Transcript Document

Josh Nassar
Overview of Mortgage Market:
How We Got Here and Policy Responses
July 23, 2008
Foreclosure Community Impact Summit
Greater Richmond Convention Center, Richmond, VA
http://www.responsiblelending.org
Introduction
http://www.responsiblelending.org
About CRL
 Nonprofit, nonpartisan research and policy
organization dedicated to protecting
homeownership and family wealth by working to
eliminate abusive financial practices.
 Affiliated with Self-Help, one of the nation’s
largest community development financial
institutions.
http://www.responsiblelending.org
3
Self-Help




Self-Help is a non-profit lender founded in 1980 to increase
and protect wealth and ownership opportunities for
minorities, women, rural residents, and low-wealth families
Over $5 billion in home, small business and non-profit
financing for more than 55,000 loans in 47 states and the
District of Columbia
Serves borrowers who do not meet traditional underwriting
criteria
7 branches in NC plus a Washington, DC and Oakland, CA
branch
http://www.responsiblelending.org
4
Home Equity and Wealth
 Wide gaps remain in wealth and homeownership
 In 2004, the median net worth of households of
color was only 17.6% of the median net worth of
white households. (Federal Reserve Bulletin, Feb. 2006)
 Approximately 75% of white Americans own their
homes. The figures are much lower for AfricanAmericans (48.2%) and Latinos (49.5%). (US Census
Housing Vacancy Survey, 2005)
 Promoting homeownership for remains the most
important tool for closing the wealth gap.
http://www.responsiblelending.org
5
Home Equity and Wealth
Median value of home equity as share of
the net worth of homeowner households (2002)
Home Equity as % of Wealth
100.0%
88.4%
88.1%
Hispanic
Non-Hispanic Black
80.0%
61.6%
60.0%
40.0%
20.0%
0.0%
Non-Hispanic White
Ethnicity
Source: Rakesh Kochkar, The Wealth of Hispanic Households: 1996 to 2002 at 5, tbl. 1 (Pew
Hispanic Center, 2004).
http://www.responsiblelending.org
6
Prime v. Subprime

“Prime” Borrowers


Excellent credit history; stable employment history;
meet traditional debt-to-income, payment-to-income,
and loan-to-value ratio underwriting criteria
“Subprime” Borrowers

Credit blemishes (usually, less than “A” rating);
insufficient or non-traditional credit history; less stable
employment history; high debt-to-income, payment-toincome, or loan-to-value ratios
http://www.responsiblelending.org
7
More Costly Credit
Subprime loans are priced higher, in theory to
cover higher risk
 However, many subprime borrowers could qualify
for prime loans but are courted only by subprime
lenders
 Other subprime borrowers are charged more than
is justified by risk. Origination fees are typically
higher and prepayment penalties are more
common

http://www.responsiblelending.org
8
Growth of Subprime Market: 1998-2006
$700
25%
(in Billions)
$600
20%
$500
$400
15%
$300
10%
$200
5%
$100
$0
0%
1998
1999 2000
2001
Subprime Volume
2002 2003
2004 2005
2006
Subprime Market Share
http://www.responsiblelending.org
9
Subprime Market Is Not Fair or
Price Competitive
More than 70% of subprime home loans contain
prepayment penalties – can cost families
thousands of dollars when they refinance or pay
off their loans early
 Prepayment penalties do not result in lower
interest rates – simply another method of stripping
home equity
 Yield spread premiums encourage brokers to make
loans at interest rates higher than the rates for
which borrowers qualify.

http://www.responsiblelending.org
10
A Critical Issue
“ . . . [B]ecause of the concentration of subprime
lending in low-income and black neighborhoods,
there has been a growing concern that borrowers
in these neighborhoods are vulnerable to a subset
of subprime lenders, who engage in abusive
lending practices, strip borrowers’ home equity,
and place them at increased risk for foreclosure.”
Randall M. Scheessele, Black and White Disparities in Subprime
Mortgage Refinance Lending (U.S. Dept. of Housing and Urban
Development, April 2002), at 1.
http://www.responsiblelending.org
11
Losing Ground: Foreclosures in the Subprime
Market and Their Cost to Homeowners
In one of the worst foreclosure crises in American
history, subprime mortgages originated from
1998 through third quarter of 2006 will wipe
out $164 billion in homeownership wealth for
2.2 million American families. Research from
the Center for Responsible Lending—the first
comprehensive, nationwide look at how
subprime mortgages perform—shows:
http://www.responsiblelending.org
12
 Alarming Rate of Home Losses: For subprime
loans made during the past two years: one out of
five (19%) will fail.
 Worse than Oil Patch: These rates are far worse
than the notoriously high rate of foreclosures
during the Oil Patch disaster (14 percent) of the
1980s.
 Increasing in Most Areas: As the housing market
cools, subprime foreclosure rates will rise sharply
in most major markets.
http://www.responsiblelending.org
13
 Driven by Lending Practices: Subprime lenders
are breeding foreclosures through bad
underwriting combined with risky loans featuring
adjustable rates, balloons, prepayment penalties,
low-doc/no-doc. Pervasive 2/28s (“exploding”
ARMs) dominate the current market and are very
likely to make the loan unaffordable.
http://www.responsiblelending.org
14
Example of 2-28, $200,000 ARM,
No Change in Rates
100%
90%
$2,000
80%
70%
$1,500
60%
50%
$1,000
40%
30%
$500
20%
Post-Tax Debt-to-Income
Monthly Payment (Principal & Interest)
$2,500
10%
$-
Monthly Payment
Post-Tax DTI
0%
Teaser Rate
Fully Indexed Rate
$1,311
$1,948
61%
90%
http://www.responsiblelending.org
Source: CRL
Calculations
15
How Did We Get Here?
 Underwriting without regard for ability
to repay:
- e.g. exploding ARMs, no docs,
piggybacks
- No escrow for taxes or insurance
 Presumption of continued housing
appreciation
http://www.responsiblelending.org
16
 Most Vulnerable Bear the Brunt: African
American and Latino families get a
disproportionate share of subprime loans. Lowwealth families have the most to gain from
homeownership, and the most to lose from
foreclosure. It typically takes 10 years to recover
and buy another house – many never recover.
http://www.responsiblelending.org
17
Subprime Spillover: Key Findings
 We project that, nationally, foreclosures on
subprime home loans originated in 2005 and 2006
will have the following impact on neighborhoods
and communities in which they occur:
 40.6 million neighboring homes will experience
devaluation because of subprime foreclosures that take
place nearby.
 The total decline in house values and tax base from
nearby foreclosures will be $202 billion
 Homeowners living near foreclosed properties will see
their property values decrease $5,000 on average.
http://www.responsiblelending.org
18
Impact of the Subprime Collapse
 Foreclosures:
-
2.2 million subprime loans will have ended in
foreclosure
1 in 5 recent originations will end in foreclose
Disproportionate impact on minority borrowers and
communities
Homeowners, not investors
 Cost:
$164 billion direct equity loss to borrowers
Billions in equity loss to surrounding homeowners
Costs to lenders, local governments
Impact on national and global economies
http://www.responsiblelending.org
19
Impact of the Subprime Collapse
Projected Foreclosures: Loans Originated 1998-2001
http://www.responsiblelending.org
20
Impact of the Subprime Collapse
Projected Foreclosures: Loans Originated 2006
http://www.responsiblelending.org
21
Loan Features Carry Risk
 Among subprime loans originated in 2000, after
controlling for credit score:





ARMs had 72% greater risk of foreclosure than FRM.
Balloons had 36% greater risk than FRM.
Prepayment penalties associated with 52% greater risk.
Low/no doc loans with 29% greater risk.
Purchase money with 29% greater risk than refinance.
http://www.responsiblelending.org
22
Higher-Cost Home Loan Purpose
Purchase
41.4%
Refinance
54.2%
Home Improvement
4.4%
Source: 2006 HMDA: First Lien, Owner-Occupied Conventional Mortgages
http://www.responsiblelending.org
23
Higher cost 1st lien total loans
2006 HMDA
# Higher cost
 African American
 Latino
 White
411,040
467,373
1,205,720
% of total
52.5%
40.8%
22.5%
Source: 2006 HMDA: First Lien, Owner-Occupied Conventional Mortgages
http://www.responsiblelending.org
24
Higher cost 1st lien refi loans
2006 HMDA
# Higher cost
 African American
 Latino
 White
216,151
200,405
684,624
% of total
52.5%
37.2%
26.0%
Source: 2006 HMDA: First Lien, Owner-Occupied Conventional Mortgages
http://www.responsiblelending.org
25
Higher cost 1st lien purchase loans
2006 HMDA
 African American
 Latino
 White
# Higher cost
% of total
176,930
250,941
458,098
52.8%
45.0%
18.4%
Source: 2006 HMDA: First Lien, Owner-Occupied Conventional Mortgages
http://www.responsiblelending.org
26
Subprime Homeownership:
a Net Loss
# homeowners (000s)
400
New
homeowners
200
0
Projected
foreclosures
-200
-400
Net
Homeownership
Loss
-600
-800
98
99
00
01
02
03
04
05
06
http://www.responsiblelending.org
27
Baltimore Foreclosure Filings and
Race
http://www.responsiblelending.org
28
http://www.responsiblelending.org
29
Payment Option ARM’s
The Next Wave of Payment Shocks
Another complex product that has put many low-income families at risk is
the payment option adjustable-rate mortgage (POARM):
This product allows people to make monthly payments that do not
cover principal and interest, which means that the home experiences
“negative amortization” – that is, the principal balance of the loan grows
larger – during the period that the minimum payment is being made.
Unfortunately, lenders like Countrywide offered these loans to
borrowers for whom they were not suited, structured the products so that
the payments substantially increase in five years or less when they hit their
negative amortization cap, used excessive teaser rates, and failed to
document income.
Unlike 2/28s, the POARMs that were poorly underwritten are
largely Alt-A mortgages as opposed to subprime.
http://www.responsiblelending.org
30
Payment Option ARM’s
The Next Wave of Payment Shocks
The next wave of mortgage defaults will likely result from
the widespread use of a nontraditional mortgage product known
as payment-option adjustable-rate mortgages, or Payment
Option ARMs (POARMs).
These complicated financial products, which can lead to
increased debt and dramatic payment shocks, have largely been
overshadowed by the collapse of the subprime market.
However, because of the dangerous structure of POARMs
and their prevalence in certain markets, these mortgages are
likely to exacerbate the housing crisis over the next few years.
http://www.responsiblelending.org
31
Payment Option ARM’s
The Next Wave of Payment Shocks
Double Whammy:
Negative Amortization + Interest Rate Shock
Unlike traditional fixed-rate mortgages, which require borrowers to
pay a set amount that covers both accumulated monthly interest and
a portion of the loan principal so that the loan is paid down each
month, POARMs can actually lead to an increase in the loan balance
over time, leaving borrowers with greater debt than they initially
took on. These loans are particularly pernicious because they usually
start off with a very low “teaser rate” that quickly resets to a much
higher rate. This rate reset, combined with a growing loan balance,
often results in an unaffordable payment shock for borrowers.
http://www.responsiblelending.org
32
Payment Option ARM’s
The Next Wave of Payment Shocks
Negative Amortization
Whereas traditional fixed-rate loans are structured so that borrowers pay a
fixed amount each month that guarantees a decrease in the amount owed over
time, POARMs do not. Generally speaking, each month POARMs allow
borrowers to pay the fully-amortizing payment amount (i.e. interest plus
principal), an amount equal only to the interest owed, or a minimum payment
that is actually less than the accumulated monthly interest. Because of this
third option, POARMs can, and often do, actually lead to an increase in the
balance of the loan or “negative amortization.” That is, these loans are
structured in such a way that borrowers may become increasingly in
debt over time. Though there generally is a limit on how high the loan
balance can go, once this limit is hit borrowers lose payment options and face
dramatic increases in monthly payments.
http://www.responsiblelending.org
33
Payment Option ARM’s
The Next Wave of Payment Shocks
Interest Rate Shock
As an added danger, these loans often start out with a very low
initial “teaser rate”—from one to three percent—which are in
effect for a short time In fact, this low starting interest rate can
be in effect for as little as one day to one month, after which the
interest rate resets (usually to seven to nine percent) and changes
monthly. The combination of an adjustable interest rate with a
growing loan balance owed can lead to severe payment shocks to
borrowers.
http://www.responsiblelending.org
34
Aftermath of Foreclosures:
Crisis and Responses
http://www.responsiblelending.org
 Subprime production in the fourth quarter of 2007 was
less than half that of the previous quarter, which in
turn produced half of the volume of the quarter before
it.
 According to Inside B&C Lending, an estimated 192.5
billion is subprime mortgages were originated in 2007.
That was down a stunning 67.9 percent from the
previous year. And lenders originated a paltry $13.5
billion in subprime mortgages in the fourth quarter of
2007, the lowest quarterly production on a record.
http://www.responsiblelending.org
36
 FHA endorsement volume outpaced subprime originations
in the fourth quarter of 2007 for the first time since 2001.
 Seven of the top 20 subprime lenders in 2007 had zero
subprime originations in the fourth quarter, either because
they abandoned the products voluntarily or because they
were out of business
 The subprime share of total MBS issuance fell to a dismal
3.5 percent in the fourth quarter of 2007, according to the
Inside Mortgage Finance MBS Database. That’s well
below the sector’s 21.6 percent share for 2005.
http://www.responsiblelending.org
37
Loan Modification
 Very few homeowners who cannot pay their mortgages
will be able to sell or refinance.
 Loan servicers who could modify loans to make them
more affordable aren’t doing so in sufficient numbers:
A recent report by Moody’s Investors Service (focusing
on Jan-Mar 2008) found that loan servicers had only
modified 9.8 percent of mortgages that increased to
higher rates, while the Dec 2007 survey reported only
3.5 percent.
(The survey includes information from ten servicers with a total
servicing volume of approximately $550 billion. These servicers
constitute about 50% of the total US subprime servicing market)
http://www.responsiblelending.org
38
The Moody’s survey also reports that:
 There has been a relatively high rate of re-defaults
on loans that were modified in 2007. The survey
finds 42% of loans that were modified in the first
half of 2007 were 90+ days delinquent as of
March 31, 2008.
 Servicers continue to be extremely challenged by
the unprecedented level of delinquencies and
reduction in profitability.
http://www.responsiblelending.org
39
Local Impact of Foreclosure Crisis
http://www.responsiblelending.org
40
Local Impact of Foreclosure Crisis
Virginia Subprime Foreclosure Starts:
2003-2007
http://www.responsiblelending.org
41
Policy Responses
http://www.responsiblelending.org
Snapshot of Housing Market’s
Distressing Trends
Based on HOPE NOW numbers recently released and
the most recent Mortgage Bankers Association’s
National Delinquency Survey, released last month
 Seriously delinquent loans are at a record high for both
prime and subprime loans.
 The MBA survey shows over 16 percent of subprime loans
were "seriously delinquent," that is 90-days or more
delinquent or in foreclosure, at the end of March. This is
double the 8 percent rate from one year earlier and the
highest on record.
 Furthermore, though defaults on subprime loans continue
to drive the overall housing crisis, prime loans are also
faltering, with the percent of seriously delinquent prime
loans more than doubling from a year earlier.
http://www.responsiblelending.org
43
Snapshot of Housing Market’s
Distressing Trends
 The number of borrowers who lost their homes to
foreclosure soared in May.
 HOPE NOW estimates that 85,000 families lost their
homes to foreclosure in May, the highest one-month
figure since the inception of the program. This
represents a 35 percent increase over three months
and more than double the number from July of last
year.
 The total number of foreclosures since the program
began last July is now estimated at almost 650,000.
http://www.responsiblelending.org
44
Snapshot of Housing Market’s
Distressing Trends
 The number of borrowers who received loan modifications is
small compared to the number who lost their home or who are
in danger of losing their home.
 While HOPE NOW reported 276,000 loans either entered or
completed foreclosure in May, only 70,000 received loan
modifications during the month. That is, almost four times as
many families lost their home or are in the process of losing their
home as received loan modifications from servicers.
 Furthermore, the data provided by HOPE NOW understates the
number of loans in foreclosure, as it only includes those homes
that entered foreclosure and those that completed foreclosure
during the month, not the total number currently in the foreclosure
process. In fact, 1.1 million families were in foreclosure at the end
of March.
http://www.responsiblelending.org
45
Snapshot of Housing Market’s
Distressing Trends
 The number of families in danger of losing their homes
continues to be near record highs.
 According to the data released by HOPE NOW, an
estimated 1,977,000 loans were 60-days or more delinquent
or entered foreclosure in May, the second highest number
since the program began reporting data last July. This is an
astonishing 43 percent increase since July of last year. This
trend is consistent with the new MBA study, which shows
that more than 5 percent of all loans were at least 60-days
delinquent or in foreclosure at the end of the first quarter of
2008, compared to just over 3 percent a year earlier.
http://www.responsiblelending.org
46
The numbers show the problem is getting worse. And
the fact is that nothing is known about the effectiveness
of the loan modifications or workouts that are being
provided by servicers.
HOPE NOW gives little information on the types of
modifications being completed by industry or on the
performance of those newly modified loans. HOPE
NOW's data provides little insight into whether its'
members efforts are resulting in long-term, sustainable
solutions for homeowners.
http://www.responsiblelending.org
47
Addressing the Foreclosure Crisis
Court-Supervised Loan Modifications – Prevent
the Most Damage
Emergency Home Ownership and Mortgage Equity Protection Act (HR 3609);
Helping Families Save Their Homes in Bankruptcy Act of 2007 (S 2136)
We could prevent up to 600,000 foreclosures by allowing courts to supervise
loan modifications, effectively mediating between lenders and homeowners. To
do this, we don't need any public funding or a new bureaucracy—we can use the
existing bankruptcy court system, which allows borrowers to modify all debts
except loans against their personal residence. The remedy in HR 3609/S2136
would apply only to people who are now holding subprime or nontraditional
loans and who are truly desperate, about to lose their house. This proposal has
passed both House and Senate Judiciary Committees and attracted bipartisan
support (13 co-sponsors in the Senate and 86 in the House), but so far industry
opposition has been successful in preventing this solution from moving forward.
http://www.responsiblelending.org
48
The Impact of Court-Supervised
Modifications on Subprime Foreclosures in
Virginia
Expected benefit of court-supervised
modifications for Virginia families
http://www.responsiblelending.org
49
Addressing the Foreclosure Crisis:
H.R. 6076, Rep. Matsui (D-CA)
Foreclosure Deferment – Give Homeowners More Time
Home Retention and Economic Stabilization Act (HR 6076)
This bill would allow struggling homeowners who meet certain
criteria to delay a foreclosure sale by up to nine months, so long as
they make reasonable monthly mortgage payment to their lender and
maintain the property responsibly. Only subprime mortgages and
mortgages with negative amortization are eligible. The proposed
timeout would benefit homeowners and industry in several ways:
(1) Allows more time for homeowners to seek a solution through a
loan modification, refinance, or home sale
(2) more time for servicers to work with troubled homeowners
(3) more time for new programs, such as an FHA expansion, to be
implemented.
http://www.responsiblelending.org
50
H.R. 6076 – Home Retention and
Economic Stabilization Act
Why is H.R. 6076 needed?
Approximately 20,000 subprime foreclosures are starting every week, and despite
the efforts of voluntary programs like HOPE NOW, the situation is projected to
get worse. Housing counselors and loan servicers are overwhelmed; the common
presence of “piggy back” second mortgages makes it virtually impossible for
servicers to modify loans even when they want to; and credit markets are
jammed, making refinancing into more affordable loans especially difficult.
Avoiding unnecessary foreclosures is urgently needed, not only for the sake of
the families immediately impacted, but for the good of their neighbors,
communities, state and local governments, and the housing market and the
economy nationwide. A short-term delay in processing foreclosures will allow
time for lenders and servicers to increase their capacities to meet current need, for
credit markets to stabilize, and for legislative solutions, such as the FHA
refinancing program under consideration in Congress, to take effect.
http://www.responsiblelending.org
51
H.R. 6076 – Home Retention and
Economic Stabilization Act
What does H.R. 6076 do?
H.R. 6076 allows struggling homeowners who meet
certain criteria to delay a foreclosure sale by up to
nine months, so long as they comply with the
statutory obligation to make reasonable monthly
mortgage payments, maintain the property
responsibly, and respond to any reasonable requests
from the lender. H.R. 6076 also preserves the ability
of states to provide additional foreclosure protections
to their residents.
http://www.responsiblelending.org
52
H.R. 6076 – Home Retention and
Economic Stabilization Act
Does H.R. 6076 permanently stop
any foreclosures?
No. The bill only provides a nine-month deferment
period to allow time for an alternative solution to be
reached.
http://www.responsiblelending.org
53
H.R. 6076 – Home Retention and
Economic Stabilization Act
Does H.R. 6076 provide a windfall
for wealthy Americans?
No. Only consumers who live in their home and
intend to remain there are eligible. Investors and
speculators are not eligible. In addition, only
homeowners with income below 200% of area
median income are eligible.
http://www.responsiblelending.org
54
H.R. 6076 – Home Retention and
Economic Stabilization Act
Does H.R. 6076 help consumers in
traditional prime mortgages?
No. Only subprime and negative amortization
mortgages, as defined by the bill, are eligible.
Subprime mortgages are higher-cost mortgages.
Negative amortization mortgages are those with the
potential for the principal balance to increase over
time.
http://www.responsiblelending.org
55
H.R. 6076 – Home Retention and
Economic Stabilization Act
Does H.R. 6076 help consumers
who really don’t need help?
No. Consumers are only eligible if they have fallen
60 days delinquent on a subprime mortgage or when
their original monthly payment either has increased or
will soon increase because the rate has reset.
http://www.responsiblelending.org
56
H.R. 6076 – Home Retention and
Economic Stabilization Act
Does H.R. 6076 allow consumers to
stop making monthly payments?
No. The consumer must continue to make payments
during the deferment period, equal to the lower of (i)
the original minimum monthly payment, i.e., at the
“teaser” rate; or (ii) a payment based on a market
interest rate plus a 1% risk premium applied to the
principal owed.
http://www.responsiblelending.org
57
H.R. 6076 – Home Retention and
Economic Stabilization Act
Does H.R. 6076 forgive debt?
No. Any deferred amounts will be amortized and
paid over the life of the loan at the end of the
deferment period.
http://www.responsiblelending.org
58
H.R. 6076 – Home Retention and
Economic Stabilization Act
When does the deferment period
start and end?
It starts when the consumer sends notice to the
creditor or servicer that he/she is exercising his/her
deferral right. It ends 270 days later. It will end
sooner, however, if the consumer fails to satisfy its
obligations, if the consumer enters into an affordable
modification plan with the creditor/servicer, or by
court order.
http://www.responsiblelending.org
59
Addressing the Foreclosure Crisis
Focus on FHA – Strengthen Oversight and
Provide More Resources
American Housing Rescue and Foreclosure Prevention Act of 2008 (HR 3221)
Both the House and Senate versions of this bill address a variety of issues related to the
foreclosure epidemic. Among the provisions (but not inclusive): expand the capacity of the
Federal Housing Administration (FHA) to insure refinances on distressed mortgages; fund
state and local governments to redevelop foreclosed homes; strengthen regulation of
government-sponsored enterprises and the Federal Home Loan Bank system; protect
members of the military from foreclosures under certain conditions; and protect mortgage
servicers who modify loans from investor lawsuits. In general, there is strong bipartisan
support in Congress for this bill, though members continue to debate issues that involve
timing and funding.
Overall, 3221 represents a positive step, but it continues to rely on voluntary industry
efforts to modify loans. We must do more to prevent unnecessary foreclosures by
providing requirements or stronger incentives to servicers and holders of subprime
mortgage debt to modify loans now held by struggling homeowners.
http://www.responsiblelending.org
60
Addressing the Foreclosure Crisis
FDIC – Allow Treasury to Make New Loans
The FDIC is urging Congress to reduce foreclosures and stabilize
the housing market by authorizing the Treasury Department to
make loans to homeowners with unaffordable mortgages to pay
down up to 20% of the principal loan amount.. Treasury would
sell debt to fund the plan at no cost to taxpayers. The costs of
repayment and financing would be borne by homeowners and loan
investors. Mortgage investors would apply to Treasury for funds
and assume responsibility for restructuring loans that comply with
the rules of the program (e.g., an interest rate cap, no prepayment
penalties). Treasury would guarantee repayment if a homeowner
defaults on the new loan.
http://www.responsiblelending.org
61
Addressing the Foreclosure Crisis
FDIC – Allow Treasury to Make New Loans
The FDIC is urging Congress to reduce foreclosures and stabilize the housing
market by authorizing the Treasury Department to make loans to homeowners
with unaffordable mortgages to pay down up to 20% of the principal loan
amount.. Treasury would sell debt to fund the plan at no cost to taxpayers. The
costs of repayment and financing would be borne by homeowners and loan
investors. Mortgage investors would apply to Treasury for funds and assume
responsibility for restructuring loans that comply with the rules of the program
(e.g., an interest rate cap, no prepayment penalties). Treasury would guarantee
repayment if a homeowner defaults on the new loan.
While this approach is promising in many respects—the FDIC estimates loan
modifications for about 1 million unsustainable mortgages—it also includes
some of the same drawbacks as proposed FHA legislation, since investors'
participation would be voluntary, and it isn't clear how this program would
remove obstacles posed by second mortgages attached to troubled loans.
http://www.responsiblelending.org
62
Better Loan Servicing
Improve Efforts to Work with Homeowners
Foreclosure Prevention and Sound Mortgage Servicing
Act of 2008 (HR 5679) introduced by Rep. Waters (D-CA)
Amends the Real Estate Settlement Procedures Act of
1974 to require loan servicers to engage in reasonable
loss mitigation activities before foreclosing. If passed,
this could help reduce foreclosures and increase
constructive efforts to work with struggling
homeowners.
http://www.responsiblelending.org
63
Focus on the Future
Prevent Another Cycle of Reckless Lending
Home Ownership Preservation and Protection Act of 2007 (S 2452)
This bill would help stop many abusive lending practices that led to
the foreclosure crisis, including abusive prepayment penalties,
yield-spread premiums (extra compensation paid to brokers that
encourage them to overcharge borrowers), and lack of generally
accepted underwriting practices by lenders. Already a number of
states have passed or are actively considering these types of
protections to prevent more unnecessary foreclosures in the
future. A strong federal law would guarantee minimum protections
nationwide that would help stop reckless lending practices that
became commonplace during the subprime heyday.
http://www.responsiblelending.org
64
New Federal Reserve Rules
On July 14th the Federal Reserve adopted key protections for
borrowers who receive subprime loans, including:
 Addressing the most substantial cause of current foreclosures, lenders must
carefully evaluate a borrower’s ability to repay a subprime loan, and verify
the income used to do so;
 Lenders cannot impose abusive prepayment penalties that trap borrowers in
short-term subprime ARMs;
 Lenders must escrow for taxes and insurance.
The new rules do not cover nontraditional or exotic loans that had
a major role in today’s massive foreclosures, such as paymentoption ARMs or interest only loans that don’t meet the subprime
definition.
http://www.responsiblelending.org
65
Principles of Responsible Lending
Eliminate incentives for lenders to originate
predatory loans
 Create a fair, competitive market that responsibly
provides credit to consumers
 Guarantee access to justice for families caught in
abusive loans
 Preserve essential federal and state consumer
safeguards

http://www.responsiblelending.org
66
Policy Recommendations to
Prevent Future Abuses
 Require lenders and brokers to serve the interests
of homeowners
 Strengthen underwriting requirements
 Make enforcement of existing laws count
 Support laws and policies that reduce abusive
lending while supporting a strong market
http://www.responsiblelending.org
67
What do we do now?
 Help Current Homeowners
- Loss Mitigation
- Bankruptcy Reform
- Foreclosure assistance
 Protect Future Borrowers
- Ability to repay
- Regulation of broker fees
- Broker duties
- Assignee liability
http://www.responsiblelending.org
68
CRL Can Help

Research on borrowers and industry

Up-to-date information on industry trends

Links to other resources and organizations

Technical assistance in understanding the issues
 Collaboration
on meetings with industry
http://www.responsiblelending.org
69
Any Other Questions?
Call CRL
(919) 313-8500
(202) 349-1850
Josh Nassar
[email protected]
(202) 349-1865
Visit www.responsiblelending.org
http://www.responsiblelending.org
70