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A Week in the Life of Mortgage "Reform"

posted by Mechele Dickerson

Here's a mortgage crisis chronology for this week, as reported by the New York Times and Washington Post.  Can you guess what these articles have in common?

On Sunday, Michelle Singletary's The Color of Money column discussed Treasury Secretary's Henry Paulson's recommendation to create a Mortgage Origination Commission that would promulgate standards for mortgage loan officers and would rate and report state efforts to license and regulate mortgage brokers.  In her view, a new Commission isn't needed.  Instead, she argues that what we need to do is send some of these people to jail.  Rather than have a commission talk about their fraudulent acts, she suggests that we need to criminally prosecute loan officers who have engaged in fraudulent lending activities. 

On Monday, the New York Times reported that the mortgage industry has stepped up its attack on proposed Federal Reserve regulations that are designed to regulate certain mortgage lending practices.  These regulations would require lenders to disclose all fees (including broker's yield spread premiums), would require lenders to show that customers can actually afford the mortgage, would ban certain types of advertising, and would regulate other practices viewed as abusive.  The mortgage community argues (of course) that tighter regulations will increase the cost of credit and ultimately will harm creditworthy borrowers.  The Times reports that the industry's aggressive attack on the regulations and their flood of comments have been successful in convincing the Fed to narrow the proposed regulations.

Yesterday (Tuesday).  An editorial in the Times criticized the government for waiting too long to respond to the foreclosure crisis and sharply criticizes the pro-mortgage industry aspects of the bill the House recently passed.  It specifically notes that the bill relies too heavily on the voluntary participation of lenders, and stresses that lenders can choose whether to reduce the mortgage loan balances or whether to continue with a pending foreclosure.  The editorial urges Congress, especially the Democratic leadership, to push forward with legislation that would let borrowers modify their mortgages in bankruptcy. 

Today.  An article in the Times reports that fewer than 1,800 homeowners have been helped by the Federal Housing Administration program that was designed to provide relief to homeowners who have fallen behind on their mortgage payments.  Though FHA officials contend that more than 150,000 people have benefited from the program, the program has largely helped homeowners who are current on their mortgage payments (and who anticipated that they might have problems in the future), not the folks who were in default and at risk of losing their homes in foreclosure.  Surprisingly, housing officials seemed surprised by the number of homeowners who sought to benefit from the program.  It's surprising that they were surprised by the homeowner interest in the program, since over a million people have fallen behind on their mortgage payments.

Why so few homeowners are benefiting from the FHA program is anyone's guess.  Perhaps it's the design of the program, which provides relief only to borrowers who have made 10 timely payments in the 12 months before they went into default.  Maybe it's because the program hasn't been well publicized.  Or, perhaps officials at the Department of Housing and Urban Development, which oversees the FHA, have been a tad distracted of late by the scandals involving the former-HUD chief (who resigned recently but is still being investigated for questionable business practices).  One thing we don't have to guess is that this program is going to do little to help most struggling homeowners this year, unless the program is radically revamped. 

So what do these news reports have in common?  First, the mortgage industry seems unwilling to voluntarily reform itself.  Second, any attempt to regulate the industry will be met with the claim that doing so will do no good and will only exacerbate the credit crisis.  Third, no one in the government seems to want to take truly bold steps to do anything meaningful anytime soon, and everyone seems happy to engage in long discussions (in committees or on commissions) about the housing crisis.  Fourth, the Fed and members of Congress appear unwilling to alienate the powerful financial services industry.

Of course, the week's not over yet.  Things can only go up.


Thanks for this succinct summary. It paints an accurate yet depressing picture of the utter lack of concern among political leaders.

Clearly, we need regulation to restore confidence and prosperity to markets. Those who persist in their arrogant, self-dealing and greedy promotion of ideologically 'free markets' are traitors to American values.

In addition to regulation (as well as asking the mortgage industry to voluntarily do the right thing), we also need much more vocal, loud and real support for a third alternative: competition.

Specifically, one of the best know ways to correct market failures is through new market entrants who have a more sustainable and attractive basis for competition. That alternative exists today in the form of America's best non-profit housing groups. They have the skills (core competencies) that have disappeared from banking and mortgage brokerage: namely, trust-based relationships with customers built around real information gathering and evaluation of what customers can afford to buy or own.

There are hundreds of excellent non-profits. They are poised to scale their offerings and take real market share away from the corrupt, self-dealing mortgage industry.

All they need is investment and backing.

I'll have to go back and check because I'm going off of memory at the moment.. But I recall looking at FHASecure when it first came out and saying, "This isn't going to work." The main reason, at the time, being that one of the stips of the program was that borrowers had to have been current on their payments for the six month period prior to applying for FHASecure assistance. That, right there, eliminates virtually EVERY applicant who **REALLY** needs the assistance of the program.

Now, this may get a little tin-foil hattish but bear with me...

Secondly, given the participation of some of the particular servicers involved with the program, in monitoring the application list servicers can follow loans that they are servicing. Upon seeing that a loan could potentially escape their pools, the servicer could simply manufacture a single default and tank any hope of an applicant qualifying for the program. I'd be interested in seeing if any applicants had problems with their payments not getting through to the servicers or not being recorded properly or in a timely manner. I'll refer you here as to why I say this:

These would be similar reasons as to why I firmly believe that "Hope Now" isn't working as well as real people actually hoped... Look at the participant servicers...Then compare the list to the sheer number of cases filed against each one on PACER or Justia.

It's simple really. When you put foxes in charge, your chickens are going to disappear every time...

Speaking of that...Professor Porter, if you catch this in time, would you please point out to Sen. Schumer and the rest of the panel next week that the issues being found in the Bankruptcy Courts are greater than just a bankruptcy problem for me? It's called Mortgage Servicing Fraud - and it is the very reason WHY so many borrowers are ending up in 7s and 13s. The only reason MSF becomes so visible in bankruptcy court is simply because MSF victims finally have competent legal representation. If they could find it or afford it BEFORE having to file a 7 or 13 they'd never end up before the Bankruptcy courts in many cases...

Voluntary programs won't work.

We need to stop treating home mortgages as creditors receiving special protection in Chapter 13 bankruptcies. That will help those who need help, and provide a template for settlement - both home owners and lenders will have an economic incentive (to avoid the costs of bankruptcy) to structure out-of-court workouts that mimic what would happen if a Chapter 13 were filed. A template and a forum to resolve these issues if negotiated agreements can't be reached - that's what we need.

And clearly, the mortgage industry HAS to be regulated. When your industry practices screw up the country THIS BAD - forcing government intervention to stop the falling of dominoes and contributing at least a recession - you kind of forfeit the "gee, let's let the free market fix things" kind of arguments industry groups like to make.

Sorry, but that's just a non-starter.

On the contrary - it is the government bailout of large losers in this crisis that prevent the now-demonized 'free-market' corrections from being fully effective.

If the government modifies the risk profile of investments by acting as an invisible safety net, there's absolutley no incentive for markets to act rationally.

The very visible failure of Bear Stearns could have provided an opportunity to create real change in the transparency of corporations, investments, etc...but instead, everyone clamored for not just one intervention (bailout) but now more (regulation - right, that ALWAYS works). Everyone who is decrying the 'free market' solution isn't seeing that our current situation has had so much intervention already that it can't, in good logic, be related to the free operation of any market.

Uh, yes Doug, a complete collapse of the financial markets is one kind of feedback mechanism we could use.... But, most would prefer something a little less draconian.

And, while I think economic incentives are powerful, useful, and deserving of respect, they are, by nature, very broad and nonselective forces, and for the life of me, I just can't recall where totally free markets have created real corporate transparency.

In contrast, what we've seen in the build up to this mortgage crisis is an EROSION of regulation - and it is clearly causal. Starting with Reagan and continuing through Clinton and Bush The Younger. There used to be laws against the kinds of loans - like adjustable rate mortgages - that are causing much of the problems today. Those were repealed.

The lead up to the foreclosure crisis is not a history of over-regulation, it is a history of regulations being repealed: the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA)(deregulating interest rates); Alternative Mortgage Transactions Parity Act of 1982 (AMTPA)(lifting the prohibition against adjustable rate mortgages); The Garn - St Germain Depository Institutions Act of 1982; the overriding of the Glass-Steagall Act starting in 1987 on a vote by the Federal Reserve and ending with its official repeal in 1999; and the Federal Reserve took a hands-off approach as this mortgage-securitization crisis was building, as did Congress and the Executive Branch.

State laws were pre-empted and not replaced. Instead, we've have oversight by folks who thought government regulation was always bad. It isn't.

We screwed up S&Ls through deregulation in the 1980s, and fixed it by regulating them in 1989.

We need to re-regulate the mortgage industry in order to fix it. 25-plus years of decreased regulation has allowed this meltdown to happen - and as long as you allow sharp practices as an open road to a quick buck, a business failing isn't going to deter the next scheming bubble-creator from getting "his" at the expense of "ours".

One thing I can thank the republicans and Bush for....... Work! Because the economy is so screwed up, I have a JOB and boy am I working! I thought republicans stood for the concept of helping Businesses? They had their “dream team” and where did it get us? If they did help Big Business, I haven’t seen the “trickle-down” in any of our debtor’s lives anyway. Well maybe our oil filed workers, in that they are working.

Gas prices alone have brought in 3 trucking companies to our door in as many days. All three are contemplating getting out of the business completely! They are paying more to continue working which in turn is sinking them into debt, often financing gas with credit cards and leaving not enough to make mortgage payments among other debts. It’s a huge vicious circle.

I like AMC's assertion that if BK laws were reformed to involuntarily modify mortgage contracts that the effect would be that the servicer’s feet would be put to the fire and they will work with debtors. It might very well have that result. I hate to say it but, I don’t think it will happen with a Republican President. We would have to have a filibuster proof congress also.

But if we are talking about a “wish list”, then:

How about adding some bells and whistles to the code that might get servicers online and get them to start crediting payments correctly in BK? Maybe the code could require Mortgage payments on "mortgage note alterations" to pass through the 13 Trustee during the duration of the Plan. Maybe then we will have an accurate accounting. Anyone want to start up a servicing company catering just to Mortgages in Chapter 13 BK? Because if we have the current servicers do it, they are only going to screw it up!

Bush has been berating congress for not doing enough and placing blame on Democrats. How do you get anything done that way? You know if BK reform comes up it would be either met by a republican filibuster, watered down legislation or outright veto! Hey, we can hope! Unfortunately though, it’s like waiting to hit the lottery. All of the numbers have to magically fall into place.

The mortgage industry is wary of additional regulation because many of the proposals will do nothing to help consumers and are knee jerk reactions by politicians who don't understand how the mortgage market works or how certain changes will impact the availability of credit.

The mortgage business needs uniform standards to apply to all loan originators whether they are a mortgage broker or working for a federally chartered bank that override the current mishmash of state lending laws. We also need streamlined disclosures to help consumers understand their mortgages. However, most of the proposals do neither. They simply make things more complicated thant they really need to be. Closing documents are confusing as it is because banks are so worried about being sued that 3/4ths of the closing package is already CYA disclosures.

FHA Secure isn't working because the vast majority of foreclosure are not related to evil mortgage lenders as some of you like to insinuate. Most of the people in trouble can't qualify for FHA loans because they can't verify income, own investment properties, or bought way more house than they can really afford.

The bulk for foreclosures right now are related to either get rich quick investors attempting to buy and flip houses or borrowers who have suffered a loss of income which is why foreclosures are concentrated in CA, NV, AZ, FL (investors) and the armpits of the midwest (economic reasons). In other words, it ain't little old ladies going into foreclosure because their rate is adjusting. In fact, the nation's largest servicer, Countrywide's own figures show that less than 2% of their mortgages that enter into some stage of foreclosure due to a rate adjustment. Hell, most of the loans are going into foreclosures PRIOR to the rate even adjusting.

What many of you fail to realize is that foreclosures are up because they were held artificially low over the past several years. All these subprime loans prevented people from going into foreclosure two and three years ago. Now that these products are gone, these people have no options but foreclosures. In fact, much of the subprime lending was around refinancing. Borrowers refinanced themselves out of trouble. Now they can't, so game over.

I wish I was seeing on the ground what you are saying Russ. If it was flipping, then what’s up with all that new construction I'm seeing? Most debtors we have in 13s do not have investment homes. I am though seeing allot of re-fi damage but the stories on how they came to re-fi a fixed rate into a ARM are horrifying! And little old ladies are not excluded from this crap either.

The new construction is symptomatic of the flippers. Flippers thought they could buy these properties pre-construction and sell them prior to even making the first mortgage payment or soon after the closing. This is why a lot of condo buildings are half empty along with many subdivisions, particularly in places like Nevada, Arizona, and Florida.

You see the stories of the guys who own 5 houses in a subdivision as "investment properties". They can't get enough rent to cover the mortgage, they can't sell them for what they paid, and they can't afford the mortgage payment. The ultimately go into foreclosure. This is why so many loans are going bad prior the rates even adjusting because these loans in all likelihood are 1) fraudulent or 2) investors. Again, FHASecure can't help these folks and these are they very people who are driving the foreclosure rates right now along with laid off workers from manufacturing plants in the rust belt. FHA can;t help either of these groups.

No lender is going to lend to a failed day trader trying to make it rich flipping properties NOR are they going to lend to people without a job. Sub-prime loans targeted a lot of these people and now that the subprime loans have gone away, the music has stopped and these people have to finally foreclose.

Everytime I read a sob story in the media, it goes like this... Someone got in trouble... they lost their job, they had medical problems and the only loan they could get at the time was a 2/28 subprime. The loan is now adjusting and they can't refinance, so they wind up in foreclosure. Of course, the journalist always seem to forget to point out, if they didn't get that 2/28 subprime loan two years ago they would have been in foreclosure then. I bet at the time, that person was sending their loan officer or broker flowers for saving their home. Now, it is all the mortgage companies fault because they can't pay the mortgage or refinance. Usually, they cant refinance into a better loan because they still haven't gotten their employment together, nor have they improved their credit.

Normally, these people would have just gotten another subprime mortgage. But the subprime loans are gone and conventional lenders aren't going to lend these folks a stick of gum. Game Over, another foreclosure statistic.

Annecdotes are not evidence that "bulk" of the foreclosures in this country are a result of people buying real estate for speculative purposes or losing income.

You got stats to back that up?

Because there are increases in foreclosure rates all over this country.

N.C. home foreclosures up 26% in 1Q

Local (Schenectady, NY) foreclosure rates soaring

St. Louis foreclosure rate up 79% from last year

"Tennessee's first-quarter foreclosures were up 72 percent, while metro Memphis' jumped 51 percent, according to RealtyTrac's Q1 2008 U.S. Foreclosure Market Report released April 29."

Cincinnati foreclosures up by double digits

Home foreclosures up in Maryland, D.C. and Virginia

"Colorado had the fifth-highest foreclosure rate in the nation in the first quarter, according to data released Tuesday by RealtyTrac Inc."

"Foreclosures increased in 46 states and in 90 of the nation's 100 largest metro areas. Some regions that had been only marginally hurt by the mortgage meltdown recorded large increases in filings. In Connecticut, for instance, filings tripled compared with the first three months of 2007. Massachusetts recorded a 260% increase."

Home foreclosures more than double in Idaho

N.J. foreclosure filings rank 16th-highest in nation
"The onslaught of homes facing foreclosures has yet to ebb, a research report showed yesterday, with bank repossessions skyrocketing in the first quarter of 2008."

1Q foreclosures increase in R.I., nationally
"Rhode Island saw a more than six-fold increase in filings compared with the first quarter of 2007, as well as an increase of 179.3 percent compared with the 2007 fourth quarter, making it 19th worst state in the country."

Iowa foreclosures up 25% from last quarter

I'm sorry, but this isn't just a problem cause by too many people watching "Flip This House". Nor is it confined to the "armpit" rustbelt.

Russ,...If I may ask, you don't by any chance work anywhere in the mortgage industry do you?

Show me some numbers NOT generated by Countrywide confirming that 2% figure and maybe I'll be interested... Countrywide has already proven that they fabricate documents... Is there any reason to believe that they don't fabricate numbers as well?


I am a mortgage broker. However, I have no love for Countrywide (most brokers generally don't for a number of reasons) so I have no reason to make up the data. I am sure if you do a google search you will find it. It was in a presentation from their investors conference call. You can also search the Mortgage Bankers Association data and it bears the same facts.

Nevertheless, even as someone who is on the front lines originating tens of millions in loans annually, I can tell you without question that the data is accurate because I see it everyday.

Don't get me wrong, I am not saying that the mortgage business is squeaky clean by any means. I have been saying the business needs some serious changes for years. However, the situation is a lot more complex than simply lenders taking advantage of little old ladies. The data bears this out. My issue is that a lot of the reforms are based on faulty assumptions and are going to limit credit availability and raise the cost to consumers rather than help it.

Ok...I'll buy that to an extent, Russ... Personally, I don't think a LOT of mortgage reform is needed either. Some of the "golden oldies" with regard to repealed legislation need to be reinstated but, for the most part, I think Michelle Singletary is right. What is needed is enforcement of laws already on the books. Across the board...Not just for lenders. Not just for brokers. Not just for borrowers. Everyone.

Lenders create these "exotic" products. Brokers push them. Borrowers purchase them. Of those three entities, the borrower is unequivocally the least educated of the three - hence the standard of "least sophisticated debtor". But there are people at all three of those levels gaming the system. And all three need to feel what happens when they get caught.

One thing that really pisses me off is that no one is looking at the servicers in a manner that puts any blame on them. Everyone appears to be looking to the servicers to FIX this problem. I've got 281,100 victims of Fairbanks Capital n/k/a Select Portfolio Servicing standing behind me screaming that the servicers are PART OF THE PROBLEM. And, instead of any investigative measures, everyone sucks up to the servicers and puts them in charge and gives them access to the very information needed to perpetrate even more fraudulent activity via programs like HOPE NOW or FHASecure.

Fairbanks/SPS, Litton, Ocwen, EMC, Saxon, Wilshire, Countrywide, Ameriquest, Option One, and others all have significant litigation against them with regard to servicing impropriety to the point that the only way anyone doesn't know about it is because they don't WANT to know about it.

And every time that someone actually wants to try and do something to fix the problems, the lobbying groups gear up to strike it down as hard as possible. The industry itself doesn't want any change because any change would make it more difficult for the industry to make the record profits that it was seeing during the bubble.

And with regard to limiting credit availability, guess what... It was easy access to credit - quite possibly TOO easy - that helped to create the problem that we're all dealing with now. If credit had been a little more difficult to obtain in the first place things might not be tanking as hard as they are now. But even if credit remained as easy to get as it has been, if the ENFORCEMENT had been there maybe it would have been enough of a disincentive to help curb shoddy and/or fraudulent practices across the board.

Once corps. become "too big to fail" that creates problems as well. Sure allowing BS to crumble would have sent shock waves through the industry and possibly the economy. It would also have served as a reminder in history for any other corp. NOT to make the same "mistakes" because no one, i.e. the federal government, is going to come to their rescue. The federal government is in place to serve the PEOPLE of this country - NOT the corporations. Once the government has been bought off by the corporations - and with regard to the mortgage and banking industry I fully believe that it has - the people of the United States don't stand a chance.

And as lousy with mortgage and banking influence as previous administrations may have been, any incoming administration is going to be just as bad. The American people get to choose between having the Pritzker family (Superior Bank) with either democratic choice or Phil Gramm (Enron) with the republican choice back in the White House. I'm not sure what the lesser of evils is there but it's not going to make anything any better regardless.

And I'm not sure that any federal "oversight" or blanket regulation that preempts state law is the solution either. Heck, you can't even get the OCC to agree to get their HOPE NOW participants to fully participate in the program in order to create more transparency within the program.

So, maybe you're correct in that the industry doesn't need MORE legislation. Maybe tools like the Martin Act, RICO and FDCPA are enough to begin to bring things back in line. Now all we need is someone to actually put the tools to USE...

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