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
started with my clients and probably prequalified them a	1	126
little better than some agents that just, you know, jump in	2	126
the car and shop.	3	126
I believe, though, it's interesting with the	4	126
Internet, going back to that one a second, with the seniors.	5	126
As you said, they have more time.	6	126
MR. FAUST: She said that.	7	126
MS. ZEIGLER: Well, in the beginning, people didn't have	8	126
the -- seniors weren't on the Internet that much, they	9	126
weren't shopping that much. But they have found if they want	10	126
to talk to their grandchildren, they'd better get on the	11	126
computer or they won't be talking to them. So we have	12	126
many -- many of our clients are very tech savvy that are	13	126
seniors and retired that never used a computer in their	14	126
business but they're using it now.	15	126
What I've had is that if they want to do a loan	16	126
application on the Internet, I have asked them -- and I have	17	126
several lenders that will do it at no charge -- double app so	18	126
that when we get to closing you know it.	19	126
Often times you start with a lender -- and in our	20	126
area we also have Indian lease land, which throws another	21	126
wrench into it. So you get to a closing and these people	22	126
think they're going to close and all the sudden the lender	23	126
calls and says, "What do you mean there's a land lease?"	24	126
Now you have the seller that's got the moving van,	25	126
the buyer has the moving van, and there's dominoes with	1	127
people moving and they can't close because this lender	2	127
doesn't do leased land.	3	127
So there's a big difference in lenders, just like	4	127
there is everything else. And I'm sure there's great -- it's	5	127
just a different business model. And I'm sure it works for	6	127
some people.	7	127
And I would think with a refinance, it would not be	8	127
a problem because you're already in your house. And if it	9	127
takes another 60 days, you can do it. But if you're trying	10	127
to move for a deadline, it's been difficult, at least in my	11	127
experience.	12	127
MR. CHANIN: Let me follow up in terms of	13	127
nontraditional mortgages. So you've either prequalified	14	127
someone -- what types of individuals get those products? Are	15	127
they people who seek to buy a larger amount of home? Are	16	127
they people who seek to minimize their payments? Are there	17	127
any trends or are -- things that you see in terms of those	18	127
individuals that get those option ARMs or interest only?	19	127
MS. ZEIGLER: In my experience, it's been people	20	127
that can probably afford to pay cash but they're doing it	21	127
just so they can write off the interest income.	22	127
MR. OLSON: Expense.	23	127
MS. ZEIGLER: Pardon me?	24	127
MR. OLSON: Write off the interest expense, right?	25	127
MS. ZEIGLER: Right. Write off the interest	1	128
expense. So it's a tax write-off.	2	128
MR. CHANIN: Maybe income. May be that wealthy.	3	128
MR. OLSON: Well, you never know. Sometimes we have	4	128
somebody from the IRS. If somebody is writing off interest	5	128
income, they'll --	6	128
MS. ZEIGLER: No, I misspoke. But they need the	7	128
write-offs. And especially if they're retired, they're not	8	128
getting as many write-offs as they used to when they're in	9	128
business, so this is one product that works for them.	10	128
Also, in second homes, many of them are going to be	11	128
in it for three to five years as a second home. When they	12	128
turn it into their retirement home, whether they stay there	13	128
and refinance or whether they pay it off because they're	14	128
going to sell their home in Michigan and retire where we are,	15	128
that's an interest.	16	128
I do have one client, for instance, going through	17	128
this now. He's 55 years old, first-time home buyer. His	18	128
FICO score is in the 800's, but he doesn't make enough income	19	128
to qualify for certain things. He is engaged, and in the	20	128
next few years, he'll be in great shape when she's done with	21	128
her schooling and she'll move in and she'll start paying with	22	128
him on the mortgage. So in this case, you know, they're	23	128
going to go with something that would be a nontraditional	24	128
product.	25	128
MS. GAY: Can I offer that in a lot of load in my	1	129
communities, it's the nontraditional because I want the house	2	129
I've seen on my way to work. And even though I was told by	3	129
NHS or some nonprofit that I might need to wait a little bit,	4	129
the broker told me because I have a 750 FICO score I can	5	129
borrow 200,000 more dollars. We see that all the time.	6	129
And then people are asking to marry it with the	7	129
individual development account money that I might have been	8	129
helping them with. And so that's where we see problems, is	9	129
when you then want to utilize subsidy along with	10	129
nontraditional mortgages that may have been intended for some	11	129
other person or some other purpose.	12	129
And I think that the microwave approach is bad. And	13	129
families who are pushing to get in at no matter what the	14	129
cost, as quickly as possible, is not a safe opportunity.	15	129
MR. FAUST: You know, one of the things I think that	16	129
we -- we need to make sure that when the consumers are	17	129
shopping, the people they're working with are professionals.	18	129
And part of that means pre-education. That also means	19	129
continuing education. That means criminal background checks.	20	129
In many, many states like California, there's three	21	129
different licensing schemes that have happened in this state.	22	129
You know, mortgage professionals can work -- and that's three	23	129
just under California. That's exclusive of all the federal	24	129
opportunities that exist as well.	25	129
In California you can be a real estate licensee.	1	130
There's about 450,000 real estate licensees that could do a	2	130
loan. At least they have pre-education, continuing education	3	130
requirements, they have a background check.	4	130
There are about 3,000 CFL's in the state of	5	130
California, a little more than 3,000 CFL's. The corporation	6	130
is licensed. The individuals who actually originate the	7	130
loans may or may not have any pre-education, any continuing	8	130
education, or any criminal background check. And many of	9	130
those mortgage bankers will say, "We do criminal background	10	130
checks." You know, it's incumbent upon the government to	11	130
make sure that if they're doing that, they provide in some	12	130
way, shape, or form.	13	130
You talk to the District Attorney's Association,	14	130
State of California, as well as the local prosecutors who are	15	130
the ones that truly carry the water on going after predatory	16	130
lending throughout the country, and what they'll tell you is	17	130
that the people who tend not to have any pre-education, any	18	130
continuing education, any criminal background check, they're	19	130
just moving from state to state, you know, exploiting the	20	130
systems.	21	130
So I think that when you get down to draw your	22	130
regulations, make sure that everyone adheres to the same	23	130
standards on pre-education, continuing education, you know,	24	130
and make sure they have a criminal background check.	25	130
Because yeah, there are bad actors in the industry	1	131
that will tell them, you know, "Oh, yeah, you got 750 FICO,	2	131
you can buy the house." But if they're doing that in a	3	131
fraudulent manner, it's incumbent upon the government to	4	131
enforce the laws we already have.	5	131
There are a lot of statutes on the books, both	6	131
federal, state, and local, that already address loan fraud.	7	131
The reality is you ask any DA, they'll tell you they're up to	8	131
their gills with usually one person who is in charge of	9	131
enforcing all the white-collar fraud that goes on, whether	10	131
it's mortgage, credit card, or whatever.	11	131
If there's nothing else that came out of these	12	131
series of hearings and it was the Fed to drive the ball	13	131
across the goal line to make sure there was adequate funding	14	131
to enforce laws we currently have -- that includes	15	131
advertising, deceptive practices -- if you guys did nothing	16	131
else besides that, I think everyone in this room would give	17	131
you guys a huge round of applause and know you truly did	18	131
something, didn't just play around in the fringes.	19	131
MR. RICHARDS: Michael, in your opening comments,	20	131
one of the other things you mentioned was the need for	21	131
uniformity when it came to alternative mortgage products,	22	131
uniformity in terms of documentation disclosure.	23	131
MR. FAUST: Sure.	24	131
MR. RICHARDS: Could you expand a little bit on what	25	131
you believe -- you believe uniformity would look like?	1	132
MR. FAUST: Well, first of all, I think you need to	2	132
make sure that whether a person is a broker or a banker,	3	132
they're not having to use different forms. Many states have	4	132
their own regulatory schemes. They require brokers to	5	132
provide this set of disclosures, you know, bankers to provide	6	132
this set of disclosures.	7	132
So when Joe Consumer goes from place to place to	8	132
place to shop, he ends up -- first of all, every disclosure	9	132
packet is, you know, anywhere from 20 to 50 pages long	10	132
because everyone is either trying to comply with every state	11	132
law and/or prevent from getting, you know, sued for something	12	132
that may or may not have anything to do with the transaction,	13	132
but also ensure that the forms that are created --	14	132
I mean, let's look at the truth in lending form just	15	132
for a second.	16	132
MR. CHANIN: Let's not.	17	132
MR. FAUST: Let's do. I mean, let's be honest. You	18	132
got that nice little four boxes across the top. There's that	19	132
one box that says "Finance Charge." Well, that was great	20	132
when you had a choice of 15-year fixed mortgage or a 30-year	21	132
fixed mortgage.	22	132
Now let's take it to the option ARM. Okay? I mean,	23	132
if someone paid essentially the 15-year payment, the amount	24	132
financed would be one number. The fully indexed 30, that's a	25	132
different number. Interest only, potentially that's a	1	133
different number. And when you get to neg am, especially if	2	133
the thing recasts somewhere down the road, that's a	3	133
completely different number.	4	133
The forms that you have, while adequate under what	5	133
we would consider traditional products, I hate to say it,	6	133
don't even come to the minimum line. You look at stuff	7	133
that's in there in the good faith estimate, you know,	8	133
principal and interest, all still on one line.	9	133
I mean, the reality is in California we do a lot of	10	133
loans that are interest only because the consumer wants the	11	133
choice. I mean, option ARMs are a good product for some	12	133
consumers. You know, commission-based employees have what I	13	133
heard referred to earlier today as lumpy income. Some months	14	133
you make money, some months you don't. You need that option	15	133
of flexibility.	16	133
You know, the reality is disclosures need to be the	17	133
same no matter what distribution channel it comes through.	18	133
You need to make sure there's a special information booklet	19	133
that -- and it's updated regularly, not updated every six to	20	133
ten years. It's something that's updated on a regular basis	21	133
to address terms. And you need to make sure the charm	22	133
booklet is up-to-date on nontraditional products. You know,	23	133
part of this is making sure those things are included in the	24	133
up-front process of the loan disclosure process.	25	133
MR. RICHARDS: Thank you.	1	134
MR. OLSON: Heidi, did you have a comment?	2	134
MS. LI: Yeah, I just want to follow up and respond	3	134
to what Michael was talking about, which is I think he's	4	134
actually touching on something that's very much speaking to	5	134
the heart of this issue, which is what is meaningful	6	134
disclosure, especially when you have these nontraditional,	7	134
exotic, interest only, option ARM products.	8	134
For example, if you have, exactly as he was pointing	9	134
out, you have someone who comes in, isn't very sophisticated	10	134
as a consumer, and just gets the written TILA boxes of the	11	134
TILA notice, and it's in English and perhaps also that's not	12	134
the language in which they were actually conducting the whole	13	134
communication with the broker or lender with, how are they	14	134
going to know that ultimately when they go to the closing	15	134
that they picked option number one, option number two, option	16	134
number three, or option number four, and what each one of	17	134
those really consists of?	18	134
I mean, to me it seems like so either there needs to	19	134
be that -- at least the minimum I think he's suggesting is	20	134
some additional required disclosure requirements for these	21	134
nontraditional products in writing, in a written format that	22	134
is really meaningful to the particular consumers that are	23	134
getting them.	24	134
And I would really say those types of products do	25	134
need to be included under HOEPA as being covered, not just	1	135
the refinance loans that we see are covered presently, and	2	135
perhaps under certain interest arrangements that they're	3	135
going to be getting.	4	135
For example, just the payment of some portion of the	5	135
interest only option one situation, that they would be	6	135
actually given really the clear indication by legal	7	135
requirements that you should go and get some, you know,	8	135
pre-signing, HUD-certified, impartial counseling.	9	135
And not to say that all of the folks who are in the	10	135
broker industry or in the lender industry are out to get the	11	135
consumers. But the problem is that I think that Lori is	12	135
speaking to and I'm speaking to, the folks we see -- I mean,	13	135
I think there are a lot of really educated consumers out	14	135
there who really know what to look for.	15	135
And I think that's a wonderful thing to know about.	16	135
And they don't really need perhaps all of these protections	17	135
that we're -- or at least some of these protections that	18	135
we're suggesting should be added.	19	135
But it really is this side of the consumer market	20	135
that is the most likely to really have the problems with not	21	135
understanding what they're getting themselves into. And I've	22	135
seen now too many in the last year, in Oakland, in Contra	23	135
Costa county, in the South Bay, in San Francisco, my	24	135
colleagues and I, we have seen too many people who came to	25	135
us, went to one of these housing counseling agencies, sat	1	136
down with someone who could individually go through with	2	136
them, "This is what I actually got into because it wasn't	3	136
explained to me before I signed all these papers at the title	4	136
company. And if I had known, I would not have taken this	5	136
loan out."	6	136
There are some folks that no matter what you do,	7	136
they're going to -- the dream of homeownership is just too	8	136
strong. And I don't think we're trying to capture in our net	9	136
with our recommendations those folks because that's kind of,	10	136
you know, you're going down that path no matter what.	11	136
But there are too many that we're actually still	12	136
seeing who really if they had been given a little more	13	136
meaningful disclosure, an opportunity to really know what	14	136
they're getting into with some of these products, I think	15	136
that it would make a difference.	16	136
So I just want to say that.	17	136
MR. OLSON: Let me change the subject slightly but	18	136
link two things that were mentioned earlier.	19	136
And, Lori, you made a statement that's one of the --	20	136
has been one of the most fundamental precepts of mortgage	21	136
lending, which is in a foreclosure everybody loses.	22	136
As a lender, we would do almost anything to avoid a	23	136
foreclosure because we did lose. It was in Minnesota. It	24	136
was a year from the time that we initiated the foreclosure	25	136
when we could get at the house. The lender could not gain --	1	137
could not gain a nickel beyond their costs and the loan	2	137
amount. And that's true in most states I believe. I suspect	3	137
it's true in California. And, of course, the borrower loses.	4	137
But a couple of you mentioned equity stripping. And	5	137
something that is I think just insidious. But if the	6	137
foreclosure process is now becoming an opportunity for either	7	137
equity stripping or for profit taking among the players that	8	137
participate in that foreclosure process, that's something	9	137
that's -- at least it's new in my experience.	10	137
Judy, I think you mentioned the term "equity	11	137
stripping" also. Do you find it -- did you mention it?	12	137
MS. ZEIGLER: Wasn't me.	13	137
MS. BRAUNSTEIN: No, I think Heidi and Lori talked	14	137
about foreclosure scams.	15	137
MR. OLSON: So how does -- is that going on and how	16	137
are you going to add those issues?	17	137
MS. GAY: My debit card scenario was equity	18	137
stripping opportunity.	19	137
MR. OLSON: I mean in connection with the	20	137
foreclosure process.	21	137
MS. GAY: Okay. I was going to say it's all	22	137
relative.	23	137
MR. OLSON: Except the predatory side is something.	24	137
But to use that foreclosure process where there presumably	25	137
are a lot of safeguards for the homeowner in it to -- that's	1	138
what I was focusing on.	2	138
MS. GAY: Chicago NHS for the last two and a half	3	138
years has done something called the homeownership	4	138
Preservation Initiative. Some of you are familiar with the	5	138
data find. Fifty percent of the foreclosures in the city of	6	138
Chicago involved homeowners who never called for help.	7	138
And so as they then dug underneath that data, what	8	138
they found was that the -- some of the lenders involved in	9	138
what they called equity stripping understood the cost of	10	138
doing business before the loans were made, understood the	11	138
profits they'd make, targeted specific kinds of families who	12	138
were less knowledgeable, less informed, lower income, and	13	138
then the same property was sold four, five, six times within	14	138
that period of time, four to five years.	15	138
And so I guess the notion really becomes -- let me	16	138
use a quick example. We spent some time during a merger two	17	138
years ago, a bank merger process, working with a bank to help	18	138
them understand a program that they offered internally to	19	138
their own -- or I should say to their customers. If you	20	138
borrowed money from that bank, you had the opportunity within	21	138
a couple of years to refinance at no fees. Not an unusual	22	138
product.	23	138
The way that they went about alerting the customer	24	138
to the option to refinance -- because there was a trigger.	25	138
You know, it was an ARM type deal. There was a trigger that	1	139
the loan would be more expensive and you could refinance if	2	139
you paid in a timely manner to a lower cost fixed rate loan.	3	139
The way that they alerted the families was with a	4	139
letter in the mail. And they had 14,000 families they were	5	139
alerting who fit this profile in the year that they had me	6	139
review.	7	139
And they said, "Only 400 people responded to our	8	139
letter." And I said, "Well, did you call? Did you send more	9	139
letters? I mean, what did you do?" And they said, "Well,	10	139
no, we just responded to the 400 and then only 40 of them --"	11	139
so we went from 14,000 to 400 to 40 "-- participated and	12	139
actually took on the fixed rate loan."	13	139
And I said, "Well, how's that working for you?	14	139
Doesn't it strike you that something is wrong with that	15	139
process? Because the other 14,000 or 13,000 and some change	16	139
that went into a higher rate priced product," I said,	17	139
"somehow in there that doesn't win for the customer. And	18	139
you, in effect, don't really give them the option of	19	139
converting because you didn't make any effort toward helping	20	139
them understand what was really going to happen. All they	21	139
know is they then got the payment notice and it's, you know,	22	139
$100 more a month."	23	139
And so in our world, as we talk about equity	24	139
stripping, it shows up in a lot of formats is all I'm trying	25	139
to say, whether through foreclosure and there's a tactical	1	140
strategy to continue to target the wrong people with the	2	140
wrong house, wrong price, and that happens, and/or whether	3	140
it's through its existing product and that product is	4	140
available to people who make not the best informed choice,	5	140
and then there's not the information disclosed to them to let	6	140
them know that there are other options available.	7	140
Clearly in the foreclosure process, as we all know,	8	140
the sophistication shows up in that, you know, homes in	9	140
certain areas are more likely to be foreclosed upon because	10	140
of the types of loans that are made in those areas.	11	140
Our foreclosure study that we did with the Joint	12	140
Center for Housing Studies at Harvard a year ago showed that	13	140
in the neighborhoods where the foreclosures were happening in	14	140
L.A. -- we call them hot spots -- at seven times the rate the	15	140
rest of the county, in those neighborhoods subprime lending	16	140
was 85 percent.	17	140
I'm not mad at all subprimers. Bunch of them are my	18	140
friends. But I want the prime rate market to be more	19	140
available in those neighborhoods. Because one out of four of	20	140
the loans that were originated ended up in foreclosure. And	21	140
so somehow it just wasn't the right placement.	22	140
And the stripping then that goes on in an	23	140
appreciating market is if, in fact, those families keep	24	140
borrowing with the wrong product, you're just never going to	25	140
gain -- there was a statistic I reviewed last night that said	1	141
something like certain types of subprime loans cut the equity	2	141
in a home by 50 percent in the first five years. And so the	3	141
stripping mechanism can sometimes just be product placement.	4	141
And I think that that's where we need to show up.	5	141
And I should say this so we're on record for this	6	141
detail, that the National Home Equity Mortgage Association	7	141
has a borrow smart curriculum that we deem as viable and that	8	141
we encourage consumers to review, both on line and in print	9	141
and in class -- there's three ways to get access to it --	10	141
that they created to encourage consumers to participate	11	141
actively in understanding what they're borrowing.	12	141
MS. BRAUNSTEIN: Heidi, before you respond -- and	13	141
maybe I misheard your question. But I know that in Chicago,	14	141
Bruce Gottschall was on one of our panels. And, of course,	15	141
he runs the foreclosure program in Chicago. But one of the	16	141
things he talked about -- and that's what I thought you and	17	141
Heidi were alluding to in your opening comments -- was that	18	141
there even were more insidious things going on in some cases	19	141
where people would start in the foreclosure process and some	20	141
people actually would go to seek help and that there are had	21	141
been companies set up and -- set themselves up as to help you	22	141
through foreclosure and those were the folks that were coming	23	141
in and -- and I thought that's what you were asking about.	24	141
We know about the stripping that goes on because of	25	141
bad loans and stuff. But this was actually people who were	1	142
trying to get help to do work-outs and not -- and pull out of	2	142
foreclosure, and that companies, if they didn't go to the	3	142
right people, all of a sudden they lost their home and this	4	142
person that was supposed to be helping them is the one who	5	142
made them lose their home.	6	142
And so -- and Heidi was nodding maybe. Is that what	7	142
you were talking about?	8	142
MS. LI: Yes. In addition to what you had just	9	142
spoken to just now, Lori, I mean, that's what I was referring	10	142
to earlier in the opening. And really this is an increasing	11	142
problem.	12	142
I mean, the National Center -- Consumer Law Center	13	142
just put out a report in the last two years that looked at	14	142
this problem of foreclosure scams and detitle theft	15	142
throughout the country.	16	142
And I think that one of the things I want to make	17	142
mention of was that here in California, we are at least on	18	142
that level one of the states that actually has some legal	19	142
protections at the state level to try to help protect those	20	142
folks who they basically -- they are a homeowner. They've	21	142
owned their home say for five to ten years or more. They	22	142
have a fair amount of equity in the home.	23	142
But because they're a senior, because they may have	24	142
other reasons why their income is now suddenly limited or has	25	142
become limited, they start to go a little bit into distress	1	143
with keeping up with either a current mortgage payment	2	143
situation or they may think that they need to take out some	3	143
sort of financing assistance to help with hospital bills,	4	143
some other obligation.	5	143
And what happens is there's a very aggressive market	6	143
now of these folks, these businesses that are presenting	7	143
themselves as foreclosure consultants and/or financial	8	143
consultants. And they're basically going ahead and sometimes	9	143
knocking on the doors, especially if many of these	10	143
homeowners -- in certain communities they're doing a lot of	11	143
aggressive advertising, calling.	12	143
And what we're finding is that folks who are maybe	13	143
again not the most sophisticated or even a little uncertain	14	143
or distrustful of other options because they don't know that	15	143
maybe they exist or they're not well placed in their	16	143
communities, prime lending options, they go ahead and start	17	143
to go through a process where they think they're getting a	18	143
loan and they're not.	19	143
So here in California we have a Civil Code section	20	143
1695 and another -- it's called a Home Equity Sales Contract	21	143
Act. And we also have an accompanying Civil Code section	22	143
that's called the Mortgage Foreclosure Consultant Act where	23	143
if a certain type of process is not gone through as far as	24	143
certain written disclosures about what the purchase loan --	25	143
If it's a purchase contract actually involved versus	1	144
an actual refinance loan, that there's a certain number of	2	144
days in which that homeowner has the opportunity in which to	3	144
be able to review that now contract for sale which they've	4	144
been told is not a sale contract but a loan contract and also	5	144
be able to cancel it.	6	144
And they also are given certain rights to go ahead	7	144
and be given written notice of how they can go about the	8	144
cancellation process. If that doesn't happen, they're	9	144
entitled to actually up to three or possibly four years after	10	144
that transaction seek to undo or cancel that sale of their	11	144
home. And that's what we call an equity purchaser situation	12	144
where there is an unknowing equity seller. So we see that.	13	144
And also in California we have Civil Code section	14	144
1632, which I think is a very useful model perhaps for	15	144
federal purposes to look at as far as giving disclosures in	16	144
writing, at least some of the key loan disclosures to folks,	17	144
in the language of the transaction if it's not English.	18	144
MR. OLSON: Kevin referred to that.	19	144
MS. LI: Yes.	20	144
MR. OLSON: I think Leonard has a --	21	144
MR. CHANIN: One final question. We're committed	22	144
to, as Michael suggested and Heidi, to reviewing regulations	23	144
and disclosures. That's a long-term goal with consumer	24	144
testing and the like.	25	144
MR. FAUST: Good luck.	1	145
MR. CHANIN: We will need it.	2	145
But one of the things I'd like your views on is are	3	145
we still in the paper world? That is, in terms of your	4	145
experiences with consumers and looking at, reviewing	5	145
information, are paper documents still the way that consumers	6	145
best are likely to review the information, understand it, or	7	145
is it possible to push consumers toward the Internet or	8	145
towards DVDs, any other means of trying to better communicate	9	145
with consumers?	10	145
MR. FAUST: I think the answer is all of the above.	11	145
I mean, I hate to say it. I mean, you've got -- you've got	12	145
everything from, you know, paper tigers to E tigers that	13	145
they'll tear it up no matter which way you go. But you've	14	145
got to have it all.	15	145
I mean, it's like some consumers that want to fill	16	145
out the application on your web site. They don't want to	17	145
come visit with you. These tend to be more sophisticated,	18	145
you know, people that are extraordinarily tech savvy.	19	145
I live and work in the Roseville area. Let me tell	20	145
you, a guy that's 30 years old working at Intel, he doesn't	21	145
need a piece of paper. But he's very comfortable on line.	22	145
You still have to make sure the disclosures, though, are	23	145
there in paper. I don't think you can, you know, give up one	24	145
for the other. I don't know.	25	145
George, what do you think?	1	146
MR. HANZIMANOLIS: That's my sentiments exactly. We	2	146
have -- within my own company, we have a web site. We get a	3	146
lot of applications on those sites. And like Michael says,	4	146
some of those people are very comfortable filling out an	5	146
application and doing things long distance like Lori did with	6	146
her last refinance.	7	146
However, in the large majority of the cases, it's	8	146
followed up with a face-to-face. So I think the customer	9	146
likes that we'll do the DVD by mail, they can apply on line,	10	146
but in most cases, it's followed up by a face-to-face so we	11	146
can sit down and really make sure they understand the process	12	146
as they go through.	13	146
So I don't think we'll ever do away with the paper	14	146
part of that.	15	146
MR. OLSON: Well, thank you very much, panel. Very	16	146
useful and we had -- I think we're -- the convergence of	17	146
opinion from group -- from people that represent very	18	146
differing points of view I think indicates that there's an	19	146
underlying presumption that the mortgage market on balance	20	146
contributes significantly to what we think is positive	21	146
societal value and we're all trying to focus in on how we can	22	146
make it better.	23	146
Thank you very much for your participation.	24	146
We'll be back here at 1:30. We have one more panel.	25	146
If you would like to speak at 3:00, please sign up outside so	1	147
that we can call on you. Thanks.	2	147
(Whereupon a lunch recess was taken.)	3	147
MR. OLSON: It's 1:30 and we would like to get	4	147
started.	5	147
First of all, it's Friday afternoon and the sun is	6	147
shining and it's gorgeous and you folks are in here. So	7	147
everybody gets a certification of appreciation for being good	8	147
enough to stay here during the -- on a Friday afternoon.	9	147
The sole exception to that will be me. I'm going to	10	147
be leaving here right at 2:00 to catch a plane back to the	11	147
east coast. I will hand the gavel to my esteemed colleague	12	147
here, Sandra Braunstein, Sandy Braunstein. As the expression	13	147
goes, and you will be in very good hands from that point on.	14	147
We will continue with the same subject but with I	15	147
guess a more specific focus and this time particularly on the	16	147
reverse mortgage product. And we will have -- we'll go in	17	147
the same format. In other words, we'll ask each of you for a	18	147
five-minute introduction of your topic.	19	147
Peter indicated to me during the lunch hour that	20	147
it's very difficult for him to compress his thoughts to 45	21	147
minutes, so this is going to be a real challenge. But I	22	147
think it's clearly an introduction to the topic. But it's in	23	147
the dialogue that so much of the real public policy issues	24	147
get addressed.	25	147
And we again have a timer who will notify you as to	1	148
the -- give you a one-minute notice and then a time is up.	2	148
And we will also continue to go from left to right.	3	148
And we'll start, Ruth, if you would identify	4	148
yourself, your organization. And you have five minutes.	5	148
MS. ROMAN: Thank you. My name is Ruth Roman. I'm	6	148
with the Department of Housing and Urban Development in	7	148
Washington, D.C. Governor Olson, thank you for the	8	148
opportunity to testify on the Federal Housing	9	148
Administration's Home Equity Conversion Mortgage program.	10	148
The HECM program launched in 1989 was designed to	11	148
meet the special needs of elderly homeowners by insuring	12	148
mortgages that turned their home equity into cash in a safe	13	148
and affordable manner. The program has been tested for 16	14	148
years and has proven to be a success story and a model for	15	148
the private sector.	16	148
With over 43,000 loans insured by FHA in fiscal year	17	148
2005, the HECM product has experienced tremendous growth over	18	148
the last several years. There has been an increase of more	19	148
than 200 percent from fiscal 2003 when FHA endorsed just over	20	148
18,000 loans. We're projecting another increase in loan	21	148
volume in fiscal year 2006 to approximately 60,000 loans.	22	148
Today HECMs continue to be at the forefront of the	23	148
reverse mortgage industry, representing approximately 95	24	148
percent of the business today. The product is less expensive	25	148
than other reverse mortgage products, providing higher cash	1	149
proceeds to borrowers and offering unique consumer	2	149
protections.	3	149
This afternoon I'll provide a brief overview of the	4	149
HECM product and mention some proposed legislative changes	5	149
that are now being considered in congress.	6	149
The HECM product provides a number of benefits to	7	149
seniors. There are no restrictions on how the proceeds from	8	149
the HECM loan could be used, no repayment is required as long	9	149
as the HECM borrower remains in the home. Unlike a	10	149
traditional mortgage, there are no monthly principal and	11	149
interest payments. The lender pays the senior.	12	149
HECMs are also nonrecourse loans. The borrower	13	149
heirs will never owe more than the value of the property,	14	149
even if that value has declined and the loan balance is	15	149
greater than the loan's appraised value.	16	149
In order to be eligible for a HECM, a senior must be	17	149
62 years or older, own their home free and clear, or have a	18	149
small remaining balance that can be paid off with the reverse	19	149
mortgage. They must occupy the property as a principal	20	149
residence and not be delinquent on any federal obligations.	21	149
Eligible properties include single family homes,	22	149
town houses, condominiums, manufactured homes, as well as	23	149
two- to four-unit developments that are owner occupied.	24	149
The HECM program has no income asset, employment, or	25	149
credit requirements. And an appraisal is required to	1	150
determine the value of the property and ensure the property	2	150
meets FHA standards.	3	150
The amount of money a senior can receive from a HECM	4	150
depends on several factors, including age, appraised home	5	150
value, the location of the home, and current interest rates.	6	150
The HECM program is extremely flexible, offering	7	150
seniors five payment plans, options that permit the borrowers	8	150
to draw funds on a monthly basis, in a single lump sum,	9	150
through a line of credit, unless some tap funds is needed, or	10	150
through a combination of these methods. The senior can	11	150
easily change payment plans at any point in time.	12	150
The standard cost of a HECM include an origination	13	150
fee, a mortgage insurance premium, third-party closing costs,	14	150
a servicing fee, and interest. In most cases, the fees and	15	150
costs may be financed into the loan, so a senior incurs	16	150
little out-of-pocket expense.	17	150
All seniors contemplating a HECM are required to	18	150
receive counseling from a qualified HECM counselor. The	19	150
purpose of the counseling is to ensure the senior understands	20	150
the product's complexities and costs and are aware of	21	150
alternatives to a HECM before making a financial commitment.	22	150
The HECM becomes due and payable when the last	23	150
surviving borrower dies, sells the home, or permanently moves	24	150
away from the home. The mortgage can be paid with or without	25	150

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