FRB: Federal Reserve Bank of San Francisco - June 16, 2006 - Transcript

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of San Francisco
101 Market Street, San Francisco, California 94105
June 16, 2006

Agenda | Transcript

Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-225 | 226-250 | 251-254

Transcript	Line	Page
immigrant population but not exclusive to the immigrant	1	101
population, that there are ranges of preferred advisors, if	2	101
you will, or where somebody is apt to go looking for advice.	3	101
And have you -- what have you found with -- in that	4	101
respect and how does that -- how does that impact the service	5	101
that you get or the assistance that you get?	6	101
MS. LI: Well, I think that's a very important thing	7	101
to try to look at more closely. And I think I would respond	8	101
by saying two things to start with.	9	101
One, we really do need to have more HUD-certified I	10	101
would say housing counseling resources that are not only	11	101
available on the ground but I think placed in the various	12	101
communities where a lot of the nontraditional loan products	13	101
are getting distributed to, originated to.	14	101
I think that's really important because people will	15	101
respond to and trust and speak with people who they are	16	101
familiar with and I think often will have the language access	17	101
issues as well to make that more possible.	18	101
I also think that the second thing goes to the	19	101
requirement for some of these -- these I think nontraditional	20	101
products to have some form of required, if not mandatory,	21	101
counseling in the process.	22	101
Because we are seeing too many people, as legal	23	101
advocates anyway, who are going to housing counselors for	24	101
that individual one-on-one counseling about a loan that	25	101
they've already gotten into or a set of loans that they've	1	102
already gotten into that are predatory after the fact.	2	102
And right now under the current legal or regulatory	3	102
schemes, state and federal laws, there's very limited options	4	102
in which people can now get out of or undo what they end up	5	102
finding out are these predatory loans.	6	102
And that's a problem because we need to figure	7	102
out -- yes, I agree that there's -- it's great to see that	8	102
there's a voluntarily level of interest from all sides to	9	102
want to encourage financial literacy at an early stage, in	10	102
middle school, to see it happening as part of a larger	11	102
education campaign. I think to continue to move along on	12	102
that track is an incredibly essential approach.	13	102
But that alone we are seeing is not going to, I	14	102
think, change the problem. And I think another reason is	15	102
because of the channels -- the people that are now seeming	16	102
the most familiar and the most trustworthy are sometimes the	17	102
brokers and some lender representatives who are from your	18	102
churches, or referrals from your churches, who are from your	19	102
own community, who are the ones that --	20	102
Unfortunately though they may be referred to as the	21	102
bad actors of the broker and realtor industry, they do exist.	22	102
And so they're the ones that are managing to gain the most I	23	102
think successful access to the most vulnerable people to	24	102
these types of nontraditional products.	25	102
MR. OLSON: Lori, you talked in your presentation	1	103
about something that is critically important to us, which is	2	103
the revitalization of neighborhoods and the important role	3	103
that homeownership plays there and, therefore, the important	4	103
role of access to financing there.	5	103
I was around at the tail end of the discussion on	6	103
the HOEPA regs, and one of the concerns that we had with how	7	103
we set our trigger rates at that time was the concern that	8	103
quality institutions would not want to identify with the	9	103
HOEPA product and, therefore, what we would see in some	10	103
markets is quality institutions maybe moving away from some	11	103
of the higher risk markets.	12	103
Part of the delicate balance that we play is how we	13	103
do that, how we continue to let lenders know that we want to	14	103
see the quality lenders and brokers because -- just in the	15	103
essence of full disclosure, I have a nephew who is a mortgage	16	103
broker. I'm very proud of him. He's a very high integrity	17	103
person. So I know that that person is -- that's the central	18	103
tendency if you will.	19	103
But nonetheless, how do we -- talk to me about -- or	20	103
talk to us about what some of your experience is in that	21	103
respect with how you -- how you encourage lenders without	22	103
mandating lenders to come into a marketplace.	23	103
MS. GAY: No one wins with foreclosure.	24	103
MR. OLSON: Amen. You are so right.	25	103
MS. GAY: We don't win. We've estimated it costs	1	104
about 40 to $50,000 to foreclose on someone. Nationally	2	104
we've initiated the Center for Foreclosure Solutions, which I	3	104
know the Federal Reserve has supported. And we want to see	4	104
more of those centers started all over the country because	5	104
that's where we are.	6	104
We're up 63 percent in L.A. county from a year ago	7	104
for foreclosures. Where are they happening? Seven times the	8	104
rate of foreclosure happens in Central City L.A., South Bay	9	104
L.A., San Pedro-Wilmington area, and East Valley where	10	104
Spanish is the primary language.	11	104
So we see -- what I'd say is to encourage the	12	104
conventional mainstream to stay. We have to talk about	13	104
beginning with the end in mind. We want to keep people in	14	104
their homes. We have to figure out a way that it's seen as	15	104
profitable to lend to people who may be perceived as poorer	16	104
credit quality and risky.	17	104
We've never had a foreclosure in 22 years in	18	104
business in NHS. And across the country the foreclosure rate	19	104
is less than three percent with the 250 nonprofits doing it.	20	104
We're not perfect. We don't know it all. We work with local	21	104
banks.	22	104
But there has got to be a way to say to them don't	23	104
continue to finance the payday lenders, don't continue to	24	104
finance some of the equity boys who are not being monitored	25	104
at the level of scrutiny they need to be.	1	105
And until there's an examination process, quite	2	105
candidly, that incense banks to think refi, think purchase	3	105
almost at the same grading quality, if you're following me,	4	105
on the CRA process, if a banker knows they get more brownie	5	105
points for the purchase type transactions and is willing to	6	105
buy the market to get to that place versus refinance, which	7	105
protects people potentially from foreclosure, they're going	8	105
to skew toward the thing that keeps them out of trouble.	9	105
So I don't want to get too deep on that, but I think	10	105
the answers really lie in protecting people from themselves	11	105
to some extent without government getting too involved. I	12	105
understood where Michael was. Consumers need to be empowered	13	105
to make their own choices.	14	105
What we see, though, is that families are not fully	15	105
disclosed to, they're not fully and adequately prepared for	16	105
the mortgage decisions that they make, and that many of the	17	105
banks feel that their arms are twisted in terms of working	18	105
with consumers to provide those adequate protections.	19	105
Because when they're examined, Governor, they feel that, you	20	105
know, the safety and soundness issues that come up for them	21	105
encourage them to be in another place.	22	105
And I don't want to certainly take issue with the	23	105
Federal Reserve or any other regulator. What I'm suggesting,	24	105
though, is that people don't have all the information they	25	105
need on any side of this process and so there's an aggression	1	106
towards originating loans because it's profitable, to	2	106
whomever, we'll take it out whenever they'll take it out,	3	106
which is how I end up with a client with $24,000 a year	4	106
income with $90,000 rehab behind two stated income loans.	5	106
That's a heart attack waiting to happen.	6	106
And when I get on the phone with her today, I'm	7	106
going to say no to all of it. And she's going to be upset	8	106
with me for a minute and then I'm going to say, "In my office	9	106
on Monday. We're going to fix your problem. But it's not	10	106
going to be fixed with the lineup you've got."	11	106
And guess what I'll have to do? I'll pay off	12	106
prepayment penalty stuff, you know, I'll sit and fight with	13	106
her lenders who shouldn't have made her that loan. She	14	106
didn't need a stated income loan. But this is the nature of	15	106
the marketplace.	16	106
So I'm just suggesting to you that when originations	17	106
on home equity loans went up to $400 billion over the last	18	106
several years versus 92 billion in the '90's, I mean, people	19	106
are -- the profit motive is alive and well in this country,	20	106
and I think that we have to be honest about that and that we	21	106
do have to push families to get educated, get smart, don't	22	106
borrow wrong but borrow smart.	23	106
But there has to be some system, and if it can't	24	106
come through the examination process, through the regulatory	25	106
process, then maybe we need our lenders to be better educated	1	107
about the real risks involved in lending to families of	2	107
modest means, because that's the last of folks that need	3	107
help.	4	107
MR. OLSON: George, both you and Michael talked	5	107
about differentiating among distribution channels. And I	6	107
know that's a -- that's an issue that is -- is an important	7	107
one for you, and for obvious reasons, not particularly	8	107
obvious to the consumer. But I'm interested in this --	9	107
initially in this part of it.	10	107
As lenders have increased their reach beyond what	11	107
would be their typical business footprint, where they might	12	107
have branches, they do it in a significant way through	13	107
brokers. So how do you -- how does the broker -- how do the	14	107
brokers develop that link, build those links, and what is the	15	107
process by which there is a monitoring that takes place to	16	107
presumably avoid the kind of situations that can exist that	17	107
we've heard, for example, from both Heidi and Lori?	18	107
MR. HANZIMANOLIS: Well, first you're correct. And	19	107
we are the grass roots. We're the people out there. And I'm	20	107
a mortgage broker. I do this every day. I meet with my	21	107
clients, my staff. My loan officers meet with clients to	22	107
determine, one, is it right. We try to help educate the	23	107
customer so they understand the products.	24	107
As we said before, I don't know if there's enough	25	107
education out there and we need to do a better job of	1	108
educating that. I think mortgage brokers on a whole do that	2	108
very well. We go out, we explain the different products, we	3	108
explain the processes. We also explain the risks and the	4	108
benefits of each of these.	5	108
Homeownership is at its highest rate. We know that.	6	108
And, in large part, that's because of what mortgage brokers	7	108
have done.	8	108
So I think when it -- to talk about -- when you talk	9	108
about things like suitability and issues like that that we've	10	108
talked about before, we have to -- we have to be careful in	11	108
what we do in limiting the mortgage broker and allowing them	12	108
to continue to offer those products to the broker. When we	13	108
do things that limit our ability, that can affect what we can	14	108
offer them.	15	108
MR. OLSON: Michael, your -- one of the points that	16	108
you made is that -- I'll have to confess I haven't looked at	17	108
this carefully, so this is new to me -- you're suggesting	18	108
that there are differences in disclosure requirements from	19	108
different channels. And that's new to me.	20	108
So could you explain that more and tell me what --	21	108
how that impacts you and how that might impact a borrower	22	108
also?	23	108
MR. FAUST: Sure. And I think part of what I'm	24	108
talking about goes back to the first panel where we had one	25	108
of the panelists talk about that he spent an enormous amount	1	109
of time searching around on a wholesale lender's web site to	2	109
find the rate sheet.	3	109
There's two different types of -- or there's	4	109
multiple types of lending that happens. One is directly to	5	109
the consumer by the lenders. The second one is through the	6	109
broker channel where we are essentially the conduit between	7	109
the consumer and wholesale lending market.	8	109
We enter into an agreement with the mortgage lenders	9	109
to, you know, provide access to their services. And there	10	109
are reps and warranties that we end up getting into with them	11	109
as well, such as if a loan pays off early or if -- or goes	12	109
into foreclosure, if there's fraud within the file, broker	13	109
can be on the hook from everything from the early payoff,	14	109
which is essentially a yield spread premium back, to, you	15	109
know, if there's fraud in the file, the broker could be on	16	109
the hook to buy the loan.	17	109
Now, that's something that no one wants to ever talk	18	109
about. And the reality is when you look at a wholesale rate	19	109
sheet -- that's the difference between wholesale and resale	20	109
pricing, boiled down to its very essence. And the lenders,	21	109
the direct lenders, still make the difference between	22	109
wholesale and retail pricing. They use -- they hide under	23	109
the concept of service release premium and gain on sale.	24	109
The reality is yield spread premium is carved out of	25	109
service release premium. They know what they think they're	1	110
going to make when they service that loan over that period of	2	110
time.	3	110
And so the entire argument that we're having here is	4	110
almost disingenuous by some people because what they've	5	110
decided to do is they've been able to easily identify one of	6	110
the ways of economic compensation for one of the distribution	7	110
channels. And what they failed to recognize is the fact that	8	110
that same economic works for all the distribution channels.	9	110
Just some of them get a federal carve out under the secondary	10	110
market exemption.	11	110
I would be concerned if I was a stockholder of a	12	110
major lending institution that couldn't determine what their	13	110
potential risk and/or, you know, income is when they	14	110
originate and fund a loan.	15	110
So the reality is that it does affect us, especially	16	110
in dialogs and conversations like this where certain lending	17	110
channels are given exemptions from having to even disclose or	18	110
acknowledge it, when the reality is everyone makes indirect	19	110
compensation. Either comes from yield spread premium, comes	20	110
from service release premium, and/or comes from gain on sale.	21	110
All distribution channels should have to disclosure	22	110
in the same and fair manner, because the reality is when	23	110
there's different ways it is disclosed, certain states have	24	110
different disclosure requirements, and when that happens, it	25	110
often provides confusion to the consumer at the origination	1	111
of the level.	2	111
MR. OLSON: Judy, you talked about changes in HOEPA	3	111
that -- and some of your suggestions I think implicit in that	4	111
were that maybe -- in the 2002 HOEPA definitions that there	5	111
were types of fees that may play into pricing that HOEPA	6	111
doesn't include. And perhaps the market has changed. Are	7	111
there definitional problems with HOEPA or isn't that --	8	111
wasn't that the point that you were making?	9	111
MS. ZEIGLER: No. I think what we were looking at	10	111
was trying to have predetermined certain fees that you can't	11	111
go over so that you would not have a prepayment penalty, for	12	111
instance, longer than three years.	13	111
I experienced in my marketplace -- for instance, I	14	111
had an older lady, in her mid '70's, retired and widowed, who	15	111
had done a refinance on her home. Was aware that she had a	16	111
prepayment penalty, but what she wasn't aware of was -- and	17	111
we purposely scheduled the closing to be 30 days after the	18	111
original loan was taken out.	19	111
What wasn't explained to us, or to her, or she	20	111
didn't remember -- and I did not do the refinance because I	21	111
was the realtor who sold her the home. She refinanced on her	22	111
own three years later and then another three years she's	23	111
buying another property.	24	111
What happened was her prepayment penalty was not	25	111
really a three-year prepayment penalty. Because you pay	1	112
interest only -- okay? You're paying in arrears when you're	2	112
first paying -- she ended up -- it was actually --	3	112
MR. OLSON: It was a negative am mortgage.	4	112
MS. ZEIGLER: No. It wasn't a negative am. It was	5	112
when you close the loan -- let's say you close on June 1.	6	112
Your first mortgage payment is on July 1. You're paying	7	112
interest from July 1 back. But then you pay the principal up	8	112
front. So if she would have closed two days into the month,	9	112
she would have paid for two days and then interest back.	10	112
Okay. So when she went to close, it wasn't really a	11	112
three-year prepayment penalty; it was three years and four	12	112
months. Don't know how the lender put that in. You know, I	13	112
tried to fight it through our local state senator for her.	14	112
Nothing we could do. She just -- she just decided not to	15	112
pursue it. She was -- she had income. It wasn't a problem	16	112
for her. But I really felt that she was being taken	17	112
advantage of.	18	112
And I think that's what we're looking at, is trying	19	112
to narrow some of these things down so that they're much more	20	112
clear to everybody when they get into something. That it	21	112
wasn't just a 36 months; it was actually in this case 40	22	112
months.	23	112
MR. OLSON: Other people have questions? Jack,	24	112
we'll start with you this time if you want. You know, we	25	112
actually -- this is pretty remarkable. In Philadelphia	1	113
somebody actually raised their hand who was on one of the	2	113
panels. Other than that, it's been pretty much a	3	113
free-for-all up here. Jack has sharp elbows I'm sure by the	4	113
end of the day here.	5	113
MR. RICHARDS: I'm getting much more aggressive.	6	113
I don't even know if this is a fair question, but	7	113
when I've bought real estate in the past or refinanced a	8	113
loan, I've had varying experiences with title companies in	9	113
terms of the title officer going through the terms of the	10	113
documents and some would not.	11	113
Just particularly, Judy, in your experience as a	12	113
realtor, do you find that title companies on a regular basis	13	113
that the officer might get involved in working with the	14	113
borrower to understand the loan terms or is that a -- is that	15	113
really up to the individual?	16	113
MS. ZEIGLER: I believe it's up to the individual,	17	113
plus it's also regional. I presume you went with -- you're	18	113
not from this area, so you would be going to like a title --	19	113
MR. OLSON: Jack is from this area.	20	113
MS. ZEIGLER: Oh, you are. Northern California,	21	113
though? Okay. In Southern California we use escrow	22	113
companies. You were using a title escrow company. So it was	23	113
the same thing? Okay.	24	113
Where we are depends upon who you sign your loan	25	113
documents with. Most of the time you're going to sign with	1	114
the closing agent, escrow officer, or the title escrow	2	114
company. And it really is individual as to how they go	3	114
through it. There are certain things they're supposed to go	4	114
down line by line by line, but you wouldn't really know that	5	114
if you didn't know what they're going to do.	6	114
Sometimes the lender goes through and does it where	7	114
we are because -- I have, for instance, a lot of clients that	8	114
are from out of the area, that they're getting a loan with a	9	114
lender in Los Angeles, for instance, and they're buying a	10	114
second home in the desert. They may well do the loan	11	114
documents there.	12	114
It seems to me sometimes if people have had a good	13	114
experience with a past lender, they'll go back to that	14	114
person. Whether they've explained it or not I don't know	15	114
because I only know after the fact.	16	114
If it's certain -- if they're not using a lender of	17	114
my choice, I'm not as involved in it as I would be when I'm	18	114
suggesting, let's say, three lenders that I've worked with in	19	114
the past who want my business back because they know my	20	114
partner and I sell 80 houses a year and they're not going to	21	114
really damage our clients because they want to keep our	22	114
business.	23	114
There's a difference than if you go, as you were	24	114
saying, Heidi, to someone that they met at church whose	25	114
sister is a mortgage lender.	1	115
MS. GAY: Can I offer just one -- I think Judy is	2	115
very right, personally and professional.	3	115
Personal. I did it by phone, my last refi. Nobody	4	115
talked to me about anything. They shipped the docs to my	5	115
house, I had them notarized, sent them back.	6	115
Professional. Most of the community development	7	115
financial institutions that offer anything similar to this	8	115
full-cycle lending model that I mentioned -- there's hundreds	9	115
of groups doing it across the country now. We're also a	10	115
full-service realtor at NHS. And so what we see is that	11	115
those groups tend to spend the time, because, again,	12	115
different profit motives to some extent, spend the time with	13	115
the consumer. I require closings at our offices and we have	14	115
multiple offices to facilitate that.	15	115
What you really see with the nontraditional mortgage	16	115
community, and particularly if you're on the purchase money	17	115
side of the market, with layered financing, you have	18	115
government involved -- and watch me now. There may be four	19	115
or five closings. So we're then called upon in the nonprofit	20	115
community to try to show up to those and try to explain	21	115
everybody's documents, which is frightening. So we tend to	22	115
coalesce it all and spend our time then working with the	23	115
consumer toward one closing.	24	115
It is very difficult. And we don't -- and we then	25	115
work with title and escrow, try to cross-train them, you	1	116
know, because when you get into multilayered financing on the	2	116
purchase side, it's complex. You've got different deeds of	3	116
trust, you've got different restrictions, covenants, you	4	116
know, shared equity. It's complicated now.	5	116
And this is what we meant about, you know, consumers	6	116
really don't have a chance is what I'm saying in terms of	7	116
having a grasp of what's going on in the mortgage market	8	116
right now.	9	116
And on a personal level when you look at it, you can	10	116
do stuff by phone, ten minutes and they ship you your docs.	11	116
Someone asked me -- and I'm honest like this. And on the	12	116
public record -- exactly what my terms were on my home loan	13	116
last year. And I had to really think because I could not	14	116
recall. And I think that that's a challenge. And I'm in the	15	116
business.	16	116
So if a typical consumer is faced with the	17	116
bombardment of advertising that they receive and they have	18	116
all these players Michael mentioned that they can talk to to	19	116
try to get a loan, it's just too much.	20	116
MS. BRAUNSTEIN: I'd like to talk a little bit more	21	116
about shopping and how consumers, especially in the lower	22	116
income minority community shop for mortgages. We had a panel	23	116
on this in Philadelphia. And one of the things that we	24	116
heard -- we had a lot of discussion about push marketing and	25	116
that in particular the brokers were doing that.	1	117
We had a woman on the panel from National Council of	2	117
La Raza, Janis Bowdler, who talked about the fact that they	3	117
did kind of a maybe unscientific survey but they looked at	4	117
newspapers and media and listened to radio that were geared	5	117
towards the Hispanic community, the Latino community. And	6	117
basically all that was being advertised were subprime	7	117
products, both in the -- in both ends of the media, both the	8	117
radio and newspapers.	9	117
And I'd like to hear some comments on what can be	10	117
done to possibly get more prime products, you know, pushed	11	117
into these neighborhoods.	12	117
And how do people in the neighborhoods you work in,	13	117
Lori, when they want to get a loan, how do they -- do they go	14	117
to the places that they see in their newspaper and hear about	15	117
on the radio? You know, how do they make those kinds of	16	117
decisions?	17	117
And lastly, I was just wondering, you know, you see	18	117
lots and lots of advertisements on TV now about these	19	117
Internet providers, like Lendingtree.Com, where you enter	20	117
your characteristics and supposedly, you know, 12 people ring	21	117
your doorbell, all competing to give you the best possible	22	117
loan. Is that truly only something that happens to prime	23	117
borrowers or is that a useful tool for the markets that you	24	117
deal with?	25	117
MS. GAY: I'll go. I'll start with your last one,	1	118
the Internet use piece. We have a digital divide -- I don't	2	118
always like that language but it's -- everybody understands	3	118
it -- in a lot of low to moderate income communities across	4	118
the country. Even though I've found now that seniors use the	5	118
computer a lot more than other people I know in their free	6	118
time when they can get access. And this is where we see then	7	118
a proliferation of certain kinds of products targeted towards	8	118
the aging population.	9	118
We are one of the few supporters I've found in the	10	118
nonprofit community of some components of the reverse	11	118
mortgage business and we're certified to counsel people in	12	118
the use of reverse mortgages. And a lot of the seniors, just	13	118
as an example, who come to see us who are low to moderate	14	118
income and ethic minorities are using the Internet to find	15	118
out about those particular products. And that's been an	16	118
intriguing piece for us to observe.	17	118
We're on average counsel -- we stopped at 100	18	118
customers a month. We could easily do 500 customers a month	19	118
in L.A. county. We're asked to do it all the time. And the	20	118
challenge we've got with that particular whole piece is phone	21	118
counseling is not one of the best mechanisms we found to	22	118
encourage people about their options.	23	118
So the Internet is actively being used. And I would	24	118
say based upon some age grouping we're seeing that. We have	25	118
a lot of young people who are coming to us to buy homes, back	1	119
to the other side of the marketplace, and they've used the	2	119
Internet to look up credit cards and so forth and then they	3	119
link to some of these sites you're talking about.	4	119
And when they come to see NHS, they've already got	5	119
weird debt ratios because they've been using credit cards	6	119
wrong and they have student loans and, you know, it just	7	119
layers from there.	8	119
And so the Internet is more at play than we probably	9	119
give it credit for in low to moderate income communities	10	119
across the country, regardless of the digital divide.	11	119
The other thing I'd say is that --	12	119
MS. BRAUNSTEIN: Lori -- I'm sorry -- is that a good	13	119
thing or a bad? Because the way it's portrayed, it could be	14	119
a good thing that people are competing for your business and	15	119
you get a better deal.	16	119
MS. GAY: I don't think people understand how to get	17	119
a better deal would be my response to that. I think they're	18	119
getting into a lot of stuff is what we see on the counseling	19	119
side that's not necessarily good and that a lot of the web	20	119
sites as it was mentioned earlier are very sophisticated and	21	119
you don't necessarily get all the information you need up	22	119
front to make an accurate or informed decision.	23	119
What's good about it is it gets them thinking about	24	119
product options and that I have choices and that maybe	25	119
there's a world out there that really wants to lend to me.	1	120
That is not always been the message in low to moderate income	2	120
communities of color. And I think that -- so there's some	3	120
power in the Internet.	4	120
I read this morning about Bill Gates kind of	5	120
stepping down and spending his time in philanthropy. And I	6	120
cried, and that's me, because I'd love to see that, not just	7	120
because he's a technology wizard.	8	120
But one of the things that I have an obligation to	9	120
in my work is a sense of personal responsibility. I am	10	120
personally responsible to care for people and to get messages	11	120
out that inform them about making wiser choices about money.	12	120
And I think that anyway that we can do that, whether it's the	13	120
Internet, through print, through cable television, through	14	120
radio broadcasts, we should. Technology is adjusting so	15	120
fast. We now have I-Pod webcasts. I have no clue what that	16	120
is.	17	120
So I think there is a whole bunch of stuff that's	18	120
out there that we could utilize more aggressively to make	19	120
sure that consumers are more financially literate and the	20	120
Internet should be an aggressive tool for that.	21	120
The LMI customer response piece that we tend to see	22	120
across the country, and certainly in L.A., is very much a	23	120
print-related response and a radio-related response. We	24	120
avoid television at all costs because it is the best	25	120
mechanism for response but it's not the best quality	1	121
customer.	2	121
And so in our work -- our name happens to be a very	3	121
warm brand. Neighborhood Housing Services does not offend	4	121
anybody. It's attractive. That's nerve-wracking because,	5	121
you know, we -- we had 3,000 Korean families walk into our	6	121
lobbies a couple of years ago from one TV spot, in a ten-day	7	121
period. And no one on our staff spoke Korean. Frightening.	8	121
All low income. Twenty-nine hundred credit reports we ran.	9	121
I think Sandy knows this story. All the FICO scores above	10	121
700. Every family needed a stated income loan, though,	11	121
because of the types of businesses that they were running.	12	121
So I think that families of low to moderate income	13	121
respond well to certain types of advertising. They're very	14	121
trusting in general of certain types of brands. It is not	15	121
the bank. That's typically not what they're interested in.	16	121
So when we partnered with Wells Fargo to do a mail	17	121
drop to 100,000 households of a postcard, we got 10,000	18	121
calls. And they called NHS's number, though, not Wells	19	121
Fargo's number. So that's not a reflection on Wells Fargo	20	121
other than that brand wasn't as trusted in those	21	121
neighborhoods as Neighborhood Housing Services, who they	22	121
didn't know but we felt comfortable.	23	121
The final thing I'd say on prime product, how do we	24	121
push that more in the neighborhoods? I got a debit card in	25	121
the mail the other day from a subprime lender. It happened	1	122
again, Kevin. So I have to get bad and mean with this	2	122
subprimer. I can put a second mortgage on my home with a	3	122
debit card by buying an ice cream. That is frightening. And	4	122
those are some of the products that are offered right now.	5	122
Prime product is critical in the neighborhoods.	6	122
There are lots of families who are getting the wrong product,	7	122
wrong house. And once they've got the home, they're	8	122
overwhelmed with those kinds of offerings. I get three	9	122
checks a week in the mail.	10	122
So I think that anything that can be done relative	11	122
to regulating some of that will be powerful. Families do not	12	122
know how to make those choices when faced with those	13	122
opportunities.	14	122
MR. FAUST: Just an industry perspective on how	15	122
consumers tend to shop for loans. It's interesting you say	16	122
that digital divide, because a lot of way people tend to shop	17	122
for loans is socioeconomically driven. If they've got the	18	122
means, they've got the time, they will surf the Internet and	19	122
collect a vast amount of information, so when they actually	20	122
show up at your office, they are loaded to bear with terms	21	122
and concepts and, I mean, they're ready to go.	22	122
However, you take the other end of the spectrum	23	122
where a person is working three jobs, trying to make ends	24	122
meet, the reality is their shopping method is a little	25	122
different. So it tends to be convenience driven.	1	123
Now, they all may actually generate the same amount	2	123
of income as the person that works that one job that has the	3	123
economic capacity. But the reality is when they go to get a	4	123
loan, they often do it by referral, friend, family, member of	5	123
the church.	6	123
One of the things the brokers do is we're in the	7	123
community. We tend to be the community home loan exert.	8	123
Mortgage brokers are people who tend to work by referral.	9	123
Want to make sure I do a good job for you so that you'll	10	123
send -- you know, you'll refer your brother, sister, cousin,	11	123
et cetera, to me when they say, "I want to buy a house."	12	123
Tends to be relationship-based. It goes to direct mail-based	13	123
or massive marketing, key and pain driven-based.	14	123
I'd like to address the Internet question about the,	15	123
you know, post your application here and you'll get 12 great	16	123
people knocking at your door. Those tend to be companies	17	123
that are in the -- it's called a referral mold. And the way	18	123
that works is essentially they put those applications, credit	19	123
reports, all that out there for people to buy the lead.	20	123
So it's mortgage bankers, mortgage brokers, whomever	21	123
who is actually going to originate the loan, pays for an	22	123
opportunity to take a peek at the consumer. And if it's	23	123
something they can do, they will -- they will call and	24	123
they'll get in the bidding mode.	25	123
But the reality is they're not making the loan.	1	124
They're referring it out to multiple other people who get the	2	124
opportunity to take a peek at a person's employment history,	3	124
down payment, credit, et cetera. And then get into a --	4	124
MS. BRAUNSTEIN: I knew that. That's why I	5	124
wondered does that mean -- are people really getting better	6	124
deals by using those services? That was my question.	7	124
MR. FAUST: I can tell you I just love when a	8	124
consumer calls and says, "I sent an application with	9	124
Blank.Com." Because I know, you know, 95 percent of the time	10	124
we're going to be able to give them better terms and rates.	11	124
MS. GAY: That's right. Absolutely.	12	124
MR. FAUST: I just love when I get that phone call.	13	124
MR. CHANIN: Judy, let me follow up on this notion	14	124
of shopping. And from your perspective, if it varies by	15	124
ethnic group, if you could explain that.	16	124
If a consumer comes to you and they either have	17	124
picked out a house or are looking for a house, and you take	18	124
them through that. Take me to the stage of where they have	19	124
to get financing. What is your role and do you assist them?	20	124
Do you find most consumers come with a lender in mind or a	21	124
broker? How active a role do you play in that process?	22	124
MS. ZEIGLER: In my particular business very active.	23	124
I usually don't show people property until I know what they	24	124
can afford. If you start showing property -- and obviously	25	124
they're going to like more expensive ones rather than less	1	125
expensive ones because they'll have more gingerbread on them	2	125
and things that they'd like. And then they can't afford it	3	125
and then they're disappointed and you can't find them	4	125
anything in their price category. I'd rather start lower and	5	125
then work them up and show them what they can get if they	6	125
want to make higher payments.	7	125
I usually recommend three lenders. My partner and I	8	125
have a list of approved lenders that we have worked with.	9	125
When Lori was talking and Michael about the Internet	10	125
lending, for instance, I have yet to close a loan with a	11	125
client that is a purchase from an Internet. I have had the	12	125
experiences that have not been great, where these poor people	13	125
come to closing -- well, I can say I had one that closed, at	14	125
a huge difference of what they thought they were closing at.	15	125
What I think is needed, especially with a first-time	16	125
home buyer, I would never recommend that. I think you need	17	125
to go in and you need to sit face-to-face and that person on	18	125
the other side of the table can look -- look them in the eye	19	125
and say they're either getting what I'm saying or they have	20	125
no clue and I have to start over again, whether it's English,	21	125
Spanish, whatever it is. They don't -- you know, you get	22	125
that deer in the headlight look and you have to start over	23	125
again.	24	125
And because I've been in the business 28 years, I've	25	125

Professional Reporting Services, Inc., Walnut Creek, California, 800-261-4814

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2006 Hearings

Building Sustainable Homeownership: Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of San Francisco 101 Market Street, San Francisco, California 94105 June 16, 2006

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of San Francisco
101 Market Street, San Francisco, California 94105
June 16, 2006