NY Times WASHINGTON, Oct. 22 — "House Democrats introduced legislation on Monday that would for the first time let homeowners sue Wall Street firms for relief from mortgages that the borrowers never had a realistic chance of repaying."
I don’t disapprove of the concept of holding people in the industry accountable for their actions. I do, however, have a problem with giving the consumer too much wiggle room.
I don’t have a lot of respect for subprime originators. I truly believe that the bad apples out-number the good by a large margin in this particular segment of the mortgage industry. I have a friend, Jim, who is a mortgage broker in Ohio, working exclusively in the subprime market. He started out working for a bank, eventually went out on his own and another bank bought his operation. I don’t know much about the way he conducts business but he did make an interesting point one day over dinner.
He raised the question, “When do you know a loan is a predatory mortgage?” Answer, “When the borrower misses his first payment!” His point is this. In most cases, the consumer is fully aware of the loan and it's terms and uses the loan specifically for a "bail out" scenario. As long as everything goes according to plan, the borrower moves towards getting back on his feet and repairing his financial situation. The borrower is satisfied with the mortgage, uses it for as long as it suits his needs and then as his situation improves, can refinance with better terms & rate, or sell the property and move on with his life.
But what happens when things don’t go as planned? The new job position that the borrower just took is eliminated or his marriage breaks up or a medical problem arises. The borrower can’t make his mortgage payment. The words "predatory mortgage" become the exit strategy for him to use to get out of a bad financial situation. People never blame themselves for their actions, it’s always someone else’s fault. A deep pocket lender then becomes an excellent target. "The broker should never have arranged for that loan," or "the broker should have known better."
You see my point. A law written that would be as one-sided as this one is, doesn’t do anyone any good. What needs to be written is a law that gets the thieves out of the mortgage business and at the same time permits a borrower to make a bad decision and deal with the consequences. Enacting a law that punishes the industry for all bad decisions does more harm than good. The net effect would be that there would be fewer options available for an individual to help himself out. This would not good public policy. We need to encourage the industry to develop mortgage programs and underwriting standards that would be difficult to abuse by originators as well as consumers, and at the same time afford consumers the tools needed to help them through bad financial periods in their lives.
We need to increase the level of quality of originator as well as hold him accountable for his advice. We also need to develop a means to verify that the consumer understands the potential consequences of his actions and is making an informed decision. We can't demand the industry prove that a borrower is making the right decision, especially in hindsight. The "right" choice is a subjective opinion. All we can hope to do is equip the applicant with the tools needed to make the decision that is "right" for them.
Tuesday, October 23, 2007
Laws need to be thought through
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2 comments:
I don’t find that view particularly satisfying, but I do understand your point. I can’t accept that the only way to know a loan is predatory is after the fact. Predatory is all about risk. The higher the risk to the borrower vs. the benefit to the broker would be a way that I would characterize predatory. I don’t have number or a criteria offhand, but I’m sure smart people can come up with an agreeable criteria. I would also add it becomes predatory when there are better loan options available to the borrower, and the lender puts the borrower in one that is worse for the borrower and more advantageous to the lender/broker ie the lender exploits the persons circumstance for personal gain.
Now you might say that in a capitalist, democracy it should be caveat emptor, and I agree up to the point where bad decisions by the few impact the rest of society. If those bad decisions mean that I will have to fork over tax dollars to bail these people out then I want rules that lower the risk to the point that we can all say bad things happen like a medical problem etc…
Personally, I would be satisfied with one simple solution. Require a down payment of 20% on all mortgage loans, 10% minimum with PMI. Now at least if the people go under, they have real skin in the game, and it prevents the marginal borrowers from borrowing without some artificial criteria that we may never all agree upon, and finally, it prevents the rest of us from paying for the negligence of the few. What do you see wrong with this?
I wasn’t addressing the black or white version of predatory lending. Yes, putting someone in a mortgage that simply benefits the broker with high profits or writing a mortgage strictly to strip equity of the home is clearly predatory. I was trying to shed some light on the gray area. For example, a homeowner that just came off a period of unemployment. Tough times damaged his credit, etc. He gets a new job and decides to refinance to bring his debts current and/or consolidate. He closes on a mortgage. He is placed in the proper loan and things go fine until something happens and he loses his new job. It not uncommon for this borrower to take the position (especially if this new law is enacted and it is financially beneficially) to claim he should never have done the refinance and it’s the broker’s fault. This is what makes things complicated.
Let’s look at another example. A borrower comes in to a broker’s office. He has plenty of equity in his home and excellent credit. He wants to start his own business. Since new small businesses have a low success rate the broker refuses to place the mortgage because the business, in his opinion, is going to fail. The broker feels that business venture in not in the applicant’s best interests and therefore neither is the mortgage. Does that broker have the best interests of his client in mind? If this law is passed, dilemmas like this will become common. When does sound business advise cross the line to imposing a personal opinion?
I give you one real life example. This was an example used by a consumer advocacy group when we were writing the NYS laws governing predatory lending. An elderly couple applied for a mortgage. They’re only source of income was social security. Based on their income they were granted the mortgage. A couple of years later one of the borrowers passed away. Now the surviving spouse can’t make the mortgage payments. The claim is the broker should have known this and the mortgage never written. Besides the whole age discrimination issue, how do you look someone in the face and say I can’t place this mortgage for you because I know better how to handle your assets?
Requiring a 10% down payment is a reasonable idea and I agree with the concept. A couple of things to remember. The high leveraged full doc, high credit grade mortgages are performing. It’s the subprime versions that aren’t. The other point is that the government has historically been pushing the industry to develop low down payment programs to help people make the transaction from renter to owner. This dates back to the forties when the FHA program was created with a minimum down payment of 3%.
Bottom line – there are no easy solutions.
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