FRB: Federal Reserve Bank of Atlanta - July 11, 2006 - Transcript

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Atlanta
1000 Peachtree Street N.E., Atlanta, Georgia 30309
July 11, 2006

Agenda | Transcript

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

Transcript	Line	Page
If you wouldn't make the loan to your grandmother, maybe you	1	51
shouldn't make the loan. But the idea is to get the lender,	2	51
the originator, to --	3	51
MS. BRAUNSTEIN: Of course, that would depend on	4	51
who the lender is and how they feel about their grandmother.	5	51
MS. SAUNDERS: I understand. But the point is	6	51
deliberately to create a sense of danger about making a loan	7	51
that may go bad so that the originator has to justify why	8	51
this loan is a good thing, why the risks are appropriate,	9	51
why the borrower truly understands and still wants to accept	10	51
this loan. In other words, we get away from the automated	11	51
underwriting for bad loans which we have right now with so	12	51
much of subprime lending.	13	51
I'm sitting here looking at Option One's AB report	14	51
that appeared online. And in 2000 -- The 1999 loan pool has	15	51
a one in eight foreclosure -- one in eight of those loans	16	51
has been foreclosed upon. We want to make every loan that	17	51
Option One makes and all the other big subprime lenders,	18	51
have the people that make the loans and the people that buy	19	51
the loans concerned with whether or not they were the right	20	51
loans to be made. And if -- I have a --	21	51
MS. BRAUNSTEIN: And I've also heard in other	22	51
hearings people describe the suitability standard as working	23	51
not just is this the right loan for you, but if we have 12	24	51
other products, making sure that which -- that there would	25	51
be some responsibility to make sure out of those 12 you give	1	52
them the best one of the 12 for their circumstances. Is	2	52
that also what you --	3	52
MS. SAUNDERS: Yes. You look at does this	4	52
consumer need a mortgage loan and what mortgage loan product	5	52
do we have available is appropriate for them. The -- What	6	52
is the costs of this loan, what are reasonable costs, can	7	52
this borrower repay the loan, is the cost -- short term and	8	52
long term equity costs of this loan appropriate in exchange	9	52
for the benefits for refinancing, for taking money out, for	10	52
avoiding foreclosure. These are evaluations that investment	11	52
counselors make every day when they take our money and put	12	52
them into the securities market.	13	52
And yet, comparatively, that's a much less risky	14	52
transaction than taking a mortgage on your home loan because	15	52
you're not only dealing with your current savings, you're	16	52
dealing -- in a home loan, you're delaying with future	17	52
savings and future income. It's a much more complex	18	52
transaction, and the distinction between how much the	19	52
homeowner knows and how much the lender knows as compared to	20	52
how much the investor knows and how much the investment	21	52
counselor knows is much greater. The ratio between	22	52
knowledge is much greater. So if we had suitability --	23	52
MS. BRAUNSTEIN: And one of the things -- It's an	24	52
interesting discussion, and we don't have a position at this	25	52
point on this, the Fed. But I will say that historically	1	53
the way we have operated has been to require the lenders to	2	53
disclose information. But the -- Frankly, the decision has	3	53
laid with the consumer -- has remained with the consumer to	4	53
evaluate the disclosed information and make decisions as to	5	53
what is the best product for them as opposed to putting that	6	53
on the lender to make that decision as to what the best	7	53
product is for the consumer.	8	53
MS. SAUNDERS: Well, that may work in the prime	9	53
market. It probably does work in the prime market, although	10	53
I get a lot of calls from fairly sophisticated people who	11	53
don't understand their loans and made bad decisions. But it	12	53
doesn't have as devastating consequences in the prime	13	53
market.	14	53
It clearly does not work in the subprime market.	15	53
What more evidence do we need that we need substantive	16	53
regulation than the escalation of foreclosures and the huge	17	53
loss in the Fed's own statistics of home equity. It's not	18	53
working.	19	53
MS. BRAUNSTEIN: Barbara, I'd be interested from	20	53
-- Do you have the perspective on this as a regulator and	21	53
you didn't use the suitability route in New York, so	22	53
would --	23	53
MS. KENT: The -- It's interesting because when we	24	53
were drafting the regulation back in 1999 and 2000 we gave	25	53
consideration to doing away with it and just doing a	1	54
suitability test. We backed off of that because of a	2	54
banking department sort of has a slightly different role in	3	54
this. We go out and examine loans. What were we going to	4	54
tell our examiners they should be looking for? You can't	5	54
tell them the grandmother standard. They have to have more	6	54
specific guidelines than that. So we tried to create,	7	54
without using the word suitability, a suitability test with	8	54
affordability, with refinancing time limits, with yield	9	54
spread premiums being included, with -- that you can't	10	54
finance high cost -- I'm sorry, that you can't finance	11	54
single premium credit insurance and yield spread premiums	12	54
are included in the points and fees.	13	54
So we tried to take the elements, but it does	14	54
leave out the fact of the products that you mentioned. They	15	54
have a dozen products the lender has the responsibility to	16	54
steer the consumer to the product that's best for them. We	17	54
would need more -- We would need substance to a suitability	18	54
test. We don't have any objection.	19	54
We wanted to go that way to begin with and -- and	20	54
think it could cure a lot of problems. But for us, it	21	54
creates the problem of what -- of how do we examine for it	22	54
and how do we take someone's license away if we don't have	23	54
some specific standards for it, how do we bring an	24	54
enforcement action.	25	54
MS. SAUNDERS: Yeah.	1	55
MS. BURKS: On this point I am speaking for Nevada	2	55
Fair Housing Center alone, and CRC has not taken a position	3	55
on suitability. As an agency that advocates for choice in	4	55
housing and lending, I think we have to be careful about	5	55
telling a consumer in the issue of getting the loan that has	6	55
a benefit what is sort of good for you. The difference in	7	55
the investment world and the mortgage world is that as an	8	55
investor, if you are investing my money, I have a different	9	55
bargaining position. I have more power than I do in the	10	55
lending arena.	11	55
So if by suitability we are talking about a final	12	55
decision by the lender as to what is best for the consumer,	13	55
I think we have to be very careful and tread lightly. I	14	55
think we can get there by looking at practices, regulating	15	55
bad practices, and looking at a benefit versus sort of going	16	55
that extra step.	17	55
MS. BRAUNSTEIN: Either Harry or Wright, you want	18	55
to comment?	19	55
MR. ANDREWS: Go ahead, Harry.	20	55
MR. DINHAM: Well, I have to agree with what	21	55
Barbara said. The problem with vague is it always ends up	22	55
in the court system, eventually, you know. We're for -- You	23	55
know, we would be for some type of suitability if you can	24	55
define what it is so everybody on both sides knows exactly	25	55
what we're talking about at that point. When you talk about	1	56
a grandmother like they said, you know, I don't know whether	2	56
you like your grandmother or not at that point.	3	56
But I really believe that this is something that's	4	56
going to come along, a suitability, affordability in some	5	56
manner. I can only relate it back to years ago, FHA used to	6	56
have a scoring system of six different things -- six	7	56
different -- I don't remember what the categories were, but	8	56
there were six different categories which you had to score	9	56
90 or above in in order to be able to get that loan through	10	56
FHA. So it's been done in the past, and they look at more	11	56
than just income and credit and that sort of thing. So I	12	56
think going down this path of trying to find something	13	56
industry related that works for both the investment side and	14	56
for the regulation side would be good.	15	56
MS. BUCHANAN: Excuse me. I would like to chime	16	56
in, if I could.	17	56
MR. ANDREWS: Okay.	18	56
MS. BUCHANAN: Oh, please go ahead and I'll --	19	56
MR. ANDREWS: Okay. Again, certainly	20	56
affordability and a benefit test, if that's -- which many	21	56
people would consider part of suitability, I don't think	22	56
industry has great problem with that. I think there is	23	56
concern, though, in the other area of how do you decide what	24	56
is best for someone. There are so many products out there	25	56
and so many factors go in, they are subjective decisions,	1	57
personal decisions to be made. I really don't know how you	2	57
could deal with some of those issues. The vagueness is	3	57
incredibly vague. Industry's very concerned that that could	4	57
lead to a tremendous amount of unnecessary litigation.	5	57
Also, just to comment, I think there is a	6	57
difference between a stockbroker working with you and a	7	57
lender or broker. Certainly lenders are not representing	8	57
the borrower, and I guess most of the time, Harry, they are	9	57
not representing either the lender or the borrower. You	10	57
know, there has to be information provided, disclosure	11	57
provided. But there has to be some responsibility on the	12	57
borrower's part to make some decisions.	13	57
And I think in many cases you've got a broad range	14	57
of products. Any of them might work, but you could also	15	57
allege that anyone you put them into if the loan goes bad,	16	57
oh, that was wrong, guess what. So again, great care has to	17	57
be taken as these are explored.	18	57
MS. SAUNDERS: Let me give a few specifics. I	19	57
think I may have not been clear. I think we can easily	20	57
provide the questions that should be asked that would go to	21	57
the evaluation of whether a loan is suitable. It's the	22	57
clear answers as to those questions that make it more	23	57
complicated. Many of these things have already come up.	24	57
The ability to repay should always be a critical part and	25	57
that ability to repay should be based on both -- as Barbara	1	58
said, both a percentage and residual income. Residual	2	58
income is critical.	3	58
Two, you look at the cost of the loan, and the	4	58
cost of the loan is evaluated in three ways. One, the	5	58
points and fees that are stripped out of equity right now.	6	58
Two, the payments. And three, how long is the term going to	7	58
last. In other words, how long are these payments to be	8	58
made.	9	58
You compare those costs of the loan to what the	10	58
consumer is paying now. And you look at -- And the next	11	58
question is, what is refinanced. It's -- No, we're not	12	58
saying a lender has to say to a borrower, no, we're not	13	58
going to refinance $5,000 worth of credit card debt into a	14	58
30-year loan. But if the borrower walks into the lender and	15	58
says, I need refinancing $5,000 worth of credit card debt,	16	58
there's got to be a good justification for refinancing the	17	58
whole first mortgage and all this other debt, in addition.	18	58
In other words, a loan that smells has to be	19	58
explained and justified, and it may be still appropriate.	20	58
Then you look at what the product is. A fixed rate, low	21	58
point and fee, low interest rate loan doesn't have to be	22	58
justified if it's at 20 percent of debt to income. That's	23	58
clear. But when you make a option ARM, which is going to	24	58
explode in three years, to someone who can only afford it	25	58
this year to a fixed income Social Security recipient, that	1	59
-- you know, I would say as the lender you've got to explain	2	59
now really well on your books why that loan is suitable or	3	59
not unsuitable. So we can give you the questions but -- and	4	59
we're not saying the loan shouldn't be made, just that they	5	59
need to be justified.	6	59
MS. BRAUNSTEIN: Bill, you said you wanted to say	7	59
something, and then Joan --	8	59
MS. BUCHANAN: I'll follow up.	9	59
MR. BRENNAN: We're certainly looking at the issue	10	59
of suitability versus underwriting standards. And actually,	11	59
we see it a couple of different ways where suitability	12	59
applies in real life cases. I actually have a live client	13	59
here, Ms. Elizabeth Giles. Would you raise your hand, Ms.	14	59
Giles? She's sitting in the back there. Just to tell you	15	59
where -- Thanks for coming.	16	59
Ms. Giles is my client, and she is 78. And she	17	59
has 1088 a month income, and she got a loan from a prominent	18	59
subprime mortgage lender for $118,719. And her monthly	19	59
payments were 826 a month, and it was an ARM not pegged to	20	59
an index. It just went up, up, up. And she pays principal	21	59
and interest only, no escrowing for taxes and insurance.	22	59
So that's an underwriting issue for us. But let's	23	59
talk about suitability for a moment. We think that in Ms.	24	59
Giles' case and in many, many of our other senior cases, she	25	59
should have been examined or looked at for a reverse	1	60
mortgage. And there's a suitability issue. That's another	2	60
loan product that for the money that she thought she needed	3	60
to get this loan that would have been perfect for her. And	4	60
she would have been eligible either on this loan or the last	5	60
subprime loan she had in the chain of subprime loans that	6	60
were push marketed on her.	7	60
And so there's a suitability issue, I think, which	8	60
needs to be looked at. Another suitability issue is doing a	9	60
-- an ARM to someone living on fixed income. You may be	10	60
able to afford it today, but they won't be able to afford it	11	60
down the road. So for underwriting, they're okay now. But	12	60
down the road when the interest is going up, they won't be	13	60
able to afford it. I think that tends towards suitability.	14	60
So I think there are some clear cases where you	15	60
can identify suitability issues and, of course, I agree with	16	60
Margot about keeping it vague because you need to. But it's	17	60
an issue for us and it ought to be on the table:	18	60
suitability standards.	19	60
MS. BRAUNSTEIN: Joan?	20	60
MS. BUCHANAN: I wanted to follow-up with the	21	60
panelists, kind of in line with suitability, is also our	22	60
ability to detect these issues. Being an examiner, I kind	23	60
of follow the same train of thought that Barbara does often.	24	60
And one of my big struggles is the mismatch between what	25	60
we're hearing from the consumer protection folks on the	1	61
panel and what we find in our examinations. And we do very	2	61
robust examinations for high cost mortgages and HOEPA.	3	61
Our examiners routinely pull foreclosed single	4	61
family files to go through those to look for any troubling	5	61
issues. They look at those often for suitability, as well	6	61
-- general suitability and prudent underwriting standards,	7	61
debt to income, loan to value, things like that.	8	61
We do not find the problems, especially at the	9	61
level that you're discussing these. And I struggle with	10	61
what the mismatch is between the detection and what you all	11	61
are seeing. Can you comment on, perhaps, you know, a void	12	61
there?	13	61
MS. SAUNDERS: Are you just looking -- What do you	14	61
look at?	15	61
MS. BUCHANAN: Mortgage loans.	16	61
MS. SAUNDERS: But what documentation do you look	17	61
at?	18	61
MS. BUCHANAN: All of them, the entire file. We	19	61
look at them for fair lending. We look at them for -- you	20	61
know, the safety and soundness folks look at it for	21	61
underwriting. But like for example, one of the things I	22	61
struggle with is the example you posed of a loan that was	23	61
130,000 and the home was only worth 70. That's like a --	24	61
almost a 200 percent loan to value. That is something we	25	61
never see.	1	62
MS. SAUNDERS: But no, the appraisal came in --	2	62
The home was bought in 1999 for 75,000. The appraisal came	3	62
in at 120,000. But you look closely at the appraisal	4	62
itself, at the appraised form, and you can find the ways	5	62
that the appraiser cheated. And it's appraisal fraud.	6	62
MS. BUCHANAN: Okay. So, that's appraisal fraud	7	62
issue.	8	62
MS. SAUNDERS: And we see appraisal fraud problems	9	62
all along.	10	62
MS. BUCHANAN: Okay.	11	62
MS. SAUNDERS: It takes hours to figure out, you	12	62
know, on the face of it, this appraisal looks fine. It	13	62
looks just like every other appraisal, but you examine and	14	62
what's the problems. Well, there's no justification	15	62
provided for it. How did a house in Beckley, West Virginia,	16	62
increase from 75,000 to 120,000 in one year? That's a	17	62
Fannie Mae, Freddie Mac, FIRREA, USMP, every appraiser	18	62
standard on the books requires that justification to be	19	62
provided. The underwriter, a big bank, didn't find that.	20	62
MS. BUCHANAN: Okay.	21	62
MS. SAUNDERS: So you're -- I don't know that	22	62
you're looking at the same things I'm looking at.	23	62
MS. BUCHANAN: And on Bill's example, this	24	62
unfortunate instance with like an 80 plus debt to income	25	62
ratio, that's --	1	63
MR. BRENNAN: The income -- See, here's the answer	2	63
to that. We look at loan files all the time. We look at	3	63
the same loan files that assignee ends up in their	4	63
portfolio, and it looks great. I mean, here's somebody with	5	63
1,000 a month income, but it says on the application that	6	63
their income is $4,600 a month, that they have two jobs.	7	63
They're working as a dispatcher at a trucking company. I	8	63
always remember that one. And they're not. They don't know	9	63
anything about it.	10	63
The point is that for underwriting, there's no	11	63
decent, honest effort on the part of the lenders to verify	12	63
income with documentation that can be meaningful like they	13	63
used to do. Gosh, when I got a mortgage in 1983 to buy a	14	63
house, I had to go through so many hoops to qualify to get	15	63
that house. There had to be a letter from my employer that	16	63
went not through me but directly to the lender and so forth,	17	63
which was a savings and loan.	18	63
But we don't have that anymore. There's no	19	63
underwriting going on. I mean, it's a joke. They just put	20	63
down whatever it takes to make the loan work to go into the	21	63
securitized pools. And so, when we call and raise an issue	22	63
on it, they pull out the file and say, what's wrong with	23	63
this loan. It looks perfectly fine to us, and it's because	24	63
there's no underwriting going on at the front end.	25	63
MS. SAUNDERS: Application fraud, right.	1	64
MS. BUCHANAN: So that income, though, there's no	2	64
verified documentation in the file which is --	3	64
MS. SAUNDERS: Oh, that I see all the time. I see	4	64
letters, Social Security Administration, this is to verify	5	64
that you have $1,000 a month Social Security income, but	6	64
then you -- then you ask, well, is this true. No, I don't	7	64
get that much. I get 600.	8	64
And what we find cut and paste jobs. That's what	9	64
they're great at, cut and paste. So they take a letter from	10	64
the Social Security Administration. They type up a new	11	64
letter for the body and they cut and paste and Xerox it and	12	64
make it look like the real thing.	13	64
The problem is the industry -- the investment --	14	64
investors don't suffer. When Bill's client goes to	15	64
foreclosure, there's enough equity in that house so that it	16	64
won't go to foreclosure. It'll go to forced refinancing so	17	64
that the risk will get pushed on to the next lender.	18	64
And we're bleeding equity and bleeding equity, so	19	64
that homeowner may not even appear on the statistics as a	20	64
loss to this borrower. And you -- Four or five loans later,	21	64
that homeowner will go to foreclosure, and the last lender	22	64
will actually let it appear as a loss, which justifies the	23	64
high ratio.	24	64
MS. BUCHANAN: So if you're looking at	25	64
suitability, you may pick up the file, and the file	1	65
certainly looks suitable, whether you have specific or	2	65
general guidelines regarding the suitability. The issue is	3	65
the fraudulent aspect of those.	4	65
MR. BRENNAN: I would almost suggest, call the	5	65
homeowner and start talking to them. That's where you find	6	65
out what's really going on.	7	65
MS. SAUNDERS: Occasionally you need to do that.	8	65
MR. BRENNAN: I mean, that's what we do. We just	9	65
sit there and start asking questions. My associate, Karen	10	65
Brown, is going to bring somebody up in the open mike this	11	65
afternoon, one of our clients. She got the whole file from	12	65
the lender. And I don't want to steal your thunder here,	13	65
but it said in there -- the lender said to the originator,	14	65
get the Social Security letter but black out the income that	15	65
she's getting. So it was obvious that they want -- And they	16	65
did. It was obvious that they wanted to show that she had	17	65
income but blacked out the income so that that would get it	18	65
through into the securitized pool. Pretty amazing.	19	65
MS. BURKE: May I -- May I make a point on the	20	65
examination issue? She said that you're not discovering the	21	65
files. I think it may also be the question of the time	22	65
difference between when you examine and when the issue	23	65
occurs. You don't examine every year the same lenders. And	24	65
so, therefore, some of these issues you may not pick up.	25	65
It also depends on what's been sold, whether the	1	66
whole servicing has been sold on the loan or the part of	2	66
it's been sold. So there are gaps that you may not pick up.	3	66
And maybe one thing we could do in regulation is to have you	4	66
sort of request those documents about those issues from	5	66
consumers more along that line when you do the examination.	6	66
MS. BRAUNSTEIN: I think another issue with that,	7	66
frankly, is that we probably don't see as much of this with	8	66
-- We're only examining state member banks, and we're not	9	66
seeing it there as much. We're not examining a lot of the	10	66
entities where this stuff is more likely to happen, so. Can	11	66
we --	12	66
MS. SAUNDERS: Can we examine --	13	66
MS. BRAUNSTEIN: I want to turn over to Leonard,	14	66
Jim. Did you have questions?	15	66
MR. CHANIN: Yeah. Let me move to -- Bill, you	16	66
and Margot, a question. Bill, you'd mentioned that you've	17	66
seen an increase in foreclosures for these transactions and	18	66
others have mentioned abusive practices, for example, where	19	66
income is stated that's insufficient, the debt to income	20	66
ratio, and so forth. Generally and I assume the answer's	21	66
anecdotal, but can you give me a sense on whether the	22	66
biggest problems are in the refinancing market or the home	23	66
purchase market? And if so, are we talking about the	24	66
problems are generally 90 percent are in refinancing or 90	25	66
percent home purchase or how does it split, recognizing -- I	1	67
assume it's anecdotal, but it would be helpful to give me a	2	67
sense of where the biggest problems are among those two	3	67
markets.	4	67
MS. SAUNDERS: I would say -- and Bill may say --	5	67
I would say from our folks around the country, it's well	6	67
over 90 percent refinancing, that almost all these problems	7	67
are refinancing. That's not to say that we don't need some	8	67
protection in the purchase money market, but the abuses that	9	67
I'm talking about today are refinancing.	10	67
MR. BRENNAN: I agree with that. We do	11	67
occasionally see the home purchase cases with falsified	12	67
statements of income and so forth, but the biggest volume of	13	67
cases we're seeing is in the refinancing area.	14	67
MR. CHANIN: Okay. And in a, I think, somewhat	15	67
related question, you had mentioned, Bill, that you're	16	67
seeing an increase in loans where consumers don't have the	17	67
ability to repay, that is, the consumers can't afford these	18	67
loans. And depending on what factors you're looking at,	19	67
that can be translated into lots of different factors. And	20	67
I just want to get a sense of, if you can, specifically what	21	67
are the biggest issues?	22	67
For example, one has already been mentioned is	23	67
there may be falsified income. So for example, it may be	24	67
the consumer's debt to income ratio is perfectly fine on	25	67
paper, but the income is stated at, let's say, $40,000 a	1	68
year when, in fact, it's 20,000. So that's one issue.	2	68
The second, though, may be that the debt to income	3	68
ratio is, in itself, too high, that is, as the example you	4	68
gave, something like 80 percent, I think, debt to income	5	68
ratio. Or there may be other issues in terms of consumer's	6	68
inability to pay. It could be you're looking at, for	7	68
example, as a third example that today the consumer can	8	68
repay, but in two years if rates go up, then the consumer	9	68
gets into trouble because rates have bumped up, let's say,	10	68
two percent, and then the consumer can't repay the loan.	11	68
So again, kind of overall, is there one most	12	68
significant problem that you see and maybe something I	13	68
haven't mentioned in terms of consumer's ability to repay or	14	68
is it quite mixed?	15	68
MR. BRENNAN: I would just -- Barbara can speak to	16	68
this, too. But you know, the funny thing is what we're	17	68
seeing is just almost immediately that the -- there's no way	18	68
in the world the borrower could afford this loan. It's not	19	68
some subtle difference between one issue of debt to income	20	68
ratio. I mean, we ask that question right off.	21	68
I mean, I usually ask a simple question just to	22	68
get right to the point, which is, what's your annual income?	23	68
You know, it's $21,000. And what was the amount of your	24	68
loan? 140. We have sort of a rule of thumb, you shouldn't	25	68
be on another -- It's not debt to income, you shouldn't be	1	69
borrowing more than two to three times your gross annual	2	69
income, assuming you have little or no debt. That's where	3	69
we start.	4	69
Sometimes we get into the debt to income analysis	5	69
but not often because what we're seeing so much of is	6	69
there's no way they could afford this loan. And the	7	69
reaction anecdotally that we're having every day is, there	8	69
must not be enough eligible borrowers out there to get these	9	69
loans. They're pushing these people into the loans, I	10	69
think, to fill the pools wherever they can get them. You	11	69
know, they're a warm body. They're lining them up and	12	69
putting them into the pools. And that's what's happening.	13	69
MS. KENT: Can I just add a point to that?	14	69
MR. CHANIN: Sure.	15	69
MS. KENT: I think that suitability is important,	16	69
but one of the other ways that suitability becomes important	17	69
is through compensation. When -- When the lenders'	18	69
employees are compensated largely on the number of loans	19	69
that they make, they will find a way to make the loan. It	20	69
may be appraisal fraud. It may be cut and paste the Social	21	69
Security statement. It may be a letter written on yellow	22	69
paper saying that I make $3,000 a month in addition through	23	69
babysitting income. It'll be whatever it takes to get that	24	69
loan over the hump.	25	69
And that is -- That's how you get -- Everybody has	1	70
a different anecdote of how it happened. And what --	2	70
Because they'll do anything to make the loan, and I don't	3	70
know that you can directly attack that through compensation	4	70
or sales practices, but that's another reason why	5	70
suitability is important and why affordability is important	6	70
as part of suitability. Because as much as they'll want to	7	70
make the loan if there's some substantive guideline that	8	70
they can't do, then they'll -- it'll act as a break.	9	70
MS. SAUNDERS: The practice of grossing up is	10	70
grossly mismanaged. We see Social Security income, $700 a	11	70
month, grossed up by 130 percent. Nobody that lives on $700	12	70
a month is paying 30 percent federal income tax so that they	13	70
-- the -- although this is not -- this practice is not	14	70
illegal under any guidelines or even improper under Fannie	15	70
or Freddie guidelines, it misses the point. And it's	16	70
completely -- It's totally irrelevant.	17	70
If you have a residual income guideline like New	18	70
York has, it protects against a lot. And the VA guidelines	19	70
are really quite good. And New York's -- If New York's	20	70
guidelines applied to all loans in New York, instead of just	21	70
the high cost loans, we wouldn't be seeing these recent	22	70
foreclosures.	23	70
The problem with the state laws is all of the good	24	70
protections just apply to the high cost loans so that the	25	70
high cost loan triggers in the states work as usury caps,	1	71
which are better than nothing, which means the -- in these	2	71
states the cost of the loans have gone down. But we need	3	71
these rules that apply to high cost loans to apply across	4	71
the board.	5	71
MR. ANDREWS: Can I just comment briefly? Again,	6	71
you know, as I said at the opening of my testimony,	7	71
certainly there are problems out there, and there are more	8	71
problems than we would like. But I tend to think that,	9	71
Margot, you and many of the advocates like Bill who work on	10	71
the front lines, see many of the very worst cases, and there	11	71
are some undoubtedly bad, bad cases out there.	12	71
That said, we don't think from an industry	13	71
perspective that the problem is nearly at the extent you're	14	71
suggesting. We don't think that foreclosures are that high.	15	71
Again, I'll leave that for people like Doug Duncan of the	16	71
MBA and people who can give some foreclosure numbers, but we	17	71
don't see that it's that high. Lenders are not making money	18	71
from foreclosures. And appraisal fraud, yes. That is --	19	71
I'm hearing an awful lot here about appraisal fraud. Huge	20	71
problem.	21	71
Lenders are doing a tremendous amount today	22	71
because they -- it is hurting them very badly. It's hurting	23	71
the customers and the lenders. So you know, we have --	24	71
We're sort of talking about two different worlds here, and	25	71
we would continue to maintain that the overwhelming majority	1	72
of the non-prime loans are not subject to all of these. But	2	72
you do have these problem areas.	3	72
MS. SAUNDERS: With all due respect, Wright, what	4	72
drives us, what brings us to this table are not just the	5	72
cases that we have on our desks, it's the escalating	6	72
foreclosure numbers in counties across the country. It's	7	72
what made one of the most conservative legislatures in the	8	72
country, Ohio, just pass a fairly strong predatory lending	9	72
law.	10	72
And I'm not looking at a advocate's statistics	11	72
here. I'm looking at the statistics from the company itself	12	72
that will post it on the Web as required by the Securities	13	72
and Exchange Commission. And it says in 1999 -- of the 1999	14	72
loans that were made by Option One, subprime loans, 12	15	72
percent of them have been liquidated in foreclosure. That	16	72
means -- These are not --	17	72
MR. ANDREWS: Is that --	18	72
MS. SAUNDERS: -- my numbers.	19	72
MR. ANDREWS: Is that referencing the loans that	20	72
are still on the books? It probably is only referencing	21	72
that small number that's still on the books. Again, I think	22	72
you will find the numbers are more realistically three and a	23	72
half, four percent.	24	72
MS. SAUNDERS: What we're seeing in our offices,	25	72
and we would like -- the legal services offices would love	1	73
to stop spending resources on consumer law and spend them	2	73
instead on -- on employment issues and health issues and	3	73
other issues that are also need sufficient attention. We	4	73
have turned it to consumer law because of this escalating	5	73
problem.	6	73
This is not a problem that is our creation. It's	7	73
-- You look across the country, look at the raw statistics	8	73
in Chicago, in Ohio, in Georgia, in North Carolina.	9	73
Foreclosures are going up, just raw numbers. Too many loans	10	73
are being made that will end up in foreclosures.	11	73
MR. ANDREWS: Well, again, in some pockets there's	12	73
no question you have foreclosure problems. Again, some of	13	73
those pockets, I think you will find not only issues such as	14	73
the economy but some real property flipping and fraudulent	15	73
type practices. But again, I'll leave that to others to	16	73
talk. Bill?	17	73
MR. BRENNAN: Wright, I would just respond also by	18	73
saying that I tend to see a lot and we do see a lot. And	19	73
through the years Karen Brown and I have looked at hundreds	20	73
and hundreds of loan pages, documents and we've -- I think	21	73
we've looked at every major subprime lender in the country.	22	73
And I'm telling you, lending without regard to the ability	23	73
to pay is occurring with every subprime lender. I know we	24	73
don't want to get into naming names. Just name the name.	25	73
I've seen it: Countrywide, Option One, you name it, Wells	1	74
Fargo. We're seeing that going on across the board with	2	74
every single subprime company.	3	74
So when you say there's some bad actors out there	4	74
and that's too bad, I tell you the bad actors are in every	5	74
major subprime lending company. Lots of them because this	6	74
is what we're seeing, and that's what's going on. And I	7	74
know what -- I think why they're doing it. They need to	8	74
fill those pools up because there's no risk at the investor	9	74
side of this equation.	10	74
All the risk is placed on the homeowner. They can	11	74
mix and match the pools in a way with loans with the certain	12	74
number of bad ones being put in that aren't going to hurt	13	74
the investors who the securities. And there's no full	14	74
assignee liability like there needs to be. If there were,	15	74
this would stop.	16	74
If there were laws making these types of practices	17	74
illegal with full assignee liability along the lines of the	18	74
FTC holder rule, which has worked very well in this country,	19	74
this stuff would stop. So I just really must disagree	20	74
strongly when I hear people say there are bad actors and	21	74
it's a shame this is going on. But in general, the subprime	22	74
industry -- Let me say one more thing.	23	74
Here's a subjective opinion. I would never allow	24	74
any of my clients to go out and get a subprime loan because	25	74
I know they will be ripped off. I know they'll get a loan	1	75
they can't afford. If Ms. Giles called me and said, Mr.	2	75
Brennan, I need some money -- and I get those calls -- do	3	75
you think I should go out and get a loan from Option One or	4	75
one of those. Heavens no. Don't go near them. Get a	5	75
reverse mortgage or don't get a loan. That's the way we	6	75
view these, and we've been working on -- I've been doing	7	75
this for 18 years looking at these loans. And that's the	8	75
reality of what's going on.	9	75
MS. BRAUNSTEIN: Jim, do you want to --	10	75
MR. MICHAELS: Yeah. And we're running out of	11	75
time here, so let me try to throw this question out quickly	12	75
and let you react. I guess the question I have is we've	13	75
spent a lot of time talking about suitability standards and	14	75
Margot led off the discussion by talking about how they need	15	75
to be deliberately vague. And I just want to throw out the	16	75
question of how would that likely play out in the secondary	17	75
market. How would the secondary market deal with	18	75
suitability standards that were less than precise? I don't	19	75
want to use the term deliberately vague. That's Margot's.	20	75
She's coined it. But how would the secondary market and the	21	75
bond rating market, in particularly, deal with those kind of	22	75
standards?	23	75
MS. SAUNDERS: Jim, can I -- I have to go. Can I	24	75
just take a one minute? The FTC in the 1970s passed a rule	25	75

Nancy Lee & Associates, Atlanta, Georgia, 404-315-8305

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

2006 Hearings

Building Sustainable Homeownership: Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Atlanta 1000 Peachtree Street N.E., Atlanta, Georgia 30309 July 11, 2006

Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice

Federal Reserve Bank of Atlanta
1000 Peachtree Street N.E., Atlanta, Georgia 30309
July 11, 2006