Mortgage Groups Testify

Sen. Charles E. Schumer (D-NY), the chairman of the Housing, Transportation and Community Development subcommittee, said risky subprime mortgages are the catalyst behind reports of an impending avalanche of foreclosures. Explaining that lower and middle-income borrowers were tricked into obtaining loans that would fail them, the senator provided a hypothetical example of a “2/28 Adjustable Rate Mortgage” and called it a “trap.” The senators seemed anxious to do something about the situation. Sen. Bob Casey (D-Pa.) told a panel made up of industry and consumer representatives that it’s time to get aggressive about preventing mortgage lending abuses, regardless of who is standing in the way. Other subcommittee senators echoed his sentiment.

Sen. Schumer (left)

“We will do something to stop it,” Schumer told hearing witnesses who hailed from the National Association of Mortgage Brokers, the Mortgage Bankers Association, the National Association of Realtors, the Appraisal Institute and several consumer advocacy organizations.But mortgage professionals presented differing ideas on how best to stop predatory lending.

Denise Leonard, chairman and chief executive officer, Constitution Financial Group — on behalf of NAMB, urged Congress to adopt uniform national standards for education, testing, and criminal background checks for all mortgage originators.

Leonard also emphasized NAMB’s support for the creation of a national registry of individuals who work in the industry, funded by user fees. “This national registry will stop bad actors from remaining in the mortgage industry, but only if it includes every individual mortgage originator at every state and federally-regulated entity.” Presently, originators who work for banks do not have to be licensed in states that require licensing.

NAMB’s proposed registry would use registrant fees to help fund enforcement and financial literacy.

She also called for increased professional standards for all mortgage originators.

“NAMB believes that part of the solution to successfully combating abusive and predatory lending practices is requiring a minimum level of education for all mortgage originators, regardless of where they are employed,” said Leonard.

Anthony Yezer (center)

NAMB supports simplified and modernized mortgage disclosures, she noted. Critics of the disclosures currently in use say that even well-educated borrowers do not understand them and that the documents haven’t been updated in years. Leonard also participated in a testy exchange with one of the senators over yield spread premiums after the senators called the back-end payment an “incentive to rip people off.” She pointed out that the premium amount is often limited by the borrower’s ability to qualify at the higher rate and to pay for higher fees. George Washington University Economics Professor Anthony Yezer joined Leonard in defending the payment, telling the senators that, in many instances, brokers work with borrowers for months to get the consumers qualified for a mortgage loan. The senators treated their claims with skepticism.

Sen. Menendez said that after one lender announced it would no longer pay a yield spread premium, it stopped receiving loans.

MBA Chairman John M. Robbins told lawmakers that financial education should be a priority, the mortgage process should be simplified and that uniform national standards for mortgage lending with increased consumer protections and more accountability for mortgage professionals including licensing requirements and the establishment of a national registry to help protect against bad actors moving from place to place should be undertaken. Robbins recently blamed “bad brokers” for the uptake in foreclosures. During the question-and-answer period, Robbins said investors can’t be held responsible for investing in loans that have predatory lending features. Such a practice, called assignee liability, is often touted by consumer advocates as a way to get the mortgage market to police itself. Robbins’ suggestions were not met with approval. One of the senators told Robbins his suggestions “fall far short of what needs to be done.”

Denise Leonard, John Robbins

Sen. Sherrod Brown (D-OH) took issue with Robbins’ argument that the national situation was not unusual if the poor economic situation in Ohio and neighboring states was factored in. Brown said unemployment rates in Ohio have dropped for the past two years while, at the same time, foreclosure filings in several Ohio cities have tripled.Brown is one of the co-sponsors of the Borrower’s Protection Act of 2007 (S.1299). Aimed at curtailing abuse in the mortgage industry, it proposes the creation of regulation and requirements for brokers such as a responsibility to act in the borrower’s interest and outlines standards for brokers and originators to use in assessing a borrower’s ability to repay a mortgage. It also holds lenders accountable for the actions of brokers and appraisers.

Robbins told the senators the bill will diminish mortgage credit.

Pat V. Combs, vice president of Coldwell Banker-AJS-Schmidt, a Michigan real estate company, testified on behalf of the National Association of Realtors. NAR called for stronger underwriting standards and for all mortgage originators to act in “good faith and with fair dealings.”

She said NAR also supports strong penalties for abusive practices and FHA modernization and repeated the association’s stand on eliminating the Mortgage Cancellation Tax. The tax requires income tax be paid on some portion of a forgiven loan after a short sale or foreclosure.

During the question-and-answer period, Combs also suggested the elimination of prepayment penalties.

But Robbins disagreed with her, saying the penalties are important.

NAR also recommended measures strengthening the independence of appraisers be adopted, a move supported by Alan E. Hummel, who testified on behalf of appraisers. Hummel suggested the establishment of a single enforcement standard to deal with appraiser coercion and independence and strengthened appraiser regulation. He said the pressure on appraisers to come back with numbers that meet lender and originator approval has to stop.

Lender sanctioned appraisal inflation is the “dirty little secret of the lending industry” that has triggered the subprime time bomb, said David Berenbaum, Executive Vice President, National Community Reinvestment Coalition.

In closing remarks, Prof. Yezer suggested that lawmakers perform a cost-benefit analysis, keeping in mind that 90 percent of subprime loans are being paid on time.

“People with less than 600 credit scores default, that’s what they do,” he told the subcommittee. He also warned lawmakers against crafting regulation that could diminish the credit supply at a time when home prices are falling. A situation, he said, that could engineer a recession.

“I am resisting the temptation to respond,” one of the senators dryly said after Yezer’s remarks.

Tuesday’s hearing on ending mortgage abuse is one of several hearings in Washington, D.C., during the past several months on mortgage lending practices.