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