US Representative Barney Frank, who chairs the House Financial Services Committee, is scheduled to meet this morning with mortgage brokers and lenders at the Federal Reserve Bank in Boston. He has invited a group of lenders that include Countrywide, GMAC, Washington Mutual,
Frank has proposed an important bill that would require the licensing and registration of mortgage originators, eliminate prepayment penalties that discourage buyers from refinancing on better terms, and ban lenders from paying rewards to brokers or their employees who manipulate borrowers into accepting higher interest rates than they are eligible to receive. Barney’s proposed ban on incentives and rewards is pissing off the mortgage industry, but it is paramount that this bills gets passed to weed out the unscrupulous mortgage brokers and originators.
Massachusetts Governor Patrick is planning some great efforts also. Patrick is placing pressure on lenders to provide $5,000 for rent and moving expenses to families facing foreclosure. Only Option One Mortgage Corp. and Massachusetts Credit Union League have stepped up to the plate. The Governor has more hope for a short sales strategy that allows borrowers to sell their homes at current market value and pay back less than the full value of the loan. Lenders in such cases would be spared the cost of foreclosing on the properties and have the added benefit of being introduced to qualified potential buyers by nonprofit housing groups.
Frank plans to spend some of the day trying to encourage workout plans by introducing lenders to representatives of these nonprofit housing advocacy groups.
{ 28 comments… read them below or add one }
Congress is considering legislation to hold the Lender liable for loans made to borrowers that fail. The legislation is saying that the lenders must predict whether the borrowers will be able to be able to repay the loan in the future. The Lender cannot predict the future. Clearly,. it is impossible to predict changes to the borrower’s income or expenses in the future… HOWEVER, it is possible to help the borrower monitor his/her ability to stay on-track and not succumb to the forces that resulted in his/her poor credit rating. It is possible to help the borrower monitor his/her financial situation by careful and specific FINANCIAL LITERACY tools that research has proven to help guide the borrower to avoid financial distress. These tools will work if we use them. My research has proven that it is possible to guide the borrower if he/she is willing to do so. This should be a requirement of all borrowers, especially if the new proposed legislation takes effect. How else can the lender uphold the new fiduciary responsibilities that this new law will impose on the lender ?
RE: “How else can the lender uphold the new fiduciary responsibilities that this new law will impose on the lender ?”
Um… how about not extending credit to anyone who can fog a mirror?
How about creating loan programs that home owners (read as people who plan to own the home, not rent it from a bank through interest only loans) can afford?
How about not making loans based on a “stated” income but actually verifying such income?
How about not making “no documentation” loans for anyone willing to accept a higher interest rate and pay some extra fees?
How about not making loans with 100% LTVs, or in some cases 110% LTVs?
How about not providing low low teaser rates that explode in 2 to 3 years?
How about not allowing the deadly neg am?
How about making sure the borrower can pay and not just basing the loan on equity?
While it’s certainly a philosophy/culture/person-choice type discussion, there are cases where our government steps in to protect us from our own inadequacies, or even stupidity… such as seatbelt laws, gambling laws, etc.. Allowing mortgage professionals to reap huge (read as trillions of dollars) in profits from unsophisticated borrowers just ain’t right. In fact it’s downright predatory.
- Paul J. Molinaro, Esq.
I am aware of this legislation and I think it is great. However, I wish this was passed a long time ago. You would think that no loans would be made without figuring out the “future” ability for borrowers to repay at rate resets. I agree with most of your comments.
In regards to your question: ”How else can the lender uphold the new fiduciary responsibilities that this new law will impose on the lender ?
I answer your question with a question: “When did lenders ever uphold to a fiduciary duty to their clients and the law?”
Couldn’t of said it better myself!
Looks like the Professor did a drive by post and sped off down the boulevard… or maybe he came back around the block and didn’t like being challenged on his comments.
Either way… no reply. Kinda disappointing.
- Paul
I agree. My main point was that we now have the opportunity to help the subprime borrower be better able to manage his/her finances. My suggestion was that the same tool that will help the borrower monitor his/her financial situation, will also be a tool that the Lender can use for due diligence documentation. The monitoring tool will help guide the borrower to stay on track, even as financial conditions change. I am certain that the borrower will welcome this guidance. Right now, the borrower has no guidance. I will also argue that we can save many borrower from default if we can get this tool to them speedily.
Hey Paul… Note my comment to Moe..
Everyone is overlooking a very important factor in this crisis. Nothing will work unless the present subprime borrower and future borrower get some vital knowledge on how to manage spending and credit card debt. Clearly, there were abuses by some lenders, but they should not be the only ones who should get the blame. All of the talk of loan modification and refinancing is useless because the borrower will still be like a boat without a paddle when is comes to managing his/her money. I believe that any legislation should also hold the borrower responsible to seek financial literacy guidance before he/she is given any loan. Without this guidance , we will go through this crisis again, even with the protections expressed in the proposed legislation. I must also add, that traditional financial literacy education is not working. The current form of FL education is “memorized, regurgitated , and forgotten”… We need a new and innovative FL delivery system that will help guide everyone as to how to manage their spending, saving, and credit card use.
What is this tool? Is it a computer program? I understand what you are conveying. It is a good idea but I just don’t see how it can be effectively implemented. Maybe before each mortgage is taken out and its part of a counseling process.
As far as the lender, that’s why they have underwriting.
Again, I think what you are proposing is sorely needed and wise but the implementation in this inpatient society will be the difficult part. A lot of people spend more time shopping for a purse or shoes, then a mortgage. Hopefully that will change now. I’m not knocking borrowers. I just feel they have put way too much trust in loan originators over the years and thats why we are in this mess.
As a professor and CPA for the past 30 years, I have researched this problem seeking a solution. I developed a web-based program that will be accessible to millions who are now at risk. There is no way that the counseling services can reach so many, since their approach is labor and time intensive. My program involves guiding and teaching the borrower that he/she can make the reset mortgage payments even though everyone is betting that the borrower will fail. Furthermore, in my conversations with counseling services I have learned that the main problem is recidivism. Once the borrower leaves, he/she never comes back. My solution is that this proigram allows a monitoring of the borrower’s financial condition so that if he/she wanders off track, it will help get the borrower back on track. My program uses Artificial Intelligence technology, which allows an interaction with the borrower. It functions as a “self-contained-advisor”. In this way, we can save many borrowers from default. For example, let’s say the monthly reset involves an increase of $400/month. With proper explanation and guidance, this is equivalent to $13/day. Hey, by lowering the spending by $13 per day, the borrower can save his/her home. This is the financial guidance that I am talking about, and it is critical that it be given to the borower at this time. No one is going to deliver this guidance, other than by a new and innovative web-based program. I think that my idea will work and save many who otherwise will default.
What you are proposing is a brilliant idea. But my suspicions are that human behavior will over ride any good intention and special software that you may have. Again, this sounds great and I may play devil’s advocate a lot, but I’m a realist and I just don’t see how we can make someone do this.
You are 100% correct. Recidivism is the American way for most people. Usually the pain is obviously not enough from past actions to put any bearing on their future actions, thus creating a cyclical behavior and thus, repeated debt problems. It’s been my experience if you give someone a hand, they take an arm. If you give them a credit card with a limit, they are going to take it to that limit.
This may be great to implement with non-profits as part of their homeowner counseling that is offered. For people that cannot obtain a loan modification, maybe they are put on this program?
While I certainly would not argue the side that some borrowers need to learn better money management skills, the borrowers were not wrong in putting their trust in real estate professionals. As a society we trust professionals all the time. Does a patient have to verify the dosage of every medicine his or her doctor prescribes? Or can he or she trust that the doctor puts the best interests of the patient first. Drastic example? Yes, so let me knock it down a notch. After I get the brake pads replaced on my old car, do I need to put ‘er up on the lift and verify that she’ll stop when I press the pedal, or can I trust that the professional I hired to do the brake job did the job properly.
Our government puts a fiduciary duty on brokers NOT on the borrowers. The brokers and lenders are the professionals.
I’m sure the Professor’s computer program will identify a borrower circling the drain, but that’s not at all the point. The lenders and brokers took full advantage of a market they controlled. They are the ones that need more oversight and restriction. They are the ones who need to do the right thing and help those that they fleeced.
- Paul
Another point that should be addressed in this legislation is the mention of one of the gauges which determines the borrower’s qualification for the mortgage. Everyone considers that the 50%(or 45%) Debt/Income ratio is a qualifier for the mortgage. In my opinion, there is another ratio that bears greater importance if we want to determine whether the borrower will be able to repay the mortgage. The Housing Expense Ratio is Housing Expense/ Income. There is a recognized range that relates to the expenditure of housing expenses..such as mortgage payment, interest, R/E taxes, insurance, repairs, etc. This ratio is a better determinant of the ability to repay. I would conjecture that a borrower may have a lower than 45-50% Debt/Income ratio but if the Housing Expense Ratio is above the recognized range, which research has proven to apply, it is possible that the borrower may have selected a mortgage that he/she will not be able to handle…even though the Debt/Income ratio is within the range of the FSC legislation.
RE: “I would conjecture that a borrower may have a lower than 45-50% Debt/Income ratio but if the Housing Expense Ratio is above the recognized range, which research has proven to apply, it is possible that the borrower may have selected a mortgage that he/she will not be able to handle”
professor, it you may have found a tool that helps BROKERS better serve their borrowers. This would help these brokers to use professional skills in determining the best mortgage program for their borrowers. The borrowers should not have to rely on themselves to learns all this complicated ratio slash statistics slash pseudocalculus stuff. That’s why borrowers pay HUGE sums (read as way too much money) to these brokers. Again, I can’t imagine why one would place even blame on the average Joe borrower and his broker. Yes, of course there are borrowers who are financial wizards who knew way more than their brokers, but that is the exception. Borrowers relied, and were reasonable in that reliance, on brokers. Brokers knew of that reliance. When brokers placed borrowers in loans that those borrowers could not afford, or loans that were not the best deals available, those brokers breached their duties. The underwriters for the lenders used willful blindness when approving applications that should have raised red flags, and loans went through. The lenders tried to shield their liability from predatory lending accusations by sticking a broker between themselves and the borrowers. Why else would these lenders allow brokers to reap such huge profits for merely attracting borrowers? The lenders could have put a bunch of application takers on staff at salary and kept the huge commissions for themselves, but they chose to create a middle-man shield. Fortunately, federal and state laws allow penetration of that shield and places liability for predatory lending practices on the lenders as well as the brokers… but I digress.
- Paul
Paul, I see your point and I fully agree. I am referring to the future. Ther determination of whethger the borrower qualifies for future loans should also consider the housing expense ratio. In fact, it would be wise to help the borrower monitor his/her spending on these expenses to enable them to stay on-track. These and other ratios can be the guides that I was referring to.
Here’s a link I posted under another heading…
http://news.medill.northwestern.edu/chicago/news.aspx?id=66689
There’s a quote in this article that fits so well here…
“We’re starting to see foreclosures on people who have credit scores of 750 and a family income of $150,000,” he says. “It’s not the person, it’s the loan.”
Borrowers get into trouble paying these new loans not because the borrowers go on a spending spress… it is because the loan adjusts upward and the borrower’s income does not. No hard math here.
It’s the loan!!!
- Paul
Paul…You have given the best example for the need for the ability to “monitor” our financial health in order to avoid failure. It’s not the loan..its the person’s awareness of financial literacy. Your statement is further proof that even high income earners with high FICO scores may fail. In fact, we are now seeing that PRIME borrowers are also going into default. This makes my point that we all need FL awareness…but not simply FL education..We need to test our financial health. The problem is that people don’t even realize that they are “financially ill” until they have slipped down the slippery slope towards financial distress. They have no idea that they are in trouble until it is too late. Try this analogy….Even though we take vitamins, do exercise, eat healthy, and do the right things…nevertheless, we still take an annual blood test to see if we are actually ,in fact, healthy. By the same taken…we also have financial blood that should be tested to see if we are “financially healthy”. Research has proven that we can test our Personal Financial Blood and determine financial weaknesses in time for correction. I will venture to state that anyone making $150,000 annually and having a FICO score of 700, also needs an annual Personal Financial Blood test to see if they are in fact financially healthy. Financial distress can be avoided. That is why I propose that everyone, especially the Subprime Borrower, be given this web-based guidance in order to help avoid future defaults..even after loan modification. If it can happen to the high income high FICO score individual…it can happen to the subprime borrower. Correct me if I am wrong…aren’t we now involved in a massive effort to save these borrowers from foreclosure? I must stress that along with loan modification, we make a deal with the subprime borrower to accept guidance to help him/her stay on-track and avoid future default and foreclosure. We now have that opportunity..let’s recognize that the subprime borrower can use this guidance..and so can we all.
I just came across this blog — many interesting thoughts here, particularly from Dr. Bornstein. Unfortunately, while Dr. Bornstein is offering a real mechanism for allowing both individuals and the financial industry to monitor the consumer’s financial health, there’s an underlying sentiment that it’s up to the real estate professionals to ensure the health and compliance of borrowers. At what point do we stop requiring government to “protect us from our own inadequacies, or even stupidity”, and start requiring people to be responsible for themselves and the outomes that they produce by their decisions??
The proposed reform legislation contains some much needed components to better regulate the industry, as well as an improved standard of fiduciary responsibility that the industry owns. But this legislation does nothing to require the consumer to be better educated or to give them the tools to make better decisions. At what point do we demand a better standard of consumer behavior and accountability? It’s not sufficient to chalk it up to “human nature” and concede that it’s OK for consumers to be more interested in American Idol than their own financial literacy, as Dr. Bornstein decribes it. There’s room to improve this legislation by incorporating some of Dr. Bornstein’s ideas and by placing a balance of responsibility on the consumer to become educated about the things that impact their life.
To Harry C..I thank you for your supporting comment. I am saying that now is the time when we say to this borrower..”Let’s make a deal, we will help you by loan modification, but you (the borrower) will commit to do your part by controlling your spending with guidance”. We now have a unique opportunity to gently guide this financially illiterate borrower. That is the least that we can ask of him/her, especially since we are giving them a “gift” by lowering their mortgage payment. What is wrong with helping consumers be more responsible?.
What are we waiting for? It seems that we are just sitting-by helplessly and awaiting the expected defaults and blaming everyone for this tragedy that is unfolding and may take our economy with it. I presented a solution to this crisis, at the Third Annual Subprime ABS conference on Sep. 19-20, 2007 in Las Vegas. My solution involves helping the borrower understand how it is possible to avoid default. There are millions at risk. Let’s not think that the counseling agencies will be able to get to a significant portion of these borrowers who need help. Anyway, even if you modify some of these borrower’s mortgages, don’t you think it wise to guide them not to make the spending and debt mistakes that got them into this mess in the first place? Here is a link to my Powerpoint that I presented to the securitization conference in Sept., 2007. It offers a solution that should be implemented. What do you think?
http://www.imn.org/esb967/presentations/Sam_Bornstein_D2_430.ppt
To Harry…One more thing.. If the legislation passes which requires that the lender determine that the borrower have the ability to repay the mortgage at inception and in the future, the lender requires due diligence documentation to “hang his hat on” in order to repell lawsuits if the borrower fails. My web-based program can be that documentation because it determines not only whether the borrower can handle the mortgage at inception, but it also allows a “monitoring” of the borrower’s financial condition when changes occur. How can the lender predict such changes as lower income, higher family spending, etc?. The Personal Financial Blood Test allows the borrower to “monitor” his/her financial condition and be warned if he/she is slipping down the wrong path, in time for correction. This monitoring tool is the most effective way to identify problems before they result in financial distress. Therefore, the program can be effective both for the borrower and the lender.
Never before have so many said so much about which they knew so little.
Why not just have the government issue tests to all citizens and then they can decide who can borrow money and who cannot?
The market can and will fix itself and is alraedy doing so. When the smoke clears, underwriting standards will be more prudent and most of the quick money amateurs who have come into the industry in recent years will be gone. Proposals like Mr. Frank’s will do far more harm than good in terms of homeownership and credit availability. Be very careful.
Maybe we will all will be required to wear helmets because the sky is falling or the economy. I dunno. The Dr. and my mom made me wear a helmet when I was 9 for like 4 months because I kept cracking my noggin open and getting stiches. If I think back, it wasn’t the helmet that saved me from doing it again. It was the behavior I changed so I didn’t have to wear that damn helmet anymore. You know, stuff like jumping trash cans with no hands and stuff. So, maybe you can apply the helmet theory here…hmmmmmmmmm………….maybe like a shock devise that shocks people every time they pull out their credit cards.
Geez, I think the President just came by my blog. Oh so honored to have the President of Boy Scouts Chapter 7’s command leader come in and give us his 2 cents. Hey, I want my 2 cents back because I feel burned. He says:
“The market can and will fix itself and is alraedy doing so.”
YOU MUST BE JOKING AND WHAT BUBBLE HAVE YOU BEEN LIVING IN? Oh wait it’s BUBBLE BOY who just came out of the bubble to comment on my blog.
I dont beleive that people in a case, say someone owns a house for 25 years and they lived in it. Now they owe $50000 and its worth $300000 and they loose there job or get laid off, and they need to be able to tap into there equity on there house so they can pay bills and live while they look for or train for a new job.if this law comes to be they would have to sell there house righty away and not have a chance to save it and get back on there feet. How can some one be able to verify weather they have the ability to repay other than the equity, But if the borrowed say $150000 of there equity they could live and try to get a new job and if they cant then can still sell there house
I don’t believe that people in a case, say someone owns a house for 25 years and they lived in it. Now they owe $50000 and its worth $300000 and they loose there job or get laid off, and they need to be able to tap into there equity on there house so they can pay bills and live while they look for or train for a new job.if this law comes to be they would have to sell there house righty away and not have a chance to save it and get back on there feet. How can some one be able to verify weather they have the ability to repay other than the equity, But if the borrowed say $150000 of there equity they could live and try to get a new job and if they cant the can still sell there house
I dont beleive that people in a case, say someone owns a house for 25 years and they lived in it. Now they owe $50000 and its worth $300000 and they loose there job or get laid off, and they need to be able to tap into there equity on there house so they can pay bills and live while they look for or train for a new job.if this law comes to be they would have to sell there house righty away and not have a chance to save it and get back on there feet. How can some one be able to verify weather they have the ability to repay other than the equity, But if the borrowed say $150000 of there equity they could live and try to get a new job and if they cant the can still sell there house
They are going to eliminate rebates? So, the mortgage industry is going to be forced to sell mortgages at wholesale prices? What other industry is going to lie down for that… absurd.
You guys are living in a dreamworld. People fall into two categories; finicially responsible and not financially responsible. You are not going to change that. Look, it’s the banking industry that invented the adjustable mortgage in the mid-eighties in the first place! Now, they want to blame mortgage brokers for all the evil in the world today! What is it that makes you think people need to have their hands held throughout their mortgage term? What a bunch of nonsense. The only thing people want to know is how much is my payment and where do I mail the check…
This problem is not the fault of mortgage originators or lenders. It’s the fault of greedy and irresponsible people buying homes that should not be. When I was a retail originator, I routinely sent people away who made $2,000 a month with 3 kids and a $700 car payment. They lied about all the under-the-table income they were receiving… they would say and do anything to buy a house. I agree that U/W needs to be tightened, and that has already happened. The main thing that caused this mess is falling home prices…