Many of the items in the measure relate to mortgage loan financing. The summary below tells us part of the story — it does not tell us what was left out of the legislation and it says nothing about the specific exceptions and benefits buried in the text. (The last revision of the bill was 1,616 pages in length so you can bet there are plenty of goodies for various special interests. We’ll know more when the final text is published.)

Below is a list of inclusions in the bill, as reported by the Financial Services Committee.

Mortgage Reform

• Require Lenders Ensure a Borrower’s Ability to Repay: Establishes a simple federal standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.
• Prohibit Unfair Lending Practices: Prohibits the financial incentives for subprime loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as “yield spread premiums” that lenders pay to brokers to inflate the cost of loans. Prohibits pre-payment penalties that trapped so many borrowers into unaffordable loans.
• Prohibit Unfair Lending Practices: Prohibits the financial incentives for subprime loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as “yield spread premiums” that lenders pay to brokers to inflate the cost of loans. Prohibits pre-payment penalties that trapped so many borrowers into unaffordable loans.
• Establishes
  Penalties for Irresponsible Lending: Lenders and mortgage brokers who don’t comply with new standards will be held accountable by consumers for as high as three-years of interest payments and damages plus attorney’s fees (if any). Protects borrowers against foreclosure for violations of these standards.
• Expands Consumer Protections for High-Cost Mortgages: Expands the protections available under federal rules on high-cost loans — lowering the interest rate and the points and fee triggers that define high cost loans.
• Requires Additional Disclosures for Consumers on Mortgages: Lenders must disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
• Housing Counseling: Establishes an Office of Housing Counseling within HUD to boost homeownership and rental housing counseling.

Related Changes

• Establishes a Consumer Financial Protection Bureau.
• Monitor Personal Financial Rating: Allows consumers free access to their credit score if their score negatively affects them in a financial transaction or a hiring decision. Gives consumers access to credit score disclosures as part of an adverse action and risk-based pricing notice.

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Speaking before the Senate Judiciary Committee last year, FBI Assistant Director Kevin L. Perkins noted that the FBI now has new funding to chase mortgage fraudsters under the Financial Intelligence Center (FIC).

The FIC, says Perkins, allows the FBI “to investigate mortgage fraud, predatory lending, market manipulation, and other financial frauds. The FIC is currently staffed with one supervisory intelligence analyst, eight staff operations specialists, and six intelligence analysts. In FY 2010, the FIC should be fully operational with a total staffing level of 58.”

This is a big jump in personnel and the effort should be welcomed but the problem concerns predatory lending.

What, exactly, is the FBI supposed to investigate? Predatory lending where a borrower is hurt by the actions of a lender is not a federal crime while mortgage fraud — where a lender is hurt — is entirely unlawful.

As an example, Smith qualifies for an FHA loan but is sold a subprime mortgage by his nearby, friendly mortgage lender. The result is that Smith pays, say, 7 percent rather than 5 percent interest and his monthly cost for a $200,000 loan goes from $1,073 for principal and interest to $1,331. That’s an additional $258 a month or $3,096 a year, a loan which is less affordable and far more likely to result in foreclosure. It’s also a loan which is fundamentally unfair given Smith’s credit and financial standing.

Why is it that unfairly taking an additional $3,100 a year from borrower Smith is lawful but robbing $20 from a convenience store is a crime? As Woody Guthrie explained, some people will rob you with a gun and some with a pen. In either case, it’s still robbery.

Under federal rules, mortgage lenders have no obligation to get the best rates and terms for borrower Smith. There is no fiduciary obligation to a borrower, no agency requirement. Unfortunately, Smith has no place to get mortgage information other than, well, mortgage lenders. Smith relies on lenders for information, advice, product options and rates.

It’s great that the FBI has more funding and will be able to field more people in the fight against financial fraud. That’s right and proper. But it’s not fair to the FBI to ask for their help in the fight against predatory lending when predatory lending is perfectly lawful under federal rules.

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The two men face decades of jail time for defrauding investors by selling securities which were described as being backed by federally-guaranteed student loans when in fact they were actually auction-rate securities, a more risky financial product.

So, let’s review. It’s illegal for stock brokers to engage in bait-and-switch tactics. Why then is such behavior entirely fine for loan officers and mortgage bankers selling loans from national lenders?

It’s a normal and routine thing to sell borrowers mortgages which are not right for them. Don’t believe it? According to the Wall Street Journal, its review of subprime loans showed that 61 percent had been sold to borrowers who qualified for better better financing with lower costs. (See: Subprime Debacle Traps Even Very Credit-Worthy, December 3, 2007)

How is it possible that borrowers consistently opted for loans with worse terms and higher costs during the past few years? Do you think when lenders promised to get those borrowers the best possible terms and instead sold them loans with high costs but higher lender profits that no bait-and-switch was involved?

There’s justice for rich investors, but when was the last time that a mortgage broker or a loan officer went to jail for screwing a borrower? As we have explained, predatory lending is not even a federal crime, it’s perfectly legal under federal rules to ruin mortgage borrowers with higher fees and costs then they should be paying.

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This is an unhappy statistic, but it does not tell the whole story. First, as the FBI explains, “the total dollar loss attributed to mortgage fraud is unknown.” This makes much sense given that fraud cannot be known until it’s uncovered — think of Bernie Madoff, Enron and Worldcom.

Second, there’s no central repository to collect mortgage fraud complaints thus the counting and definitions of one source may be different than another.

Third, and most importantly, the FBI report does not cite ONE instance of predatory lending.

Could it possibly be that in a one-year period there was not a single predatory loan issued anywhere in the US?

You’re kidding, right?

Predatory Lending Is Not A Federal Crime

The reason there are no predatory loan statistics in the FBI report is very simple: Although most mortgages originate from nationally-regulated lenders, predatory lending in not a federal crime so there are no statistics to report.

As Benny Kass explains, “there are no federal laws making predatory lending illegal.– Kass is a long-time real estate columnist with The Washington Post and a well-regarded real estate attorney.

In other words, if you make a material misstatement, misrepresentation, or omission on a loan application that can be regarded as mortgage fraud. However, if a lender sells a subprime loan to a family that qualifies for a prime mortgage and increases their housing costs by thousands of dollars per year, that’s just dandy — even if it drives them into foreclosure and bankruptcy. No crime there, no obligation to do what is best for the borrower.

Suspicious Activity Reports (SARs)

The FBI report reflects Suspicious Activity Reports (SARs) rather than actual fraud cases. Given that millions of loans are originated each year the number of fraud prosecutions is tiny. As the FBI reports, last year — in fiscal 2007 — there were 1,204 mortgage fraud cases. They produced 321 indictments and 260 mortgage fraud convictions.

The point, of course, is that the FBI cannot go after predatory lenders if predatory lending is not a crime. Can you guess which industry has worked zealously to assure that mortgage fraud is an issue — but predatory lending is not?

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“The very success of the mortgage industry creates a dilemma for those who want to reform the system,” says Jim Saccacio, chairman and CEO at RealtyTrac.com. “How do you make the mortgage industry better without ruining the present system, a system which to this point reliably makes loans available nationwide at low rates and with little down?”

By “better” a growing number of consumer groups and lawmakers mean giving borrowers a stronger shot at low rates and less-expensive loans. Forget about how loans are packaged or sold, say reformers, who instead argue that the mortgage system is enormously successful and profitable precisely because borrowers routinely overpay for their loans.

Consider “stated-income” loan applications. If you apply for a loan and with a stated-income application the lender doesn’t check your salary or income. Of course, such applications mean extra risk for the lender so the loan rate is increased. The catch is that many of those who use stated-income loan applications don’t need them and don’t need to pay a premium rate for their loans, a premium that produces additional profits for loan officers and lenders.

Why is it that many borrowers don’t need stated-income loan applications? Because they’re employed. They can easily provide payroll stubs, W-2 forms and tax returns. For them, a stated-income loan application is unnecessary.

Reformers essentially argue that loan officers and borrowers are not equals. Borrowers enter the lending system every few years and are entirely dependent on experienced and skilled loan officers for current loan information. Shopping around for the best rates and terms makes no difference because loan officers have no obligation to obtain anything other than the financing which produces the highest commissions and largest profits. In effect, there’s no borrower advocate in the lending system and borrowers have insufficient knowledge and experience to make informed decisions.

Carolyn Warren, in her insider’s book, Mortgage Rip-Offs and Money Savers, offers this example:

As a wholesale account executive, I got a loan approved for a couple who had six pages of late payments and paid-off collections. These people had stiffed everyone from Visa to the pizza delivery guy. It was one ugly credit report! But this lucky family had just inherited money, so they got their loan. The catch was that they had to make a 20 percent down payment and take a high interest rate with a two-year obligation (prepayment penalty).

What’s interesting is that the investor wasn’t the only one who wanted more money. On top of the lender’s high rate, the loan officer jacked up the rate by an additional 1 .25 percent so she could collect the maximum back-end commission for herself. Then she added a couple extra points up front, too, because she figured they’d consider themselves “stuck” and wouldn’t shop around. So Mr. and Mrs. Lucky ended up paying triple for their bad credit, because on top of what the lender required. the loan officer saw an opportunity to take advantage. And that’s the way it usually goes.

But what if the system were changed? Instead of loan officers who have no obligation to the consumer, what if loan officers were required to act like doctors, lawyers and real estate brokers and put client interests first?

That’s exactly the standard being pushed by Sen. Charles Schumer (D-NY). Under Schumer’s proposed Borrower’s Protection Act, every mortgage loan officer would have a “fiduciary relationship with the consumer.”

Think about when you use a doctor, lawyer or real estate broker. In each case there are standards and expectations. If a doctor, lawyer or broker fails to put your interests first or does not meet basic standards of practice then you have recourse, you can sue for damages and the professional can lose his license.

However you can’t readily sue if there are no performance standards in place or if the professional does not have a “fiduciary” or “agency” obligation. In effect, you can’t sue a car salesman, loan officer or waiter if you pay too much.

In basic terms a “fiduciary” obligation means that your interests come first and that your doctor, lawyer or broker is really your agent. The word “agent” is a loaded expression because it means that an individual has defined, lawful obligations to serve your best interests.

The Schumer bill at this moment is merely a proposal, it’s not law. One can expect the lending industry to oppose Schumer’s proposal at every step in the legislative process.

“Some have proposed,” says Harry Dinham, president of the National Association of Mortgage Brokers, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.

“Simply put, a mortgage broker should not, and cannot, owe a fiduciary duty to a borrower. The consumer is the decision maker, not the mortgage broker,” according to Dinham.

John Robbins, chairman of the Mortgage Bankers Association said during June 2007 congressional testimony that “notably, MBA does not believe that a disclosure of function and fees is warranted for mortgage lenders. Unlike a broker whose role may be uncertain — agent or loan provider — a lender’s role is clear. A lender underwrites, approves and funds the loan. The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”

What are the odds that the Schumer bill will pass? In today\’s financial environment, perhaps 50-50 because you have a powerful and important senator competing with a powerful and important lobby. But if foreclosure rates rise, if the lending system becomes a political hot topic in the way that telemarketing was important to voters a few years ago, then no one would be surprised if Schumer prevails.

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Published originally by RealtyTrac.com during May 2007 and posted with permission.

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I’m not so sure Ozzie and Harriet were off the mark. Ownit closed in December 2006.

Ozzie and Harriett — the Nelsons of early TV — didn’t do too badly. The Nelsons were a prototypical one-wage earner household. They no doubt financed their home with an afforable fixed-rate loan. The mortgage choices then available were pretty much limited to VA, FHA and conventional financing with 20 percent down, financing that usually came from a local savings & loan association.

Today’s mortgages might well have confused the Nelson’s — they certainly confuse a lot of current borrowers. How could one explain the joys of interest-only financing or option-ARMs to visitors from the 1950s? What would they think of such ideas as negative amortization, interest rates based on LIBOR movements (a European index that did not then exist) and monthly payments that might double in a few years?

The Nelson’s lived in a country that was the world’s largest producer of cars and steel and by far the largest producer and exporter of food, but let’s not idealize the ’50s — schools and neighborhoods were segregated; women were relegated to a second-class status; businesses and colleges openly discriminated against Jews; lenders engaged in redlining; there had never been a Catholic president; the Korean war had ended — and the Vietnam war loomed ahead. But at least in the sense of real estate and mortgages, things were understandable.

The worry at the start of 2007 is that the market for subprime loans is less stable then investors would like and perhaps not so understandable. For instance, a 2006 study by Friedman Billings Ramsey found that default rates for adjustable subprime loans originated in 2005 were “15.4% and 6.3% higher than the default rates of those originated in 2003 and 2004, respectively.” (See the June 2006 MarketPlus Report from FRB for details.)

Well sure, you might think, interest rates reached record lows in the summer of 2003. As rates have risen so have foreclosures.

Not quite. Yes, interest rates have risen since 2003 but the Friedman Billings Ramsey study found that most of the subprime loans (74.9%) were 2/28 hybrid adjustables — that is, financing where the payment stays the same for the first two years of the loan term. “Hence,” says the report, “most of the adjustable-rate subprime loans originated in January 2005 will not reset at the earliest until January 2007.”

If rising interest rates aren’t doing it, then why then the rash of subprime foreclosures?

FBR looked at subprime foreclosure rates in 361 metropolitan statistical areas and found that 95 had particularly steep default rates. The reason: slowdowns in areas dependent on auto manufacturing, weak labor markets in New England and Golf Coast areas still reeling from hurricanes Katrina and Rita.

If you remove these 95 metropolitan statistical areas from the mix you find, according to FBR, that default rates increased from 4.16% in in July 2005 to 5.84% in July 2006. An increase, but not as bad as a superficial figures suggest.

It’s just a guess, but I would suggest that those fiscally-conservative folks from the ’50s might look at the FBR survey results and map out a mortgage investment program that looks something like this:

If I’m a mortgage investor I’d look at rising subprime default rates and say more risk means I need more interest. That, of course, is a problem given that subprime rates are already steep. Can the market absorb higher subprime rates without steeper default levels?

I’d stay away from areas with especially high default rates — that would unfortunately mean less financing for the metropolitan statistical areas where the need for mortgage capital is especially accute.

I’d look ahead and wonder about areas that have high levels of interest-only and option ARM activity. FRB reports that in the first six months of 2006 more than a quarter (25.8%) of the loans in California allowed negative amortization. In the same period interest-only financing was remarkably popular (or necessary) in Charlottesville, VA (47.1%), Ventura, CA (46.3%) and Santa Cruz-Watsonville, CA (45.7%).

I’d wonder what would happen with those 2/28 hybrid adjustables, the ones that will begin resetting in big numbers in this month. Does anyone seriously think that higher interest rates will not compound subprime problems?

The Nelsons may not have had home computers, electronic games or DVDs, but each month they could easily pay their steady mortgage bill. For a growing number of homeowners, that’s not a bad deal.

————————

Published originally by RealtyTrac.com during January 2007 and posted with permission.

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“While predation is the law of the jungle in nature, as civilized society, we need to have laws in place to protect investors and consumers,” Ryan told the Securities Industry and Financial Markets Association (SIFMA).

“Market integrity is critical for a sound and robust market,” he continued. “Market participants must know the playing field is level and the rules are fair. There is a real benefit to the existence and enforcement of broad anti-fraud and anti-manipulation authorities. Predatory lenders, rumor mongers, market manipulators, insider traders and others who seek to gain an unfair advantage must be identified and prosecuted.”

This is great stuff and you can readily agree with Ryan’s sentiments, but no predatory lender will ever be persecuted by the federal government. The reason? Predatory lending is not a federal crime.

Don’t believe it? Just take a look at the annual statistics for financial crimes. Not a single case of predatory lending.

In our system mortgage fraud — such as deliberately and materially inflating income or assets on a loan application — is a crime. But if a borrower qualifies for an FHA mortgage at 6 percent and is sold a subprime loan at 8 percent, the law says that’s not a crime and that’s not predatory lending. That’s just good business for a lender — though perhaps not so good for the borrower who now has far higher monthly costs and is much more likely to lose his home to foreclosure and bankruptcy and thus lower the value of neighborhood houses.

Our Treasury official says “it is important that regulators have broad authority to investigate and prosecute these actions. These measures instill confidence in market participants that the market is operating in a fair and transparent fashion where rules matter.”

Mr. Ryan is right, of course, but he would be more right if the concepts of fairness and transparency applied not just to borrowers but also to lenders. Until predatory lending is a federal crime with actual consequences there’s little reason for borrowers or investors to have faith in a one-sided system which does not serve them well.

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Published originally by Realty Times on May 7, 2008 and posted with permission.

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Timothy Husvar, according to the Cincinnati Enquirer, was involved in illegal flipping worth $2.3 million over a three-year period. The paper says he has “admitted in court papers to serving as a mortgage broker and property seller in a scheme involving low-priced homes, stooge or puppet buyers, bogus appraisals, falsified loan applications and, ultimately, loans well in excess of the value of the properties. Among his victims: Washington Mutual Bank, Midas Mortgage Corp. and Trust Corp. Mortgage Co.” (See: “More ‘flippers’ are sentenced,” June 29, 2006)

How illegal flippers get away with their crimes is an unremitting source of amazement. Every time I apply for a mortgage I wind up with a 12,000-page application file and the need for more verifications than we require from North Korean nuclear plants. But somehow, magically, illegal flippers glide through the system with the ease of a champion ice skater.

“Flipping” — the idea of quickly buying and selling real estate — is entirely legal. The parallel is this: You buy a stock on Monday for $10 a share and sell on Tuesday for $20. There is no crime here, nothing wrong or immoral.

Illegal flipping is another story. From one end to the other these are deals that routinely involve valuations from appraisers who get money under the table, falsified loan applications, mortgage fraud, bait-and-switch financing, predatory loans with unconscionable terms and repairs which are not up to code and thus result in a house which may be neither safe nor habitable.

Illegal flipping occurs in large measure because we see it as an acceptable white-collar crime. Many of those involved in the Cincinnati scheme received two years in jail for their assorted crimes. If you think that’s tough, consider how much damage was done and how many people were harmed — and then imagine the sentence if someone robs a convenience store of $20.

Those who engage in serial illegal flipping should face far tougher sanctions than we now demand.

The Cincinatti convictions relate to activities that stopped in 2003. According to Walt Molony of the National Association of Realtors, the typical Cincinatti home sold for $138,900 that year. If it’s true that the scams were valued at $50 million, then we might reasonably expect that some 360 properties were involved. Even this estimate may be too small given that illegal flippers usually concentrate on less expensive homes.

Imagine the impact on the local marketplace when hundreds of homes are illegally flipped. If the houses were concentrated in one area or a small number of neighborhoods, we might see a huge number of foreclosures.

What happens to home values when there are many foreclosures in a given area? Do prices rise or fall?

In other words, illegal flipping surely harms innocent buyers, sellers and lenders, but it also harms communities in general. If you’re on the same block with a few homes that have been foreclosed, the value of your house will fall.

Have people who live next to illegally flipped homes done anything to justify the reduced value of their properties? Or are the neighbors just like you and me — people who pay their mortgage, pay their taxes and probably hope to clean out the basement next week? Isn’t the damage from less equity and lower selling prices real?

Given that the social and financial damage from illegal flipping is so great, we need to treat such activities as if they were a real crime, a crime that requires more serious sentences. If someone burned down a few houses in a neighborhood we wouldn’t fool around with light sentences, and the result should be the same for someone who flips multiple homes, causes multiple foreclosures and ruins multiple lives.

In addition, all lenders should adopt the HUD anti-flipping measures that were first established in 2003.

In basic terms, HUD will not provide FHA loan guarantees to finance any private home that has been sold within 90 days except for estate sales and sales within presidentially-declared disaster areas. A second appraisal is required when a home is resold between 91 and 180 days after the last sale and additional paperwork and verifications are needed for homes being re-sold within a year. No property will be financed unless the seller is also the owner — a requirement to make life tough for settlement agents who fail to properly record property transfers or pay the taxes that are due.

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Published originally by Realty Times on August 22, 2006 and posted with permission.

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