FRB: Federal Reserve Bank of Philadelphia - June 9, 2006 - Transcript

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Philadelphia
10 Independence Mall, Philadelphia, Pennsylvania 19106
June 9, 2006

Agenda | Transcript

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-221

Transcript	Line	Page
that financial literacy is woefully inadequate.	1	26
Assuming that a written notice will overcome that,	2	26
no matter how plain language that is, is plainly	3	26
naive.	4	26
Second, is my personal observation	5	26
based on interactions with borrowers, counselors,	6	26
sheriffs, and attorneys, that borrowers are not	7	26
all economically rational actors. All due respect	8	26
to the economists in the room. Borrowers in	9	26
financial difficulty are, oftentimes, in denial	10	26
and they don't exercise all the options that are	11	26
available to them. They disregard or	12	26
misunderstand notices sent by their lenders and	13	26
servicers until too much time has passed to	14	26
recover from their predicament.	15	26
On the other hand, we are invariably	16	26
told by borrowers, counselors, and attorneys that	17	26
servicers report having absolutely no latitude to	18	26
make any modifications or forbearance available to	19	26
borrowers, when they request such action in an	20	26
effort to become current or remedy some other	21	26
aspect of the transaction.	22	26
Again, resorting to the research of	23	26
reports of Fitch, that's not true and I'll quote,	24	26
"Fitch currently rates numerous residential	1	27
mortgage-backed securities transactions that allow	2	27
the underlying collateral to be modified if	3	27
borrowers are having difficulty making their	4	27
monthly payments. A few transactions," and I	5	27
understand there are a few, "A few transactions	6	27
call for the full and immediate removal of	7	27
modified loans from the pool."	8	27
Third, in the subprime market	9	27
especially, mortgages are sold to consumers	10	27
through mortgage brokers. In the mind of the	11	27
borrower, there is no distinction between the	12	27
broker and the lender. Our experience suggests	13	27
that it is highly unusual for borrowers to shop	14	27
for mortgages. Oftentimes, borrowers aren't out	15	27
looking for money, but money's looking for them.	16	27
In Pennsylvania, although it's typical	17	27
that the borrower pays for the broker's service,	18	27
the broker does not have fiduciary duty to the	19	27
borrower. And that is a fact that's not	20	27
understood by the borrower. In the best case	21	27
scenario, the broker is a true professional who	22	27
helps the borrower understand and obtain a	23	27
mortgage product that best fits their needs; in	24	27
the worst case scenario, the broker sells the	1	28
product that is most advantageous to them.	2	28
In a significant civil rights case	3	28
brought by the Pennsylvania Human Relations	4	28
Commission, under the Pennsylvania Human Relations	5	28
Act, against a local mortgage broker, we learned	6	28
that the African-American broker targeted	7	28
African-American borrowers and sold them	8	28
remarkably disadvantageous subprime loans that	9	28
yielded far greater benefits to him than to his	10	28
customers.	11	28
Having testified as an expert in this	12	28
case, I can tell that you the hearing examiners	13	28
themselves needed help understanding the	14	28
complexity of the complainant's HUD-1 settlement	15	28
sheets and the borrowers seemed to comprehend even	16	28
less. What was salient to me, in speaking with	17	28
the respondent broker's customers, was that's	18	28
borrowers were especially susceptible to this	19	28
broker's sales pitch because of their desire to	20	28
help out a fellow African-American.	21	28
Fourth, although foreclosures have	22	28
declined locally from their peak levels in	23	28
2002/2003 time frame, there are clear signs in the	24	28
90-day delinquency data that there will be an	1	29
upturn. These foreclosures result in losses for	2	29
the borrowers and lenders/investors themselves.	3	29
Research conducted by TRF and EConsult	4	29
Corporation, commissioned by the Federal Reserve	5	29
Bank of Philadelphia, demonstrates that there is a	6	29
statistically demonstrable adverse effect of	7	29
mortgage foreclosures on local property markets.	8	29
In fact, after applying an appropriate set of	9	29
statistical controls, we found that each	10	29
foreclosure within 1/8 of a mile of a sale and one	11	29
to two years prior to that sale, reduces the value	12	29
of the home by one percent. In Philadelphia, the	13	29
typical home sale has four to five foreclosures	14	29
within the specified time and distance, and so it	15	29
is reduced by well more than five percent.	16	29
The implication of this is that	17	29
everyone in the area has lost some of the wealth	18	29
that they might have otherwise accumulated as the	19	29
value of real estate appreciates. What's	20	29
interesting to consider about this, is that even	21	29
if the lender/investor and borrower agree that	22	29
they want to compare the risk of the transaction	23	29
it is borne by others.	24	29
GOVERNOR OLSON: Ira, let me stop you	1	30
there. We'll have plenty of opportunity. I think	2	30
your experience is relevant, and we'll want to	3	30
hear more.	4	30
Peter, I want to come back to the point	5	30
that you were making, if you can -- I'm sure you	6	30
can -- it's the difference, the unexplainable	7	30
difference, the APR differences that are	8	30
unexplainable based on risk, and Doug can amplify	9	30
his comments about the compression that's taking	10	30
place, but the extent to which you can quantify or	11	30
clarify how that distinction comes about,	12	30
particularly in this context we're talking about,	13	30
the different channels. So it would be	14	30
interesting to hear any further application you	15	30
have on that issue.	16	30
MR. ZORN: I'll just make a couple	17	30
points. So, if you look at the characteristics	18	30
that, presumably, you would like to think as an	19	30
economist, would explain differential pricing,	20	30
above and beyond those characteristics that you	21	30
see in the HMDA data. As you add credit risk	22	30
variables and loan product characteristics, which	23	30
will affect prepayment and interest rate risk,	24	30
then you do explain much of the difference between	1	31
-- again, on average we're talking about a	2	31
regression here -- between the APR that we see in	3	31
the subprime market and within the prime market,	4	31
but you're focusing within the subprime market.	5	31
It doesn't explain everything, and one of the	6	31
things that we haven't -- we looked at other data,	7	31
which -- these are -- that's the result of	8	31
analysis that we've done on 2005 origination. So	9	31
it's fairly recent data.	10	31
The other data that we've looked at are	11	31
older data in the earlier part of this decade,	12	31
where we have additional information, more about	13	31
people's financial education, financial knowledge,	14	31
and actual propensities to shop, to pick up on	15	31
Doug's point, and as you start to add those	16	31
additional variables, you start to come close to	17	31
eliminating, statistically, the differences you	18	31
see in pricing and channel choice between	19	31
minorities and non minorities.	20	31
So it gets to the point that Doug was	21	31
raising, why do you see these differences?	22	31
Certainly, part of it is, in my observation,	23	31
having to do with how -- people's financial	24	31
knowledge and sophistication; part of it has to do	1	32
with their shopping behaviors. That is, I think,	2	32
generally speaking, subprime borrowers will shop	3	32
for a yes or a low payment; prime borrowers tend	4	32
to shop for a low rate or a lower price, which is	5	32
a different story.	6	32
GOVERNOR OLSON: Should we add a	7	32
behavioral economist to the group?	8	32
MR. ZORN: I think that is a	9	32
possibility. The marketing behaviors as well, I	10	32
mean, subprime lenders, there's much more push	11	32
marketing on the subprime side. And then the	12	32
other part is, there's, I think, traditions,	13	32
knowledge, exposures. So I think you have people	14	32
who -- subprime lenders are in certain	15	32
neighborhoods and are the lenders that people are	16	32
familiar with, and that creates a momentum and a	17	32
tradition to follow that path, even if they're not	18	32
certain it's the right path.	19	32
GOVERNOR OLSON: Doug, a couple of	20	32
points that you made, number one, the compression	21	32
of the rates between the subprime and prime	22	32
product, and I wonder how much of that is based on	23	32
the fact that we're in an overall lower rate	24	32
environment, but I'm also interested in, if you	1	33
could amplify if you would, on the explosion in	2	33
the numbers of applications, and some of the	3	33
implications of that seems to me that in a time,	4	33
or unquestionably, we are seeing an increase in	5	33
the number of products, and to come to a point	6	33
that Janice touched on a little bit, the	7	33
difference -- the enhancements that are available	8	33
because of the additional ways that we have of	9	33
approving, or at least evaluating, products.	10	33
And then, so, we have the two things	11	33
that are happening simultaneously. We have growth	12	33
in the marketplace and additional complexity. How	13	33
do you see that impacting, either the need for	14	33
education, or the results that we see in terms of	15	33
foreclosures or delinquencies?	16	33
MR. DUNCAN: Let me talk to the spread	17	33
issue first. The spread issue in the secondary	18	33
market, those are pretty available publicly and	19	33
pool differences, price differences have been	20	33
narrowing. To buttress that, we have a series of	21	33
subprime companies that provide us with	22	33
performance data, and over the last five years	23	33
we've seen -- to use the way economists look at	24	33
this to see if companies in different market	1	34
segments or infrastructures are being equally	2	34
compensated, the risk adjusted rate of return to	3	34
capital among the subprime lenders has declined	4	34
continually to where it's almost exactly the same	5	34
as prime borrowers.	6	34
GOVERNOR OLSON: Stick with that,	7	34
because the subprime and prime borrowers, the	8	34
rates, if you take the yields, not the yield	9	34
spread, the yield, and if you adjust for cost, the	10	34
return on capital is about the same for the prime	11	34
and non-prime markets.	12	34
MR. DUNCAN: That's correct. That was	13	34
not true five years ago, but it is true today.	14	34
GOVERNOR OLSON: Talk about the other	15	34
side of that, the explosion of the market. Could	16	34
you repeat those statistics again, the number of	17	34
applicants.	18	34
MR. DUNCAN: We were just looking at	19	34
the HMDA data for home purchase loans. In 2000, I	20	34
believe there were 8.3 million applications.	21	34
These are HMDA data. In 2004, there were 9.8	22	34
million applications.	23	34
GOVERNOR OLSEN: So you added about a	24	34
million and a half applications in that time	1	35
frame.	2	35
MR. DUNCAN: Yeah. At the same time,	3	35
as you point out, there's been a tremendous	4	35
expansion in the number of loan products. Our	5	35
view of how this occurred is a couple of things.	6	35
One is, obviously, a declining interest rate	7	35
environment in general. Although, in 2004 rates	8	35
were up from 2003; they were down from 2000.	9	35
In the midst of that, there has	10	35
undergone a tremendous technological change in the	11	35
mortgage business. Underwriting tools are	12	35
available and cut out the most expensive piece of	13	35
the credit assessment process. The	14	35
electronification of the entire mortgage process	15	35
has reduced hurdle costs in the industry. The	16	35
ability to use sophisticated yield estimation	17	35
tools by investors has brought in more capital.	18	35
All of these things have lowered the hurdle cost	19	35
rate, which would make a borrower who was credit	20	35
constrained, a viable candidate for a loan.	21	35
As the cost structure has fallen within	22	35
the industry, it's not as though there have never	23	35
been credit constrained borrowers before; it's	24	35
just that the cost hurdle to make them profitable	1	36
to lend to, has fallen, opening the door to those	2	36
households. At the same time, you have those all	3	36
implicated products, which absolutely make more	4	36
critical that there be a high level of disclosure	5	36
of how loans behave, that is, how payments change.	6	36
If it is a loan that has payment change, and what	7	36
the different strengths and weaknesses of the	8	36
different loan products are for an individual	9	36
household.	10	36
Back on what Peter was saying, the	11	36
strength of shopping among credit constrained	12	36
borrowers is not the same as it is among the prime	13	36
borrowers, so that heightens the need for	14	36
financial literacy.	15	36
MR. COLLINS: Could you tell us how	16	36
you're defining subprime?	17	36
MR. DUNCAN: That's always the	18	36
question. And there's not a generally accepted	19	36
definition. What we always do is, we require the	20	36
respondents to sell to us, that is, the companies	21	36
who provide us data, do you view yourself as a	22	36
subprime lender or a prime lender, and then	23	36
distribute the prime and subprime loans within	24	36
your portfolio.	1	37
GOVERNOR OLSON: Janice, we, at the	2	37
Fed, have become increasingly conscious of the	3	37
difference in cost in clearing checks between	4	37
checks that can be cleared electronically and	5	37
checks that are cleared manually, and the cost	6	37
difference is significant, and, of course, you	7	37
take that and you apply it to mortgage processes,	8	37
which is back to the point you were making, a very	9	37
important point, the efficiencies available	10	37
through the consolidation of credit data, such as	11	37
a credit score, obviously improve the efficiency	12	37
of that system; it gets passed down one way or	13	37
another. And yet, I think the market needs to be	14	37
aware, not only of the Latino borrowers, but many	15	37
other minority groups, whose pattern or habits or	16	37
culture falls outside of the norm, and yet, the	17	37
availability of homeownership and homeownership	18	37
mortgage products ought to be available.	19	37
Talk more about that issue from your	20	37
perspective, as to how we can bridge that gap and	21	37
how we can deal with the borrowers that fall	22	37
outside of the most efficient channels.	23	37
MS. BOWDLER: I think the work on this	24	37
has actually been done. The products just aren't	1	38
used. I know, for example, Fannie Mae and Freddie	2	38
Mac have products that allow for no credit scores	3	38
and the documenting of untraditional credit	4	38
history.	5	38
Two other major underwriting barriers	6	38
are, not being able to verify income or assets	7	38
and/or not being able to verify employment. For	8	38
example, it's really common for low wage workers	9	38
that you might have had consistent employment in	10	38
two years, but there could be gaps in that if some	11	38
of that was cash income, especially in the	12	38
construction industry. So there are products out	13	38
there that account for that.	14	38
GOVERNOR OLSON: We have this	15	38
dichotomy. On the one hand, you have products	16	38
that are naturally suited, the stated income	17	38
products, which fit that, but on the other hand,	18	38
it's the stated income product which also allows	19	38
for -- unlike the conforming product, Peter,	20	38
Freddie and Fannie, that's always sold in the	21	38
secondary market, you have a product that allows	22	38
for it, but on the other hand, there's a wide	23	38
range of -- there's opportunity for abuse with	24	38
that product, to put it mildly.	1	39
MS. BOWLDER: Right. And we see a lot	2	39
of abuse with that product. I think one of the	3	39
important things for us is that the products are	4	39
available to answer the needs of those clients,	5	39
there's just not much incentive to use them and	6	39
they cost more. So, our view of proprietary data,	7	39
through partner financial institutions, shows that	8	39
they're making this review of data from the	9	39
northeast, southeast, East Coast corridor. They	10	39
weren't making more than five loans a market that	11	39
use nontraditional credit history or have zero	12	39
credit scores. They're very, very little. When	13	39
they held them in portfolio, they priced them	14	39
higher. When they sold them to Fannie or Freddie,	15	39
they were priced more conventionally, but either	16	39
way, it still took more work for them to do. They	17	39
just had no one to tell them to do that. It's	18	39
easier and more profitable to refer them to the	19	39
subprime market where they'll get into a stated	20	39
income loan, or they have somebody there that,	21	39
maybe, is more willing to take the time to go	22	39
through the manual process.	23	39
GOVERNOR OLSON: Ira, you talked about	24	39
the wide range of -- the growing, increasing	1	40
difficulty of understanding, and there again,	2	40
you've got multiple factors impacting that. On	3	40
the one hand, you've got a much wider range of	4	40
products, which allows for more product and you	5	40
have a much more avaricious secondary market,	6	40
we'll want to come back to that with both Doug and	7	40
Peter, and on the other hand, a larger number of	8	40
borrowers, many of them first-time, and, perhaps,	9	40
lesser educated, a lot of societal value in that	10	40
but also some real risks in that. So could you	11	40
talk about both sides of that and how you see	12	40
that?	13	40
MR. GOLDSTEIN: On the risk side, I	14	40
think something that Mr. Duncan said, the cost	15	40
turner would make cost experience more profitable	16	40
to lend to has declined, and I think that the last	17	40
piece of research that I mentioned in my comments	18	40
is relevant to that, and that is, the costing	19	40
trend to lend to that group has declined and that	20	40
is something that, sort of, works out for the	21	40
borrower and the lender, but that's a	22	40
risk-adjusted cost, and that means that the	23	40
lenders are being compensated for the risk of the	24	40
daily return of that loan. That's a deal between	1	41
the borrower and the lender. That's not a deal	2	41
between me the neighbor of that borrower and that	3	41
lender.	4	41
What our research shows is that there	5	41
is a substantial and statistically significant, if	6	41
properly done, controlled difference, an adverse	7	41
effect of when the borrower and lender get into	8	41
that risk adjusted agreement, assuming the	9	41
borrower even understands that agreement.	10	41
On the upside, definitely, if you look	11	41
at homeownership rates, and they have increased,	12	41
if you look at the demographic groups for whom	13	41
homeownership has increased, there's certainly --	14	41
the rates, although not equal, have grown much	15	41
faster among minority group members, and in local	16	41
markets like Philadelphia, they're much greater	17	41
among low-income markets. So the benefits are	18	41
clearly there. However, the risks are great and,	19	41
really, should be seen in tandem between those	20	41
benefits.	21	41
MS. BRAUNSTEIN: I'd like to get back	22	41
to the channels and the shopping a little bit.	23	41
One of the things that we saw, that everybody saw	24	41
in the 2004 HMDA data, which was that minorities	1	42
are more likely to get loans from subprime	2	42
lenders. And we talked a little bit about this	3	42
today, but it seemed like Doug, in particular,	4	42
was, it's the consumers who need to do better	5	42
about shopping and looking around, but I'd also	6	42
like to, also, explore the flip side of that. I	7	42
mean, how good a job are the prime lenders doing,	8	42
in terms of reaching out to minority communities?	9	42
Is that part of the issue too? Is it just that	10	42
the consumers aren't educated enough to go to	11	42
prime lenders, or are the prime lenders not trying	12	42
to market those opportunities in minority	13	42
neighborhoods as well as they should?	14	42
MR. DUNCAN: We did a survey of a	15	42
thousand people who bought homes. This was in	16	42
1999, so it's a little bit dated. And in it, we	17	42
asked a couple things. We asked, "How did you	18	42
start the process of information gathering?"	19	42
Because that was a point in time when people were	20	42
really starting to focus on outreach to minority	21	42
borrowers, in particular. When we ask companies	22	42
anecdotally, "How do you market to different	23	42
minority groups?" They say, "Well, we spend a lot	24	42
of money on marketing." And so, we say, "But	1	43
where do you spend it?" Whey say, "Well, we spend	2	43
a lot of money on marketing." So then, we say,	3	43
"Well, do you know if anyone's listening?"	4	43
So, when we conducted the survey, found	5	43
some very interesting things. What we found was	6	43
that if you were speaking to Asians over the	7	43
television, they weren't listening. If you were	8	43
speaking to the Hispanics through the newspapers,	9	43
they weren't reading it. There was, within the	10	43
Hispanic community, a dramatic difference that	11	43
that relationship had, within family and church	12	43
and things like that, on where they gathered their	13	43
information on the mortgage process. With the	14	43
African-American community, things like housing	15	43
fairs on television were more effective. White	16	43
population was, sort of, all over the mark.	17	43
Asians very much gathered information through the	18	43
newspaper.	19	43
So we took that back to the industry	20	43
and said, you need to think about, in your	21	43
outreach, that you are spending your resources and	22	43
attempting to reach the customer in a way that the	23	43
customer isn't listening. So there's been change	24	43
based on some early lack of investigation.	1	44
MS. BRAUNSTEIN: And Janice, can you	2	44
comment from your perspective. Do you think	3	44
that's true; has there been change in that?	4	44
MS. BOWDLER: I think there has been	5	44
some change, but part of that is the qualitative	6	44
piece to what they are marketing. I've been on a	7	44
little project lately, where I've been gathering	8	44
all the Spanish language newspapers that I can and	9	44
listening to the Spanish radio. And for months	10	44
now, the only thing that's advertised in the Casa	11	44
Sections of the Spanish language press, are option	12	44
mortgages, one hundred percent financing, and	13	44
stated income loans, with your documents, without	14	44
your documents, with proof of income, without	15	44
proof of income.	16	44
Recently, I've seen several mainstream	17	44
prime lender advertising -- two, I saw two, but	18	44
they were advertising these same products. They	19	44
were not advertising the 30-year fixed products	20	44
that they advertise in the Washington Post. It's	21	44
the same on Spanish language radio. Although,	22	44
it's much more broker focused.	23	44
That's anecdotal, but this is also what	24	44
I hear from the counselors, whose great	1	45
competition are the brokers and the subprime	2	45
lenders, because counselors tell you, you've got	3	45
to wait six months, and somebody else will tell	4	45
you, if you want a loan, like other people have	5	45
said, you can find a loan. What their experience	6	45
has been, is that they will market to the Latino	7	45
client, these products that have the lower initial	8	45
down payments that then rise later, and they're	9	45
not marketing the same kind of products as they're	10	45
marketing to the other communities. And they're	11	45
certainly not marketing the conventional Fannie,	12	45
Freddie, nontraditional credit history products	13	45
that are available.	14	45
MR. CHANIN: Let me follow something up	15	45
with Peter. How you view this issue dictates, to	16	45
some extent, what you view the solution to this	17	45
issue or problem is. One of the things you	18	45
mentioned is, the HMDA data clearly shows there's	19	45
a disparity, in terms of the percentage of	20	45
minority versus non-minority borrowers and higher	21	45
priced loans. And you cautiously -- your lawyers	22	45
must have advised you -- you cautiously said, much	23	45
of this difference is explained by risk factors.	24	45
My question is, can you quantify the percentage of	1	46
factors that are explained by credit score, loan	2	46
value, or other materials? Is it 40 percent, or	3	46
80 percent, or 30 percent of that data that	4	46
explain those differences, in terms of rates	5	46
received?	6	46
MR. ZORN: Sure. Let me put some	7	46
qualifiers in front of this. What I will give	8	46
you, is on the basis of the data that we are	9	46
currently using, so this is an A sample, large	10	46
sample, subprime lenders. But for the data that	11	46
we're looking at, we can get odds, ratios, APRs	12	46
down to within, sort of, 1.2. So, starting from	13	46
the odds ratio of 3 to 1 for differential APRs in	14	46
raw data, between minorities and non minorities,	15	46
we can get it down to, sort of, a 1.2 kind of	16	46
range. Of course, we have ability plus	17	46
observations, so any difference is statistically	18	46
significant. I'm not saying that that difference	19	46
is not, also, economically significant, but it's	20	46
substantially smaller.	21	46
MR. COLLINS: Peter, if I could ask a	22	46
question. In your look at the higher APRs for	23	46
minority borrowers, do they have an adequate	24	46
understanding of their credit profile and credit	1	47
scores? Do they know whether or not they can	2	47
qualify for prime credit? If they come in through	3	47
the subprime channel, do they get to the prime	4	47
channel? And secondly, getting back to the	5	47
marketing piece of it, do they approach lenders	6	47
with the higher rates based on advertising in the	7	47
market? If they have sufficient understanding, is	8	47
their financial literacy around credit scores and	9	47
what they would actually qualify for?	10	47
MR. ZORN: I guess the short answer is	11	47
no, but I guess -- but it's more -- we have no one	12	47
killer data source. So we've got 2005 data where	13	47
we've got a lot of detailed credit information,	14	47
but not survey data where we know a lot about	15	47
their financial knowledge. We've got financial	16	47
knowledge and survey data back from three or four	17	47
years ago. And this is a rapidly evolving market	18	47
as everyone is describing.	19	47
But what's certainly true, is that when	20	47
you ask people -- so in our survey data, which is	21	47
several thousand borrowers, and you ask people --	22	47
we gave them a little financial quiz, essentially,	23	47
and asked a bunch of questions that we thought	24	47
would be relevant for someone who was financially	1	48
knowledgeable, and then also asked them to	2	48
self-assess their financial knowledge. We asked	3	48
them to self-assess their credit, and we pulled	4	48
their credit. So we had observable objective	5	48
credit, observable objective knowledge, and	6	48
subjective self-assessed credit and subjective	7	48
self-assessed knowledge. What's true was that	8	48
there was definitely a large number of people who	9	48
did not have what we consider to be an accurate	10	48
assessment of their knowledge and an accurate	11	48
assessment of their credit, and disproportionately	12	48
that tended to be true of minority borrowers.	13	48
We would like to believe that it is	14	48
disproportionately people who poorly understand	15	48
their credit, who end up -- so for example, people	16	48
who believe they are worse creditors than they	17	48
actually are, who end up in the subprime market.	18	48
Despite the fact that we've portioned it out, we	19	48
haven't got it to say that yet, but we haven't got	20	48
it to reject that either. So, I say that's my	21	48
personal, maintained hypothesis. I cannot give to	22	48
you empirical evidence to suggest it. I believe	23	48
it must be true, but I don't know if it is true or	24	48
not.	1	49
MS. BRAUNSTEIN: We've heard that	2	49
anecdotally before, that people often -- it's like	3	49
a self-fulfilling prophecy. They think their	4	49
credit's worse than it is, and they go to a	5	49
subprime lender.	6	49
MR. ZORN: What we can't show is the	7	49
people who actually think they have better credit	8	49
than they do, are very effective in getting prime	9	49
loans. I don't know what that means.	10	49
MS. BRAUNSTEIN: They are very	11	49
effective?	12	49
MR. ZORN: Yes, they are.	13	49
GOVERNOR OLSON: They are very	14	49
effective?	15	49
MR. ZORN: Yes, they are. I think my	16	49
observation on that one is, what it reflects is --	17	49
the -- getting back to Doug's point -- right now,	18	49
you can still observe channels, and this is	19	49
getting back to Michael's question, what's a	20	49
subprime lender, what's a prime lender. Like	21	49
Doug, what we do is ask people to self-assess or	22	49
we self-assess for them, but we don't do it loan	23	49
by loan, we do it sub by sub, if you will, and I	24	49
believe that distinction was greater in 2000 than	1	50
it is in 2005 and 2006 and is diminishing rapidly.	2	50
And so part of the story that explains this, is	3	50
that just because you get a loan from a prime	4	50
lender does not mean you're home free. It doesn't	5	50
mean you can't pay a high rate and a rate that's	6	50
not necessarily, by some other people's standards,	7	50
the right rate. Because that middle range of A	8	50
minus lending is increasingly an active and	9	50
competitive area for both, what we consider, to be	10	50
prime lenders and subprime lenders.	11	50
So, I believe, I mean, it's still okay,	12	50
in general, I believe, to talk about, isn't it	13	50
better to get a prime loan than a subprime loan.	14	50
Again, that's a central tendency. I don't believe	15	50
it's always true.	16	50
MR. DUNCAN: If I could. In looking --	17	50
to, kind of, take that point a little further,	18	50
when we take credit scores from portfolios of	19	50
lenders who classify themselves as prime lenders	20	50
and from portfolios of subprime lenders, and	21	50
there's an overlap in the center. So you would	22	50
say, gee, well, then, aren't there some of these	23	50
people that have this credit score, should have	24	50

Class Act Reporting Agency, Philadelphia, Pennsylvania, 215-928-9760

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-221

2006 Hearings

Building Sustainable Homeownership: Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Philadelphia 10 Independence Mall, Philadelphia, Pennsylvania 19106 June 9, 2006

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Philadelphia
10 Independence Mall, Philadelphia, Pennsylvania 19106
June 9, 2006