Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice
Federal Reserve Bank of Atlanta
1000 Peachtree Street N.E., Atlanta, Georgia 30309
July 11, 2006
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Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-226
| Transcript | Line | Page |
|---|---|---|
| that required that all buyers of car loans and other loans | 1 | 76 |
| used to purchase goods were fully liable up to the amount of | 2 | 76 |
| the loan for -- for all claims. And at the time the FTC | 3 | 76 |
| passed this, the industry screamed, you're going to cut off | 4 | 76 |
| credit for cars, you're going to cut off credit for | 5 | 76 |
| furniture loans, and so on. And that was not the case. | 6 | 76 |
| It's a uniform national standard that's | 7 | 76 |
| implemented uniformly across the country, and there was not | 8 | 76 |
| even a blip in the market. So that's what we're proposing, | 9 | 76 |
| apply the same in the mortgage market. It's not a state by | 10 | 76 |
| state where the secondary market can say, well, we're not | 11 | 76 |
| going to give a crap, we're not going to do loans in Georgia | 12 | 76 |
| anymore because we can still make money in the other 49 | 13 | 76 |
| states. If it's applied nationwide, we think it would have | 14 | 76 |
| the same affect as the FTC holder rule, which is none. They | 15 | 76 |
| would learn to adopt -- adapt. | 16 | 76 |
| MR. ANDREWS: I think you'd get a different | 17 | 76 |
| perspective from industry. Again, I think the two big | 18 | 76 |
| results would be, obviously, many of the secondary market | 19 | 76 |
| people would be very concerned and would be less willing to | 20 | 76 |
| lend. We've heard that repeatedly from the Bond Market | 21 | 76 |
| Association and others in testimony in Washington, | 22 | 76 |
| certainly. The other thing, obviously, to the extent they | 23 | 76 |
| lend, they often would be lending at a higher cost, which | 24 | 76 |
| ultimately means higher cost to the borrowers. | 25 | 76 |
| MR. DINHAM: And I just want to respond, too. Any | 1 | 77 |
| uncertainty seems to concern the bond market and the | 2 | 77 |
| investors. I'd give an example of Texas. When Texas passed | 3 | 77 |
| their home equity law, which has several restrictions, it | 4 | 77 |
| was -- in other words, you could get a -- you could readily | 5 | 77 |
| get a second lien home equity loan, but you could not get | 6 | 77 |
| your first lien or a refinance of your total deal. There | 7 | 77 |
| were only three investors that would come into the state | 8 | 77 |
| until some of the unknowns were fixed out -- were settled. | 9 | 77 |
| So I would say that it's going to have a negative | 10 | 77 |
| effect as far as credit availability if you -- if it's | 11 | 77 |
| uncertain to the market at this point. If they don't know | 12 | 77 |
| what the problem is, they're going to have a problem lending | 13 | 77 |
| money to it, so. | 14 | 77 |
| MR. ANDREWS: My memory suggest that you had that | 15 | 77 |
| very problem here in Georgia originally with the Georgia | 16 | 77 |
| law. One of the big concerns was assignee liability that | 17 | 77 |
| literally shut down part of the market for a while. | 18 | 77 |
| MR. BRENNAN: And let me address that. Standard | 19 | 77 |
| and Poor's did an analysis of the Georgia Fair Lending Act, | 20 | 77 |
| which contained complete falsehoods. And my suspicion was | 21 | 77 |
| that Standard and Poor's was brought -- Because they profit | 22 | 77 |
| from rating subprime securities. They were brought into | 23 | 77 |
| Georgia to make false statements about what that law | 24 | 77 |
| contained. | 25 | 77 |
| And the argument was made, we're going to shut | 1 | 78 |
| down all mortgage lending in Georgia because these loans | 2 | 78 |
| cannot be securitized because Standard and Poor's wouldn't | 3 | 78 |
| rate them. In Standard and Poor's press release, which we | 4 | 78 |
| responded to, indicated that they completely misstated what | 5 | 78 |
| the law provided. For example, there was now assignee | 6 | 78 |
| liability for all loans under the act, and they said there | 7 | 78 |
| was. | 8 | 78 |
| So I completely disagree with that. That idea | 9 | 78 |
| that the Georgia Fair Lending Act was going to shut down | 10 | 78 |
| mortgage lending in Georgia was a really sleazy tactic that | 11 | 78 |
| was employed to stop a law that we desperately needed in | 12 | 78 |
| Georgia to save people's homes like Ms. Giles. | 13 | 78 |
| MS. BRAUNSTEIN: And I think we're going to need | 14 | 78 |
| to make that the last word. And I want to thank very much | 15 | 78 |
| our panelists. This was a great panel. We probably could | 16 | 78 |
| have gone on with this discussion all day because there's a | 17 | 78 |
| lot of topics we never did touch on. But we look forward to | 18 | 78 |
| probably additional written comments from many of you. And | 19 | 78 |
| again, I'd like to thank you. We will take a 15 minute | 20 | 78 |
| break. We will start the next panel precisely at 10:45. | 21 | 78 |
| (A short break was taken from 10:32 a.m. to 10:47 | 22 | 78 |
| a.m.) | 23 | 78 |
| MS. BRAUNSTEIN: Okay. We're going to started | 24 | 78 |
| with our second panel. We've got a large panel of people, | 25 | 78 |
| so we want to get started. And the same rules as before | 1 | 79 |
| apply, each panelist has five minutes for their opening | 2 | 79 |
| comments. You will get a yellow light when you hit four | 3 | 79 |
| minutes and then the red light when your -- when the five | 4 | 79 |
| minutes -- when your five minutes are up. And we'll start | 5 | 79 |
| over on the same side of the table. Doug, why don't you | 6 | 79 |
| kick us off. And please start out by introducing your name | 7 | 79 |
| and what organization so we'll have it in the record for the | 8 | 79 |
| court reporter. | 9 | 79 |
| MR. DUNCAN: Hello. I'm Doug Duncan, senior vice | 10 | 79 |
| president of research and business development and chief | 11 | 79 |
| economist of the Mortgage Bankers Association. The MBA | 12 | 79 |
| appreciates the opportunity to discuss the macro economic | 13 | 79 |
| impact of the non-traditional mortgage products here today. | 14 | 79 |
| MBA is forecasting a soft landing for the economy and the | 15 | 79 |
| housing market in 2006. | 16 | 79 |
| According to OFHEYO home price appreciation slowed | 17 | 79 |
| to an annualized 8.1 percent rate in the first quarter of | 18 | 79 |
| 2006, the first single digit annualized home priced gain | 19 | 79 |
| since the first quarter of 2004. Their purchase only index | 20 | 79 |
| shows an even more pronounced slow down to an annualized 5.3 | 21 | 79 |
| percent in the first quarter. | 22 | 79 |
| In terms of originations, MBA's most recent data | 23 | 79 |
| covers the second half of 2005. With short term rates | 24 | 79 |
| rising last year, mortgage borrowers moved to fixed rate | 25 | 79 |
| mortgage products, both for first liens and second liens. | 1 | 80 |
| Non-traditional products, namely deferred amortization, also | 2 | 80 |
| called interest only or IO loans, and payment option loans | 3 | 80 |
| continue to be a significant part of the market. | 4 | 80 |
| In terms of volumes, traditional fixed rate loans | 5 | 80 |
| represented 44 percent of the dollar volume originated, | 6 | 80 |
| traditional ARMs 31 percent, and IOs comprised the remaining | 7 | 80 |
| 25 percent of originations. While the majority of IOs are | 8 | 80 |
| adjustable rate loans many with an initial fixed period for | 9 | 80 |
| several years, a growing share of IOs have fixed rates. | 10 | 80 |
| In terms of the macro economic impact, we estimate | 11 | 80 |
| that there were 690 billion of IO loans originated in 2005 | 12 | 80 |
| out of a total of 2.9 trillion for the market as a whole. | 13 | 80 |
| Payment option or option ARM originations accounted for 8 | 14 | 80 |
| percent of the dollar volume of originations in the second | 15 | 80 |
| half of 2005. Among those lenders who responded with a | 16 | 80 |
| survey payment option ARM volume data, these loans comprised | 17 | 80 |
| 12 percent of their originations for the second half of | 18 | 80 |
| 2005. | 19 | 80 |
| Lenders have been successful at assessing risk, | 20 | 80 |
| and this success has been reflected in low foreclosure and | 21 | 80 |
| default rates. MBA's first quarter 2006 national | 22 | 80 |
| delinquency survey showed that the seasonally adjusted | 23 | 80 |
| delinquency rates stood at 4.41 percent at the end of the | 24 | 80 |
| first quarter, down 29 basis points from the fourth quarter | 25 | 80 |
| in 2005. The foreclosure inventory rate was 0.98 percent at | 1 | 81 |
| the end of the first quarter, a drop of one basis point from | 2 | 81 |
| the fourth quarter of 2005. | 3 | 81 |
| For several quarters we've been noting a number of | 4 | 81 |
| factors, including the aging of the loan portfolio and | 5 | 81 |
| increasing short term interest rates, which are putting | 6 | 81 |
| upward pressure on delinquency rates. On the other hand, | 7 | 81 |
| the strong economy and labor markets are offsetting positive | 8 | 81 |
| factors that were particularly important in the first | 9 | 81 |
| quarter. Going forward, we expect these same factors will | 10 | 81 |
| continue to be important. Additional modest increases in | 11 | 81 |
| delinquency foreclosure rates are likely in the quarters | 12 | 81 |
| ahead. | 13 | 81 |
| We estimate that first-time home buyers | 14 | 81 |
| represented almost one in three home purchases in the second | 15 | 81 |
| half of 2005, given the increases in home ownership rates | 16 | 81 |
| over the past several years, the marginal home buyer today | 17 | 81 |
| is, by definition, a higher risk borrower than the marginal | 18 | 81 |
| home buyer in prior years. However, to this point, society | 19 | 81 |
| has determined that the positive externalities flowing from | 20 | 81 |
| increased home ownership outweigh any negative externalities | 21 | 81 |
| that may flow from lending to higher risk borrowers. | 22 | 81 |
| As an economist, it's sometimes frustrating to me | 23 | 81 |
| that some of those engaged in this issue are unwilling to | 24 | 81 |
| clearly state what they view as an acceptable rate of | 25 | 81 |
| default. Some analysts and advocates will tell you that | 1 | 82 |
| non-traditional mortgage products combined with weakened | 2 | 82 |
| underwriting standards in a period of rising interest rates | 3 | 82 |
| is a recipe for rising foreclosures. They contend this will | 4 | 82 |
| lead to housing over supply in the market, a decline in | 5 | 82 |
| house prices, and an economic down turn. I don't think this | 6 | 82 |
| analysis is correct. | 7 | 82 |
| Let me share with you numbers that tell a | 8 | 82 |
| different story. 34 percent of home owners own their home | 9 | 82 |
| with no mortgage. 48 percent have fixed rate loans, leaving | 10 | 82 |
| 18 percent with adjustables. Of the adjustables, 12 percent | 11 | 82 |
| are prime leaving 6 percent of all home owners with subprime | 12 | 82 |
| adjustable loans. The post-recession peak and foreclosure | 13 | 82 |
| inventory was 9 percent for subprime adjustables, so round | 14 | 82 |
| that up to 10 percent of that 6 percent and it gives you | 15 | 82 |
| six-tenths of one percent foreclosure inventory of all | 16 | 82 |
| homeowners in the presence of three million lost jobs. | 17 | 82 |
| We're predicting job gains in the foreseeable | 18 | 82 |
| future. Even if foreclosures occur at twice the level of | 19 | 82 |
| our historical data and in the presence of job gains, it | 20 | 82 |
| would still be only 1.2 percent of homeowners and hardly | 21 | 82 |
| enough to cause an economic downturn, although it might be | 22 | 82 |
| enough to cause some problems in some local markets. I have | 23 | 82 |
| additional data on the gains in consumer wealth as a result | 24 | 82 |
| of home ownership and was hoping to comment on the impact of | 25 | 82 |
| suitability, but I'm happy to take questions at your | 1 | 83 |
| leisure. Thank you. | 2 | 83 |
| MS. BRAUNSTEIN: Okay. We'll have plenty of time | 3 | 83 |
| to discuss those topics. Glenn? | 4 | 83 |
| MR. COSTELLO: Thank you and thank you for the | 5 | 83 |
| opportunity to participate today. Good morning. My name is | 6 | 83 |
| Glenn Costello, and I'm a managing director at Fitch | 7 | 83 |
| Ratings. Fitch is the third largest bond credit rating | 8 | 83 |
| agency, both in the U.S. and globally. As part of its | 9 | 83 |
| credit rating business, Fitch assigns ratings to | 10 | 83 |
| Residential-Mortgaged Backed Securities, known in short as | 11 | 83 |
| RMBS. | 12 | 83 |
| I'm the co-manager of the RMBS business. I've | 13 | 83 |
| been involved in RMBS ratings for 15 years. Let me take a | 14 | 83 |
| moment to explain the RMBS ratings process as a preface to | 15 | 83 |
| Fitch's role in analyzing the risk of mortgage products, | 16 | 83 |
| including the non-traditional mortgage products that we're | 17 | 83 |
| talking about today. | 18 | 83 |
| The central component of the RMBS rating process | 19 | 83 |
| is evaluating the likelihood of default by some number of | 20 | 83 |
| borrowers in a pool of mortgage loans and assigning probable | 21 | 83 |
| recoveries to those loans once they have defaulted. For | 22 | 83 |
| example, we might determine through statistical analysis | 23 | 83 |
| that in the worst case no more than ten percent of the loans | 24 | 83 |
| in a mortgage pool will default and further determine that | 25 | 83 |
| 50 percent of the value of those mortgages could be | 1 | 84 |
| recovered, or conversely that 50 percent of the mortgage | 2 | 84 |
| amounts could be lost. | 3 | 84 |
| Therefore, our worst case expectation would be ten | 4 | 84 |
| percent of the mortgage pool defaulting with 50 percent | 5 | 84 |
| losses on the defaults leading to a five percent loss on the | 6 | 84 |
| pool of mortgages. We could then assign our highest rating | 7 | 84 |
| of AAA to a bond size equaled to 95 percent of the mortgage | 8 | 84 |
| pool, reflecting our opinion that the probability of a loss | 9 | 84 |
| greater than five percent was extremely remote. This is a | 10 | 84 |
| very high level summary of the process we go through for the | 11 | 84 |
| hundreds of mortgage pools that we rate each year. | 12 | 84 |
| As part of this process, it's necessary for Fitch | 13 | 84 |
| to evaluate new mortgage products in order to determine the | 14 | 84 |
| risk of default and loss posed by the terms of such | 15 | 84 |
| products. This is a challenging task as the fundamental | 16 | 84 |
| basis of our risk analysis process is statistical modeling | 17 | 84 |
| of the historical performance of large numbers of mortgages | 18 | 84 |
| over long periods of time. By definition, newer products, | 19 | 84 |
| such as interest only mortgages, 40-year term mortgages, and | 20 | 84 |
| pay option ARMs do not offer this sort of data for analysis. | 21 | 84 |
| Therefore, a different approach is required. We analyze | 22 | 84 |
| these products by reviewing the potential for payment | 23 | 84 |
| increases, which are in some instances substantial and also | 24 | 84 |
| the possibility of little or no or sometimes negative | 25 | 84 |
| amortization of the mortgage balance. | 1 | 85 |
| We can compare these risk factors to those of more | 2 | 85 |
| established mortgage products and, based on that comparison, | 3 | 85 |
| assign conservative risk factors to the new mortgage | 4 | 85 |
| products. This process is detailed in our rating criteria | 5 | 85 |
| reports available at www.fitchratings.com. | 6 | 85 |
| To summarize Fitch's findings in researching non- | 7 | 85 |
| traditional mortgage products, we find that these products | 8 | 85 |
| can be structured and underwritten in a manner that provides | 9 | 85 |
| increased financial flexibility for homeowners without | 10 | 85 |
| creating undue risk of mortgage defaults. For example, our | 11 | 85 |
| analysis indicates the addition of an interest only period | 12 | 85 |
| to a mortgage of a borrower with good credit and well | 13 | 85 |
| documented income and a reasonable ratio of debt to income | 14 | 85 |
| does not introduce substantial additional risk. Also, a | 15 | 85 |
| similar loan of a term greater than 30 years may also be | 16 | 85 |
| only moderately riskier than traditional loan products. | 17 | 85 |
| However, Fitch is concerned about the combination | 18 | 85 |
| of risk factors present in some non-traditional mortgages. | 19 | 85 |
| We see combinations of non-traditional loan terms as a | 20 | 85 |
| source of additional risk. For example, as we've discussed | 21 | 85 |
| in our research, we do think there is additional risk in | 22 | 85 |
| interest only lending to subprime borrowers, particularly | 23 | 85 |
| when the loan is an adjustable rate mortgage and the | 24 | 85 |
| borrower is qualified to the initial interest only payment. | 25 | 85 |
| Since borrowers can face payment increases of as much as 50 | 1 | 86 |
| percent when the mortgage rate begins to adjust, lack of | 2 | 86 |
| full income documentation only exacerbates this risk. | 3 | 86 |
| Forty-year mortgages can present some similar | 4 | 86 |
| concerns. For the most part, Fitch does not view the | 5 | 86 |
| extension of terms from 30 years to 40 years as a very large | 6 | 86 |
| risk factor. Many, if not most, borrowers will have an | 7 | 86 |
| opportunity to refinance or to move early enough in the life | 8 | 86 |
| of the mortgage that the difference in amortization level is | 9 | 86 |
| not so large. However, Fitch takes a different view of 40- | 10 | 86 |
| year mortgage terms on pay option ARMs. | 11 | 86 |
| Since option ARMs allow the borrower to make a | 12 | 86 |
| minimum monthly payment sufficient to amortize the mortgage | 13 | 86 |
| at a very low rate, such as one and a half percent over the | 14 | 86 |
| term of the loan, the extension from 30-year to 40-year | 15 | 86 |
| terms allows for very low payments or, to put it another | 16 | 86 |
| way, allows the borrower to afford at least initially a much | 17 | 86 |
| higher priced home. The borrower's ability to absorb | 18 | 86 |
| subsequent very large payments as the loan terms adjust is a | 19 | 86 |
| source of risk that we must consider in our analysis. | 20 | 86 |
| So just to recap, you know, in Fitch's opinion | 21 | 86 |
| non-traditional mortgage products when offered in | 22 | 86 |
| conjunction with sound underwriting practices do not | 23 | 86 |
| necessarily add substantial amounts of mortgage default | 24 | 86 |
| risk. However, combinations of mortgage features that | 25 | 86 |
| create large amounts of borrower leverage and/or risk of | 1 | 87 |
| substantial payment increases may cause higher levels of | 2 | 87 |
| mortgage defaults. Thank you. | 3 | 87 |
| MS. BRAUNSTEIN: Thank you very much. George? | 4 | 87 |
| MR. REYNOLDS: Good morning. I'm George Reynolds, | 5 | 87 |
| senior deputy commissioner with the Georgia Department of | 6 | 87 |
| Banking and Finance. Our department has responsibility for | 7 | 87 |
| a variety of financial service providers, including banks, | 8 | 87 |
| bank holding companies, mortgage lenders and brokers, and | 9 | 87 |
| money service businesses. This broad range of supervisory | 10 | 87 |
| responsibilities has given us a unique perspective on the | 11 | 87 |
| impact of non-traditional mortgage products. | 12 | 87 |
| Our department has a long-standing tradition of | 13 | 87 |
| taking a market-based approach to innovations in the | 14 | 87 |
| financial service industry. Although concerns have been | 15 | 87 |
| expressed by many regulatory agencies regarding the | 16 | 87 |
| potential impacts of these products, let us first recognize | 17 | 87 |
| that innovation in the mortgage industry has broadened the | 18 | 87 |
| availability of financial services and has permitted | 19 | 87 |
| individuals who previously may have been excluded from home | 20 | 87 |
| ownership into the market. We believe that innovations that | 21 | 87 |
| encourage participation by low income minority and other | 22 | 87 |
| underserved groups should not be discouraged, provided that | 23 | 87 |
| safety and soundness and consumer disclosure issues are | 24 | 87 |
| appropriately addressed. | 25 | 87 |
| The Department has noted over the past 18 months a | 1 | 88 |
| marked increase in the volume of non-traditional mortgage | 2 | 88 |
| loans that could be characterized as subprime, that is to | 3 | 88 |
| say, loans with FICA or beacon scores of 650 or less. These | 4 | 88 |
| are credits that are primarily originated at licensed | 5 | 88 |
| mortgage lenders and brokers, primarily supervised by the | 6 | 88 |
| states rather than at insured depository financial | 7 | 88 |
| institutions. The Department distributed guidance on our | 8 | 88 |
| website that expressed caution regarding the usage of non- | 9 | 88 |
| traditional products by marginal or inappropriate borrowers. | 10 | 88 |
| Individuals using these products as vehicles to | 11 | 88 |
| facilitate home ownership, particularly to qualify for loans | 12 | 88 |
| that they could not otherwise qualify for based on current | 13 | 88 |
| income, could find themselves facing difficulty as these | 14 | 88 |
| loans become seasoned. In the current market environment of | 15 | 88 |
| rising interest rates, borrowers are faced with the prospect | 16 | 88 |
| of rising loan payments. The real concern is that as | 17 | 88 |
| borrowers are faced with the prospect of implementation of | 18 | 88 |
| principal amortization, that marginal borrowers are going to | 19 | 88 |
| be unable to service their increased monthly obligations and | 20 | 88 |
| that non-performing loans or even increased loan foreclosure | 21 | 88 |
| could be the result. | 22 | 88 |
| We recognize as state regulators the need for full | 23 | 88 |
| and timely disclosures to borrowers to provide information | 24 | 88 |
| on the risk and suitability of these products. It is noted | 25 | 88 |
| the current methodologies for disclosures may be inadequate | 1 | 89 |
| to provide consumers with timely and meaningful information | 2 | 89 |
| that fully describes the optionality of these products and | 3 | 89 |
| the impact increases in market interest rates and future | 4 | 89 |
| principal payments could have on the consumer. | 5 | 89 |
| It's suggested that disclosures be moved forward | 6 | 89 |
| in the decision-making process, be more specifically | 7 | 89 |
| tailored to the loan products that are being offered, and | 8 | 89 |
| involve modeling that is standardized between institutions | 9 | 89 |
| so that consumers can validly compare product offerings. | 10 | 89 |
| Disclosures should be sufficiently detailed to permit | 11 | 89 |
| consumers redress if there are variances between disclosures | 12 | 89 |
| and the final loan offerings at the closing table. | 13 | 89 |
| There are certainly questions as to whether the | 14 | 89 |
| current approach regarding truth and lending disclosures can | 15 | 89 |
| be tailored to fit unique features and complexities of these | 16 | 89 |
| non-traditional mortgage products and provide meaningful | 17 | 89 |
| disclosures to consumers. It's important to focus on a | 18 | 89 |
| reasonable number of meaningful consumer disclosures to | 19 | 89 |
| prevent consumers from being confused and to reduce the | 20 | 89 |
| possibility of information overload. | 21 | 89 |
| I would also strongly echo the recent comments of | 22 | 89 |
| the chairman of the Federal Reserve regarding the need for | 23 | 89 |
| enhanced and improved financial literacy and education to | 24 | 89 |
| better prepare consumers to deal with the complexities of | 25 | 89 |
| the financial service marketplace. | 1 | 90 |
| Finally, it's vitally important that market | 2 | 90 |
| discipline in the secondary market provides certain | 3 | 90 |
| underwriting and suitability standards for purchase of these | 4 | 90 |
| products in the secondary market. Enhanced expectations by | 5 | 90 |
| the secondary market regarding underwriting and verification | 6 | 90 |
| procedures could mitigate some of the risk concerns noted | 7 | 90 |
| above. Care should be exercised to permit continued | 8 | 90 |
| innovation and product development in the financial services | 9 | 90 |
| marketplace. It's our opinion that regulatory efforts | 10 | 90 |
| should be focused on better educating the public on the | 11 | 90 |
| potential risks involved in these non-traditional products | 12 | 90 |
| and ensuring that appropriate underwriting and disclosure | 13 | 90 |
| standards are maintained. Thank you. | 14 | 90 |
| MS. BRAUNSTEIN: Thank you very much. Ken? | 15 | 90 |
| MR. LOGAN: Good morning. My name is Ken Logan. | 16 | 90 |
| I'm a resident of Canton, Georgia. I serve as executive | 17 | 90 |
| vice president of NovaStar Capital, but I'm here today in my | 18 | 90 |
| capacity as chairman elect of the National Home Equity | 19 | 90 |
| Mortgage Association. | 20 | 90 |
| I commend the Federal Reserve Board for its focus | 21 | 90 |
| today on ascertaining the effectiveness of disclosure | 22 | 90 |
| relating to non-traditional mortgage products. There's no | 23 | 90 |
| doubt that mortgage lending in general and the new | 24 | 90 |
| alternative or specialty products that have evolved over | 25 | 90 |
| time, in particular, are complex lending transactions that | 1 | 91 |
| are not easily explained to or understood by many borrowers. | 2 | 91 |
| We believe that the most important element in | 3 | 91 |
| assuring the understanding of a residential mortgage loan | 4 | 91 |
| transaction is consumer knowledge. Ultimately, an educated | 5 | 91 |
| and knowledgeable consumer is best equipped to analyze and | 6 | 91 |
| select the appropriate mortgage loan for him or herself. | 7 | 91 |
| Four years ago NHEMA founded the BorrowSmart Public | 8 | 91 |
| Education Foundation, whose mission is to educate the | 9 | 91 |
| mortgage borrower directly and indirectly through training | 10 | 91 |
| and supplying educational material to neighborhood housing | 11 | 91 |
| counselors across the country. | 12 | 91 |
| While we are wedded to consumer education, we are | 13 | 91 |
| also advocates of consumer choice. Improvident laws and | 14 | 91 |
| regulations that restrict consumer choice will have the | 15 | 91 |
| effect of limiting credit and will restrict the ability of | 16 | 91 |
| borrowers to purchase homes of their choice and use the | 17 | 91 |
| equity in their homes for matters of their choice. We do | 18 | 91 |
| not believe that such a result is sound public policy. | 19 | 91 |
| The role of the real estate finance industry is to | 20 | 91 |
| develop and produce mortgage loan products that serve the | 21 | 91 |
| changing needs of Americans. Lenders strive to produce | 22 | 91 |
| affordable, yet economically sound mortgage loans that the | 23 | 91 |
| borrowing public wants. That effort is what has led our | 24 | 91 |
| nation to be a nation of homeowners with the highest | 25 | 91 |
| ownership rate in the country's history. That effort is | 1 | 92 |
| also what brings us here today. | 2 | 92 |
| There are clearly a multitude of mortgage loan | 3 | 92 |
| product choices to fill borrower needs and objectives. | 4 | 92 |
| While the industry has provided and produced affordable | 5 | 92 |
| loans for millions of Americans, the question persists as to | 6 | 92 |
| whether the federal disclosure regimen has kept pace with | 7 | 92 |
| the new products on the market. My answer to this question | 8 | 92 |
| is that today's disclosure regimen with respect to non- | 9 | 92 |
| traditional products does about the same job as it does with | 10 | 92 |
| respect to the traditional mortgage products. Quite | 11 | 92 |
| frankly, that performance is generally poor. | 12 | 92 |
| In my judgment and experience, despite the best | 13 | 92 |
| efforts of HUD and the Board, few borrowers fully understand | 14 | 92 |
| their residential transaction or the disclosures. The | 15 | 92 |
| mortgage loan is an inherently complex transaction. And | 16 | 92 |
| unfortunately, the layer after layer of disclosure required | 17 | 92 |
| by federal law, state law, and by lender necessity does not | 18 | 92 |
| help much and arguably makes borrower understanding more | 19 | 92 |
| problematic. Accordingly, it is our conclusion that | 20 | 92 |
| tweaking the disclosure regimen to address only non- | 21 | 92 |
| traditional products will not result in the fundamental | 22 | 92 |
| issue of whether the regimen serves the purpose of effective | 23 | 92 |
| disclosure to borrowers from a macro perspective. | 24 | 92 |
| Consumers already receive an incredible array of | 25 | 92 |
| information about the residential mortgage transaction | 1 | 93 |
| through the RESPA, TILA disclosures, Reg Z, Reg X, and those | 2 | 93 |
| additional disclosures required under Fair Credit Reporting | 3 | 93 |
| and Equal Credit Opportunity Act, in addition to the various | 4 | 93 |
| state requirements. The result of all these disclosures is | 5 | 93 |
| to produce loan closing packages like this one, typically | 6 | 93 |
| three-quarters of an inch thick and commonly totaling in | 7 | 93 |
| excess of a hundred pages. I just note that I just counted | 8 | 93 |
| up as a typical package, 42 signatures alone just on the | 9 | 93 |
| disclosure portions alone. | 10 | 93 |
| So the problem is not the sufficiency or even the | 11 | 93 |
| timing of receipt of information. Rather, it is NHEMA's | 12 | 93 |
| position and my personal experience as a lender that the | 13 | 93 |
| quantity and nature of the information disclosed is simply | 14 | 93 |
| too much and detailed for the average borrower to digest | 15 | 93 |
| over any period of time and that borrowers would be better | 16 | 93 |
| served by simpler and more targeted disclosures. An | 17 | 93 |
| overwhelming amount of information is available and provided | 18 | 93 |
| while comparison shopping if borrowers so choose at | 19 | 93 |
| application or within three days of it by federal law, if | 20 | 93 |
| the terms change materially during the processing, again, by | 21 | 93 |
| federal law, and then finally at the closing table. | 22 | 93 |
| And so called loan suitability is not the answer | 23 | 93 |
| to the failure of loan transactions to be meaningfully | 24 | 93 |
| understood by borrowers. If lenders are made responsible | 25 | 93 |
| for the final matching of borrowers to loans, such a duty | 1 | 94 |
| would be practically impossible to effect or create | 2 | 94 |
| litigation chaos and cause a loss of credit options to many | 3 | 94 |
| borrowers. Lenders cannot wear two hats. They cannot be | 4 | 94 |
| both their own advocate and shareholder fiduciaries and a | 5 | 94 |
| fiduciary for their borrowers also. It is axiomatic that | 6 | 94 |
| one cannot well serve competing interests, and it is | 7 | 94 |
| certainly true that both lenders and borrowers lose in the | 8 | 94 |
| unfortunate event of a foreclosure. | 9 | 94 |
| In fact, if a lender does not allow an applicant | 10 | 94 |
| to choose an available product for which they qualify, that | 11 | 94 |
| lender may very likely be accused of discriminating against | 12 | 94 |
| that borrower. Lenders cannot stop a borrower from choosing | 13 | 94 |
| a loan program they qualify for nor should they be expected | 14 | 94 |
| to. Each borrower's circumstances in total are very | 15 | 94 |
| personal and unique. | 16 | 94 |
| In summary, NHEMA advocates a serious borrower | 17 | 94 |
| education initiative to go hand in hand with meaningful, | 18 | 94 |
| simplified residential mortgage loan disclosures. NHEMA is | 19 | 94 |
| willing to lend its resources to this effort. However, | 20 | 94 |
| revising the existing disclosure to address only non- | 21 | 94 |
| traditional mortgage products is an inadequate solution to | 22 | 94 |
| the overarching problem of the failure of the federal | 23 | 94 |
| disclosure regimen to produce an understanding of the | 24 | 94 |
| transaction comprehendible by the average borrower. Thank | 25 | 94 |
| you. | 1 | 95 |
| MS. BRAUNSTEIN: Thank you very much. And before | 2 | 95 |
| I go to you, Alys -- I'm sorry. At the beginning, I should | 3 | 95 |
| have noted that Juan Sanchez has joined the panel, who is an | 4 | 95 |
| assistant vice president and community affairs officer for | 5 | 95 |
| the Federal Reserve Bank of Atlanta, and we welcome you, | 6 | 95 |
| Juan. Alys. | 7 | 95 |
| MS. COHEN: Thank you. My name's Alys Cohen. I'm | 8 | 95 |
| a staff attorney at the National Consumer Law Center. I | 9 | 95 |
| appreciate the opportunity to be here today. And I'm glad | 10 | 95 |
| to be here because the Federal Reserve Board is really in a | 11 | 95 |
| unique position at a key moment in this debate. What is the | 12 | 95 |
| debate about? It's about preserving home ownership for | 13 | 95 |
| working families who do not have equal bargaining power in | 14 | 95 |
| the marketplace. | 15 | 95 |
| The marketplace has gone awry. Unaffordable | 16 | 95 |
| loans, non-traditional, and otherwise are rampant in the | 17 | 95 |
| subprime market. And the risk for these loans is carried | 18 | 95 |
| only by the borrowers. The risk is pooled in such a way | 19 | 95 |
| that industry is making money without bearing the risk while | 20 | 95 |
| people like Ms. Giles in the back risk losing their homes. | 21 | 95 |
| We need to change the system. | 22 | 95 |
| The push marketing is characterized by | 23 | 95 |
| concentrations, geographically and racial, of inappropriate | 24 | 95 |
| loans, including in the non-traditional market. And let me | 25 | 95 |
| give you some statistics. In the Wall Street Journal, an | 1 | 96 |
| industry study projected that one in eight households with | 2 | 96 |
| ARMs originated in 2004 and '05 will default. The six-month | 3 | 96 |
| LIBOR has increased every month for over two years, and soon | 4 | 96 |
| folks will be facing unaffordable resets. | 5 | 96 |
| And energy prices, part of residual income, are | 6 | 96 |
| skyrocketing. Families below 150 percent of the federal | 7 | 96 |
| poverty guideline spent about 20 percent of their annual | 8 | 96 |
| income on energy costs. These are problems in refinancings | 9 | 96 |
| and in purchase loans, and some of that difference is | 10 | 96 |
| geographic. | 11 | 96 |
| In addition, non-traditional mortgage products are | 12 | 96 |
| often associated with other abusive practices. Prepayment | 13 | 96 |
| penalties that exceed the teaser rate period, yield spread | 14 | 96 |
| premiums, fraudulent appraisals, and falsified loan | 15 | 96 |
| application data. The first panel is not unrelated to this | 16 | 96 |
| panel. | 17 | 96 |
| We need to revive underwriting so that loans are | 18 | 96 |
| not sold on a buyer beware basis. We need to shift the risk | 19 | 96 |
| so that originators evaluate what the maximum payment will | 20 | 96 |
| be to the borrower, whether there will be any negative | 21 | 96 |
| amortization, and what the residual income will be for the | 22 | 96 |
| borrower. We need disclosures that are relevant to the | 23 | 96 |
| borrower's loan. They need to be more specific and more | 24 | 96 |
| comprehensive. They need to be early, and they need to be | 25 | 96 |
| enforceable. And we need full assignee liability. We need | 1 | 97 |
| the market to work for borrowers, and we need to stop | 2 | 97 |
| practices before they happen and to provide remedies after | 3 | 97 |
| the fact. | 4 | 97 |
| What do we recommend? First, we ask the Federal | 5 | 97 |
| Reserve Board to use its authority under 15 USC 1639 (l)(2). | 6 | 97 |
| What is that? That's the FRB's UDAP authority that was part | 7 | 97 |
| of HOEPA. We ask the FRB to expand the interagency guidance | 8 | 97 |
| that's coming out to all institutions involved in subprime | 9 | 97 |
| lending and other forms of mortgage lending. | 10 | 97 |
| We also ask the Federal Reserve Board to make it | 11 | 97 |
| an unfair practice to make unaffordable loans with | 12 | 97 |
| alternative features, such as underwriting based only on a | 13 | 97 |
| temporary rate, not considering residual income, and not | 14 | 97 |
| underwriting for the worst case scenario, including the | 15 | 97 |
| maximum rate, which is not the fully indexed rate under the | 16 | 97 |
| loan, and any negative amortization. We also ask that the | 17 | 97 |
| Federal Reserve Board identify as an unfair practice | 18 | 97 |
| imposing prepayment penalties beyond the first reset date. | 19 | 97 |
| We also ask that disclosures be re-evaluated so | 20 | 97 |
| that they're early, firm, and loan specific. That would | 21 | 97 |
| include disclosure of the maximum payment and the maximum | 22 | 97 |
| rate as part of the federal box, any negative amortization, | 23 | 97 |
| the index that the loan is based on, and how one can find it | 24 | 97 |
| if you're an average person, for example on the Web, and the | 25 | 97 |
| length of the initial interest rate period. | 1 | 98 |
| The timing of the early disclosures needs to be | 2 | 98 |
| changed so that they're relevant to someone who can use | 3 | 98 |
| disclosures. People need a GFE of terms at least seven days | 4 | 98 |
| before closing or within three days of the application, | 5 | 98 |
| whichever is earlier. They also need early redisclosure if | 6 | 98 |
| the terms have changed. There need to be consequences for | 7 | 98 |
| originators and investors of loans that don't follow these | 8 | 98 |
| guidelines. | 9 | 98 |
| We also ask the Federal Reserve Board to go to | 10 | 98 |
| Congress as it has done in the past. We ask for rescission | 11 | 98 |
| for purchase loan abuses because in markets where those are | 12 | 98 |
| a serious problem, people have almost no options. We also | 13 | 98 |
| ask for duty of good faith and fair dealing for originators, | 14 | 98 |
| for servicers, and for appraisers. It's a flexible standard | 15 | 98 |
| that can't be evaded by changing your practice slightly. | 16 | 98 |
| Full assignee liability for the amount paid plus the amount | 17 | 98 |
| remaining on the loan and a federal cause of action for | 18 | 98 |
| private citizens under the FTC 9. Thank you. | 19 | 98 |
| MS. BRAUNSTEIN: Thank you very much. Kate? | 20 | 98 |
| MS. CRAWFORD: Hi. My name's Kate Crawford and | 21 | 98 |
| I'm the subcommittee chair for the Consumer Protection and | 22 | 98 |
| Affordable Housing Committees for the National Association | 23 | 98 |
| of Mortgage Brokers, and I'm also a licensed loan officer in | 24 | 98 |
| North Carolina. And I want to thank you for inviting NAMB | 25 | 98 |
| to discuss the issues relating to non-traditional loan | 1 | 99 |
| products. | 2 | 99 |
| NAMB's the voice of over 25,000 mortgage brokers | 3 | 99 |
| throughout the country. Our members are independent small | 4 | 99 |
| business men and women that adhere to a strict code of | 5 | 99 |
| ethics and best lending practices when guiding consumers to | 6 | 99 |
| the loan process. We provide an efficient market mechanism | 7 | 99 |
| to deliver loan product choices where banks, lenders, and | 8 | 99 |
| others do not venture. NAMB believes there are five | 9 | 99 |
| critical tools consumers need to choose a mortgage, | 10 | 99 |
| traditional or non-traditional, to shop effectively and make | 11 | 99 |
| an informed consumer choice, consumers need revised mortgage | 12 | 99 |
| comparison tools that are uniform and consumer tested, a | 13 | 99 |
| competitive market that is free from false distortions, | 14 | 99 |
| educated loan originators, a mortgage marketplace that weeds | 15 | 99 |
| out bad actors from all distribution channels through | 16 | 99 |
| criminal background checks and financial literacy. | 17 | 99 |
| Today consumers are given -- are not given the | 18 | 99 |
| tools needed to shop effectively for mortgages. Disclosures | 19 | 99 |
| that lack uniform information are laden with legalese to | 20 | 99 |
| prevent consumers from being able to comparison shop. For | 21 | 99 |
| example, today only mortgage brokers disclose in the GFE | 22 | 99 |
| that they can earn indirect compensation when a loan closes. | 23 | 99 |
| Although lenders and bankers also earn this indirect | 24 | 99 |
| compensation in the form of service release premium or gain | 25 | 99 |
| on sale, they are not required to disclose such income. | 1 | 100 |
| This uneven disclosure requirement has led to consumer | 2 | 100 |
| confusion, hampered the ability of the consumer to compare | 3 | 100 |
| apples to apples when shopping for a loan product from | 4 | 100 |
| different distribution channels. | 5 | 100 |
| NAMB proposes revising current shopping tools to | 6 | 100 |
| make them effective, as well as account for market | 7 | 100 |
| innovations and non-traditional mortgages. We believe the | 8 | 100 |
| government should revise the CHARM booklet, as well as the | 9 | 100 |
| special information booklet to include information about the | 10 | 100 |
| features, risks, and benefits of non-traditional loan | 11 | 100 |
| products. For example, these booklets should contain | 12 | 100 |
| information on what happens to a loan's monthly payment | 13 | 100 |
| after the loan teaser rate expires. | 14 | 100 |
| Consumers test the new and revised booklets to | 15 | 100 |
| ensure the utility and effectiveness as information sources | 16 | 100 |
| for consumers, consult with the task force that represents | 17 | 100 |
| the current mortgage marketplace, and obtain industry and | 18 | 100 |
| consumer input when revising these booklets. Revise the GFE | 19 | 100 |
| so it mirrors the HUD-1, is one-page in length, and provides | 20 | 100 |
| valuable information to the consumer, meaningful estimates | 21 | 100 |
| of closing costs and monthly payment, enforce existing laws | 22 | 100 |
| to effectively eliminate deceptive or misleading market | 23 | 100 |
| practices and communications with consumers with respect to | 24 | 100 |
| any loan product type, traditional or non-traditional. | 25 | 100 |
Nancy Lee & Associates, Atlanta, Georgia, 404-315-8305
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