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Mortgage Loan Lending
High risk mortgage loans may help bad credit people obtain a home and better invest their money than spending it on rent, but some say lenders are offering mortgage loan packages that these consumers cannot fulfill. Should these high risk loans be terminated and force sub-prime, bad credit people to remain renters? Or is it the failure of these consumers to effectively evaluate their ability to make timely mortgage payments?
Congress is looking at potential reforms to risky home lending practices, although a House subcommittee hearing on Tuesday suggests lawmakers are still sorting out the complex workings of the mortgage market and wondering whether reforms will be necessary or helpful.
With the number of foreclosures nationally jumping 47 percent in March from a year ago, lawmakers are weighing whether new lending rules are needed or whether the market is already in the process of self-correcting. The task of crafting reforms is made more complicated by the long list of players involved in mortgage transactions.
Calculate new purchase mortgage loan payments and interest or mortgage refinancing payments and interest.
"There is a very complicated web of contributors to this issue that makes it very difficult and unwieldy to unwind," said Rep. Melvin Watt, D-N.C., at Tuesday's hearing of the House Subcommittee on Financial Institutions and Consumer Credit.
Watt and other committee members said Congress needs to avoid unintended consequences of trying to fix the housing market.
"It's kind of like the Pillsbury dough boy," Watt said. "If you push in one place, it juts out somewhere else."
Their concerns were echoed by Rep. Carolyn Maloney, D-N.Y., the subcommittee's chairwoman, although she made clear that Congress is willing if need be to address the issues.
"This committee is by no means waiting for the private sector to do what it thinks is right to solve this rapidly growing crisis," she said.
Last week, Sen. Charles Schumer, D-N.Y., Sherrod Brown, D-Ohio and Bob Casey, D-Pa., introduced a bill that would mandate tougher federal standards for mortgage lenders even as Senate Banking Committee Chairman Christopher Dodd, D-Conn., was emphasizing that increased regulatory oversight and voluntary reforms by lenders are preferable to legislation.
The mortgage industry, in general, has argued that reform could restrict lending in the near term, hurting low-income borrowers - the intended beneficiaries.
Still, Cara Heiden, president of Wells Fargo & Co.'s mortgage lending division, testified Tuesday in favor of federal lending standards and national regulation of mortgage brokers.
Wells Fargo, she said, already has a ban on risky lending practices, including, for example, loans on which the principal balance can increase over time.
Big financial institutions and Wall Street investment firms have in recent years increasingly bought home loans in bulk from banks and other lenders and bundled them into securities to be sold to investors, theoretically spreading risk and helping provide more funds for lending.
Critics say the creation of this secondary market in mortgages caused housing lenders to be too lenient in evaluating high-risk or subprime borrowers. Instead, they argue, mortgage brokers and banks approved mortgages as quickly and as often as possible so they could profit from the huge demand for securitized mortgages.
Consumer advocates say investors in bundled or pooled mortgages should be held legally accountable for encouraging lax lending practices. They argue that mortgage-holders should file lawsuits against investors and mortgage lenders if there's proof that their actions were illegal or abusive.
But industry representatives say investors, who had no direct role in loan approvals, can't be held legally responsible for creating excesses in subprime lending.
Several lawmakers warned against overzealous reform efforts, citing Georgia's experience as a textbook case. A predatory lending law was enacted in the state in the fall of 2002 that allowed borrowers to seek punitive damages from anyone who bought a loan or a security that included the loan.
In response, the three major credit-rating agencies decided they would no longer rate the credit quality of securities containing Georgia home loans. More than 25 lenders pulled out of the state in the wake of the credit agencies' move.
Georgia's legislature subsequently adopted a law limiting liability for loan abuses to original lenders.
If Congress isn't careful, said Rep. Spencer Bachus, R-Ala., "it will harm low- and middle-income Americans and their ability to finance and purchase a home."
Some lawmakers, however, expressed frustration at the hearing that Congress can't tackle the issues head-on.
"We agree that there is a problem, but we don't want to do anything about it it seems," said Rep. Al Green, D-Texas.
The pace of existing home sales slowed in the first quarter by almost 7 percent compared to a year ago, the National Association of Realtors said Tuesday.
In the latest indication of the housing market's slowdown, the NAR said home sales reached a 6.4 million annual rate compared to 6.9 million in the same quarter of 2006.
The report came on the same day that RealtyTrac Inc., an industry research firm, said mortgage lenders foreclosed on 62 percent more U.S. homes in April than a year ago.
"We expect foreclosure activity to at least stay above last year's levels for the remainder of 2007, fueled by a combustible mix of risky loans taken out in the last few years - many in the subprime market - and slowing home price appreciation," James Saccacio, chief executive officer of Irvine, Calif.-based RealtyTrac, said in a prepared statement.
Home prices are also still falling. The national median existing single-family home price in the first quarter was $212,300, down 1.8 percent from a year ago when the median price was $216,100, according to the NAR's quarterly survey of housing market conditions. The median is a typical market price where half the homes sold for more and half the homes sold for less.
At least part of the decline in the median prices of homes is because sales have shifted away from more expensive homes, a release from the NAR, a realtors trade group, said.
There are some signs of hope in the housing market. Existing home sales rose at a 2.4 percent higher annual rate than in the final quarter of 2006. Fourteen states and the District of Columbia showed an increase in the rate of home sales last quarter compared with only six states showing gains a quarter earlier, the NAR said.
"It appears the worst of the price correction is behind us," said Pat V. Combs, NAR's president and vice president of Coldwell Banker-AJS-Schmidt in Grand Rapids, Mich., in a prepared statement.
Regionally, existing home sales took the biggest hit in the West, where the sales pace fell 11.9 percent to an annual rate of 1.3 million units and the median home price was 1.8 percent below a year ago at $336,200.
Existing home sales in the South fell 7.3 percent to an annual rate of 2.5 million units and the median home price was $177,800, just 0.6 percent below a year ago.
In the Midwest, existing home sales fell 6.1 percent to a pace of 1.5 million units. The median single-family home price was $154,600, down 2.8 percent from a year earlier.
The Northeast fared the best with sales rising at a 1.2 percent annual rate to 1.1 million units last quarter with a median price of $268,900, down 2.5 percent from a year ago.
As home prices slump, there has been a jump in the number of borrowers unable to meet higher payments and unable to sell their homes.
Irvine, Calif-based RealtyTrac said foreclosures in April spiked to 147,708, compared with 91,168 in 2006, as lenders moved to repossess one of every 783 homes. The April figure was 1 percent lower than in March, when foreclosures hit a two-year high.
Nevada, Colorado, Connecticut, California and Ohio had the highest foreclosure rates nationwide, RealtyTrac said.
Foreclosures - defined by RealtyTrac as default notices, auction sale notices and bank repossessions - have been rising nationwide, partly due to too many loans given to people with shaky credit. And during the real estate boom of the past few years, many so-called subprime borrowers were issued adjustable-rate mortgages that are now beginning to reset at higher rates.
The House debated legislation Thursday that would tighten federal oversight of the two largest buyers and guarantors of home mortgages, Fannie Mae and Freddie Mac.
The bill, expected to be put to a vote on Tuesday, is the product of an earlier compromise between majority Democrats and the Bush administration. It also has attracted support from a number of House Republicans.
But the bill was reshaped in a way that lessens the power of the new federal regulator of Fannie Mae and Freddie Mac over their massive mortgage holdings, compared with an earlier version that moved through the House. The mortgage portfolios of the two government-sponsored companies now are worth a combined $1.5 trillion, and the administration has insisted that the new regulator should have the discretion and authority to reduce them.
A bipartisan amendment adopted by voice vote would put some restrictions on that authority.
The overall legislation provides for stricter federal oversight of the two companies, which together finance or guarantee more than three-quarters of U.S. home mortgages.
The multibillion-dollar accounting scandals that rocked Fannie Mae and Freddie Mac in recent years brought demands for tighter government supervision and cuts in their mortgage holdings.
A partisan split was evident during debate over creating a housing aid fund to be financed by the two government-sponsored companies.
About $500 million to $600 million a year from the companies' profits would go to the five-year fund. It would be used for construction and rehabilitation of housing for low-income people.
In the first year, the money would go for housing for victims of hurricanes Katrina and Rita.
Diverting company profits to the housing fund would impose a "mortgage tax" on every home loan financed by Fannie Mae and Freddie Mac, Republicans said, thereby making middle-class homeowners pay for the fund.
In addition, the White House is concerned the fund could be "susceptible to political influences that could compromise the goals of assisting as many low-income families in need as possible."
Republicans say no money from the fund should go to community groups that run voter registration drives.
A corresponding bill in the Senate does not mandate creation of a housing fund.
Fannie Mae and Freddie Mac were created by Congress to pump money into the mortgage market by buying home loans from banks and other lenders, to keep interest rates low and make home ownership affordable for low- and moderate-income people. They bundle the mortgages into securities for sale on Wall Street.
Federal Reserve Chairman Ben Bernanke says the central bank is considering tougher rules to crack down on abusive practices by mortgage lenders. But he says the economy should escape without significant harm from the problems in the subprime market.
Facing criticism from members of Congress about lax regulation, Bernanke said Thursday that the Fed was reviewing all of its options from bolstering disclosure requirements on what lenders must tell prospective borrowers to writing tougher rules to guard against fraud.
"We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers," Bernanke said in a speech to a banking conference in Chicago.
Bernanke, who served as President Bush's chief economic adviser before taking over the Fed post in February 2006, said regulators needed to be sure that any rules they imposed did not stifle the market for legitimate loans.
"In deciding what actions to take, regulators must walk a fine line," he said. "We must do what we can to prevent abuses or bad practices, but at the same time we do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers."
He said that while it was likely there would be further increases in mortgage delinquencies and foreclosures this year and in 2008, he did not believe these problems would be enough to derail the overall economy.
"We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," Bernanke said. He said in answer to a question that he believed the financial system would be able to absorb the losses from the subprime mortgage loans that go bad without major difficulties.
Bernanke's comments represented his most extensive review of the troubles in the subprime market since the Fed and other banking regulators came under criticism from members of Congress earlier this year. The lawmakers said the regulators were not doing enough to halt abusive practices in the subprime market, which provides loans to people with weak credit histories.
Problems with subprime loans have roiled financial markets and raised concerns about possible spillover effects to the entire economy. One major worry was a potentially more severe downturn in housing if significant numbers of homes get dumped back on the market because borrowers cannot meet payments adjustable mortgage payments that are resetting at higher levels.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., who earlier called the whole episode a "chronology of regulatory neglect," welcomed Bernanke's announcement of Fed hearings.
"It's past time for action," Dodd said in a statement, which urged the central bank to "move expeditiously" to promulgate tougher rules.
Sen. Charles Schumer, D-N.Y., who has introduced legislation to help homeowners avoid foreclosures, said Congress needed to act in time to deal with thousands of homeowners facing the threat of foreclosure.
"I hope Chairman Bernanke is right when he says that a slumping housing market will not affect the broader economy, but I would not bet the house on it," Schumer said in a statement.
Dodd, Schumer and other Democrats on the Senate Banking Committee wrote Bernanke a letter last month encouraging the Fed to write new rules against predatory lending in the subprime market. They urged the central bank to require all lenders to assess a borrower's ability to repay before making a home loan, classify as unfair and deceptive any failure by lenders to earmark money for payment of taxes and insurance and restrict the use of home loans with only minimal documentation required of borrowers.
Home-mortgage delinquencies and foreclosures have been surging in recent months, especially among borrowers who took out subprime mortgages.
In his speech, Bernanke said that there are currently about 7.5 million subprime first mortgages, accounting for about 14 percent of all first mortgages on homes. He said the "vast majority of mortgages, including even subprime mortgages, continue to perform well."
The House debated legislation Thursday that would tighten federal oversight of the two largest buyers and guarantors of home mortgages, Fannie Mae and Freddie Mac.
The bill is the product of an earlier compromise between majority Democrats and the Bush administration. It also has attracted support from a number of House Republicans.
But a partisan split was evident during debate over creating a housing aid fund to be financed by the two government-sponsored companies.
About $500 million to $600 million a year from the companies' profits would go to the five-year fund. It would be used for construction and rehabilitation of housing for low-income people.
In the first year, the money would go for housing for victims of hurricanes Katrina and Rita.
Because the companies are chartered by Congress and have an implicit government backing, Republicans said, the public indirectly would be paying for the housing fund.
In addition, the White House is concerned the fund could be "susceptible to political influences that could compromise the goals of assisting as many low-income families in need as possible."
Republicans say no money from the fund should go to community groups that run voter registration drives.
The overall legislation provides for stricter federal oversight of the two companies, which together finance or guarantee more than three-quarters of U.S. home mortgages.
The accounting scandals that rocked Fannie Mae and Freddie Mac in recent years brought demands for cuts in their massive mortgage holdings - now worth a combined $1.5 trillion.
The bill by the chairman of the House Financial Services Committee, Rep. Barney Frank, D-Mass., would not mandate such reductions. It would give the companies' new federal regulator discretion to limit or reduce the holdings.
A corresponding bill in the Senate does not mandate creation of a housing fund.
Fannie Mae and Freddie Mac were created by Congress to pump money into the mortgage market by buying home loans from banks and other lenders, to keep interest rates low and make home ownership affordable for low- and moderate-income people. They bundle the mortgages into securities for sale on Wall Street.
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