | 19 |
| inefficiencies in the marketplace are causing | 5 | 19 |
| adverse market segmentation. | 6 | 19 |
| NCLR intends to submit a more in-depth | 7 | 19 |
| written statement, but today I will briefly | 8 | 19 |
| describe how the structure of today's mortgage | 9 | 19 |
| market channels Latino borrowers into the subprime | 10 | 19 |
| products; how these borrowers are then steered | 11 | 19 |
| toward loans that are profitable for the lender, | 12 | 19 |
| rather than suitable for the consumer; and how | 13 | 19 |
| both lenders and consumers rely on mortgage | 14 | 19 |
| brokers to serve as market intermediaries. | 15 | 19 |
| Let me begin by describing how Latinos | 16 | 19 |
| are fairing in the mortgage market. | 17 | 19 |
| Non-traditional credit histories and a variety of | 18 | 19 |
| underwriting variables common among Latino | 19 | 19 |
| borrowers often require manual underwriting. For | 20 | 19 |
| example, 22% of Latinos do not have credit scores. | 21 | 19 |
| In a world of automated underwriting, manually | 22 | 19 |
| underwritten loans are an unwelcome increase in | 23 | 19 |
| time and resources. | 24 | 19 |
| Not wanting the added burden, lenders | 1 | 20 |
| ration the number of such loans they process and | 2 | 20 |
| excess demand is then de facto channeled into the | 3 | 20 |
| subprime market. | 4 | 20 |
| Subprime lenders have the same profit | 5 | 20 |
| motivations as prime lenders, but risk-based | 6 | 20 |
| pricing allows greater pricing and product | 7 | 20 |
| discretion, which, in turn, allows lenders to | 8 | 20 |
| price a loan at any risk level. The model focuses | 9 | 20 |
| on placing clients in products that are highly | 10 | 20 |
| profitable for the lender rather than suitable for | 11 | 20 |
| the borrower. | 12 | 20 |
| The evidence here is clear. Latinos | 13 | 20 |
| are 30 percent more likely to receive loans that | 14 | 20 |
| meet the HOEPA rate spread than whites when | 15 | 20 |
| purchasing their home. They are twice as likely | 16 | 20 |
| as whites to receive payment option mortgages. | 17 | 20 |
| NCLR's experience with the market busts | 18 | 20 |
| the myth that such products are the only ones | 19 | 20 |
| available for these hard to serve borrowers. 88 | 20 | 20 |
| percent of NCLR housing counseling clients are | 21 | 20 |
| below 80 percent of area median income, and many | 22 | 20 |
| require manual underwriting, but all receive prime | 23 | 20 |
| products. Instead, lenders are looking to cut | 24 | 20 |
| costs, please investors, and increase their | 1 | 21 |
| profits. | 2 | 21 |
| The same motivation forces lenders to | 3 | 21 |
| rely on mortgage brokers. Mortgage brokers | 4 | 21 |
| function as intermediaries who help lenders reach | 5 | 21 |
| deeper into certain markets, and they help them | 6 | 21 |
| save costs by reducing branch and retail expenses. | 7 | 21 |
| Consumers also rely on mortgage broker | 8 | 21 |
| services, especially Latinos. Bilingual and | 9 | 21 |
| bicultural brokers promote themselves as advisors | 10 | 21 |
| Latinos can trust to find them the best deal. | 11 | 21 |
| However, lender-offered incentives, known as yield | 12 | 21 |
| spread premiums, entice brokers to push the cost | 13 | 21 |
| of the loan higher. Coupled with non-traditional | 14 | 21 |
| lending products, YSP adds another layer of | 15 | 21 |
| subjective pricing to very risky products. As | 16 | 21 |
| will be discussed later, there is valid concern | 17 | 21 |
| that this is a formula for foreclose and equity | 18 | 21 |
| loss. | 19 | 21 |
| NCLR values the role of the | 20 | 21 |
| intermediaries, as can be seen by our support of | 21 | 21 |
| housing counselors. However, this means that | 22 | 21 |
| consumers shop for mortgages based on | 23 | 21 |
| relationships, rather than on products and | 24 | 21 |
| pricing. Unfortunately, many consumers do not | 1 | 22 |
| understand the broker is an independent agent. | 2 | 22 |
| The broker is not professionally or legally | 3 | 22 |
| required to find the borrower a suitable loan. | 4 | 22 |
| Many are unaware of the presence of a YSP in their | 5 | 22 |
| loan, making it virtually impossible for even a | 6 | 22 |
| well-educated borrower to weigh its costs and | 7 | 22 |
| benefits. | 8 | 22 |
| What's more, recent research by the | 9 | 22 |
| Federal Reserve concluded that low-income, | 10 | 22 |
| lesser-educated recipients of ARMs did not fully | 11 | 22 |
| understand the way their loan functioned or the | 12 | 22 |
| impact of rising interest rates. | 13 | 22 |
| Many efforts exist to increase | 14 | 22 |
| borrower's awareness of their mortgage options and | 15 | 22 |
| risks. Of these methods, housing counseling is | 16 | 22 |
| the most effective. Unlike brokers, housing | 17 | 22 |
| counselors do not have a financial interest in the | 18 | 22 |
| terms of the borrower's loan, but, unfortunately, | 19 | 22 |
| not every consumer has access to their advice | 20 | 22 |
| before closing. Moreover, their hard work is lost | 21 | 22 |
| without reinforcement of strong protections and | 22 | 22 |
| accountability standards. | 23 | 22 |
| To summarize, the structure of today's | 24 | 22 |
| market is not serving Latinos well. It creates | 1 | 23 |
| incentives for directing otherwise creditworthy | 2 | 23 |
| families to subprime, expensive and risky | 3 | 23 |
| products. Latino families are forced to rely on | 4 | 23 |
| subjective pricing models because of inadequate | 5 | 23 |
| service by the prime markets. And finally, the | 6 | 23 |
| lack of professional and legal accountability | 7 | 23 |
| standards for brokers and lenders leaves families | 8 | 23 |
| vulnerable. | 9 | 23 |
| NCLR would like to make three | 10 | 23 |
| recommendations to improve the structure of the | 11 | 23 |
| marketplace for Latinos and other underserved | 12 | 23 |
| borrowers: Improve accountability standards; | 13 | 23 |
| creates a suitability and anti-steering standard | 14 | 23 |
| for lenders and mortgage brokers; strengthens | 15 | 23 |
| consumer protections. Set high standards for | 16 | 23 |
| compliance with the new interagency guidance; | 17 | 23 |
| ensures victims have access to meaningful | 18 | 23 |
| remedies. And finally, invest in housing | 19 | 23 |
| counseling. Public entities and private mortgage | 20 | 23 |
| companies must invest in housing counseling. It | 21 | 23 |
| is a meaningful way to bridge the information gaps | 22 | 23 |
| between underserved borrowers and their | 23 | 23 |
| homeownership opportunities. | 24 | 23 |
| Thank you. I would be happy to answer | 1 | 24 |
| any questions. | 2 | 24 |
| GOVERNOR OLSON: Thank you. | 3 | 24 |
| Ira. | 4 | 24 |
| MR. GOLDSTEIN: Good morning. My name | 5 | 24 |
| is Ira Goldstein, and I am the Director of Policy | 6 | 24 |
| and Information Services for a local organization | 7 | 24 |
| called The Reinvestment Fund. TRF is the national | 8 | 24 |
| leader in the financing of neighborhood | 9 | 24 |
| revitalization, and we have been actively involved | 10 | 24 |
| in research related to various aspects of the | 11 | 24 |
| housing market. | 12 | 24 |
| Our research in the areas of mortgage | 13 | 24 |
| lending, foreclosure and predatory lending has | 14 | 24 |
| been supported through the grants from foundations | 15 | 24 |
| such as the Ford, William Penn and Goldseker | 16 | 24 |
| Foundations in Baltimore, as well as contracts | 17 | 24 |
| that we have with the City of Philadelphia, | 18 | 24 |
| Department of Banking for the Commonwealth of | 19 | 24 |
| Pennsylvania, Delaware Office of the State Banking | 20 | 24 |
| Commissioner and the U.S. Attorney. I've also | 21 | 24 |
| testified as an expert in several cases brought by | 22 | 24 |
| the local community legal services and by the | 23 | 24 |
| Pennsylvania Human Relations Commission, and it's | 24 | 24 |
| that body of work and experience that I draw upon | 1 | 25 |
| for my comments here today. | 2 | 25 |
| First, I would say that it's my | 3 | 25 |
| observation that over the course of time, | 4 | 25 |
| consumers have become increasingly less able to | 5 | 25 |
| understand the transactions that they are engaged | 6 | 25 |
| in. I say, "increasingly less able", because, | 7 | 25 |
| over time, the products themselves become more | 8 | 25 |
| complex, and how those products behave in relation | 9 | 25 |
| to market changes is also difficult to understand | 10 | 25 |
| even for mortgage professionals. | 11 | 25 |
| Not only are these products more | 12 | 25 |
| difficult to understand, they're also more | 13 | 25 |
| frequently subject to mortgage fraud. Reports | 14 | 25 |
| from Fitch Ratings are clear on this point, and | 15 | 25 |
| consumers with whom we work show a limited degree | 16 | 25 |
| of comprehension about what they're doing in these | 17 | 25 |
| transactions. And that's even the case after they | 18 | 25 |
| receive counseling. | 19 | 25 |
| The work of Alan White convincingly | 20 | 25 |
| demonstrates that the reading comprehension levels | 21 | 25 |
| of borrowers is all too often less than is | 22 | 25 |
| necessary to effectively understand the | 23 | 25 |
| transactions to which they are. The consensus is | 24 | 25 |
Class Act Reporting Agency, Philadelphia, Pennsylvania, 215-928-9760
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