Stabenow law offers debt help but foreclosure crisis rages on

U.S. Sen. Debbie Stabenow's Mortgage Forgiveness Debt Relief Act has now been signed into law. The Michigan Democrat's legislation frees individuals from paying income tax when they have had a part of their mortgage loan forgiven or have been forced to foreclose. It is a measure to remove the insult of additional taxes after the injury of foreclosure.

Even with this legislation, there is more work ahead to help borrowers stay in their homes, keep credit affordable and stave off a recession. There is plenty of blame to go around in Michigan's foreclosure crisis and not all of it in Michigan. Politicians are scrambling to respond to a crisis that was years in the making and could have been prevented through sensible regulation and appropriate oversight. Other recent actions include:

• The Bush Administration announced an entirely voluntary plan for mortgage servicers to consider instead of outright foreclosure when borrowers fall behind on payments.

• The Federal Reserve Bank has approved a set of rules that resemble pre-1980 lending practices - that require evidence of borrowers' income and ability to repay loans and full disclosure of the terms of a loan to borrowers before closing the deal.

• Congress is considering legislation that would allow the Federal Housing Authority to refinance sub-prime loans due to reset at higher interest rates. The FHA would reduce down-payment requirements and increase loan amounts to accommodate the loans.

• The Michigan Legislature is considering a sheaf of bills that would require licensing for loan officers and prohibit predatory lending practices.

• Michigan Attorney General Mike Cox last week sponsored a foreclosure prevention forum at Cobo Center that attracted thousands of borrowers behind on their mortgage payments.

Michigan has recorded over 135,000 foreclosure filings this year. The Detroit area ranked second highest in the third quarter for the rate of households in foreclosure -- one out of every 33 households. Wednesday, RealtyTrac announced that nationally 201,950 foreclosure filings were reported last month, compared with 120,334 in November 2006. Nevada, Florida and Ohio had the highest rates of increase over the year.

While the situation in Michigan is not unique, it is exacerbated by our declining manufacturing economy. Here are some of the ingredients that went into making Michigan's mortgage mess:

• Repeal of the Glass-Steagall Act in 1999. In 1933, this federal act was created to separate investment and commercial banking activities in order to prevent the speculative excesses of the type that preceded the Great Depression. Sixty-six years later, the walls protecting mortgages from becoming fodder for financial speculation finally came down.

• Not enough mortgage examiners. The Michigan Office of Financial and Insurance Services (OFIS) is responsible for regulating the mortgage industry in Michigan. OFIS has an insufficient number of examiners - 12 to regulate over 2,800 companies making mortgages.

• Mortgage loan officers in Michigan are not licensed. Nor does the state require background checks. Convicted criminals can become loan officers.

• Inadequate consumer education. At the epicenter of the foreclosure crisis, Detroit HOPE, a coalition of lenders and consumer advocates, was formed in 2005 to reduce foreclosures in the metro area. In 2007, by September, the group had only held three foreclosure-prevention workshops. Only about 75 people attended each seminar.

• Unethical, but legal, practices. Offering adjustable-rate mortgages to sub-prime borrowers is not illegal. Lax federal and state regulation has permitted giving loans without verifying income or ability to repay.

• Unclear jurisdiction. According to the Conference of State Bank Supervisors, matters of jurisdiction are still being worked out between the states and the federal government in the courts. This April, in Watters v. Wachovia, the U.S. Supreme Court ruled that state-chartered subsidiaries of national banks are exempt from state regulation. OFIS Commissioner Linda A. Watters had advocated for state regulation of state-chartered subsidiaries. Numerous organizations filed amicus briefs, as well as every state attorney general in the nation including Washington, D.C., and Puerto Rico.

Mr. Greenspan pitches his book

Former Federal Reserve chairman Alan Greenspan is on the book circuit pushing his memoir, The Age of Turbulence: Adventures in a New World. He's popping up all over the place offering advice and placing odds on everything from inflation (it's going to accelerate) to recession (more likely than one would want). (source)

Actually, he's changed his mind on recession. On September 12 he put it at 1 in 3. Today, he says just less than 50/50. One recalls Jimmy the Greek in advance of a fight or Monday night football.

He's criticized President Bush and Republicans:

"Little value was placed on rigorous economic policy debate or the weighing of long-term consequences," he said.

He has cautioned against abrupt Federal Reserve rate cuts:

Greenspan said the Fed should be careful not to cut rates too aggressively because the risk of an "inflationary resurgence" is greater now than when he was chairman, the Financial Times reported.

And in some quintessential Monday-morning quarter backing, admits the global credit crunch was well in view on the horizon for some time:

"We did know what was going on and the reason we didn't stop them was that to a large extent these types of questionably egregious actions are taken by people who have their own money invested," he said. (source)

You mean like average homeowners, who in good faith put their own money down for mortgages and find themselves flipped because property values are falling? What about the egregious actions of disreputable lenders pushing loans onto people who couldn't afford them in order to feed the insatiable appetite for potentially high-yield securities?

Well, we're all adults here and it is a new world; Ben Bernanke is chairman now. And he preferred the risk of doing too much to doing too little on interest rates. (source) A man of action almost as daring as Indiana Jones.

House Banking Committee to examine mortgage lending

cross-posted at Michigan Messenger

Legislators are taking on predatory lending in Michigan, but can they eliminate questionable practices that pervade the mortgage industry and laid the foundation for the subprime mortgage crisis? A house committee will hear testimony Tuesday from representatives of the agency that oversees mortgage regulation in Michigan.

House Banking and Financial Services Committee Chair, Rep. Andy Coulouris said, "Tuesday's hearing will lay the groundwork for the debate on how we deal with foreclosures and predatory lending practices in Michigan. We're going to get the lay of the land from state regulators. We want to know what is happening--what regulations are working or not working and what do we need to do to step up enforcement."

House Democrats announced late in August that they would be crafting new legislation to address predatory lending in Michigan. As part of that process, the House Banking and Financial Services Committee will hear testimony from Michigan's Office of Financial and Insurance Services (OFIS) Commissioner Linda Watters, Chief Deputy Commissioner Fran Wallace and Kirt Gundry, Director of Mortgage Examinations and Investigations.

OFIS's work is vast and its effectiveness frustrated by an insufficient number of examiners; unclear jurisdiction; and the lack of education standards, practice standards and licensing for loan officers. Industry standards are so lax you could be a janitor one day and a loan officer the next.

According to OFIS, there are over 3200 companies making mortgages in Michigan. OFIS has 13 full time examiners. Prior to last year, it had only 6.

Depending on a lender's corporate structure, OFIS may not have jurisdiction over an institution creating mortgages. This April, in Watters v. Wachovia the U.S. Supreme Court ruled that state-chartered subsidiaries of national banks are exempt from state regulation. OFIS Commissioner Watters had advocated for state regulation of state-chartered subsidiaries. Numerous organizations filed amicus briefs, as well as every state attorney general in the nation (including Washington D.C. and Puerto Rico). Unfortunately, for consumers, the Court ruled against the state.

OFIS licenses entities--companies or sole proprietors, usually LLCs or corporations, due to liability issues. Loan officers work for licensees; there are no standards for loan officers.

Many in the industry blame unscrupulous loan officers for pushing expensive mortgages onto unqualified borrowers. But companies share some of the blame having created incentives like "yield spread premiums" that reward loan officers for getting well qualified borrowers into unnecessarily expensive loans. As far back as 2004, the Center for Responsible Lending estimated that yield spread premiums cost borrowers $2.9 billion per year nationally.

With ample blame to go around, complicated laws and regulation in flux at the federal level, Michigan's lawmakers will need to take extra care crafting effective legislation to curb predatory lending.

Housing Advocate ACORN Releases Report on Predatory Lending

The Association of Community Organization for Reform Now (ACORN) has released a report titled "Foreclosure Exposure: a study of racial and income disparities in home mortgage lending in 172 American cities".

Using data gathered according to the Home Mortgage Disclosure Act, ACORN concludes that "unaffordable loans disproportionately impact minority and low- and moderate- income families and neighborhoods."

The report examines patterns of lending among minority populations compared to affluent white populations. It concludes that:

"Nationally, African-American home purchasers were 2.7 times more likely to be issued a high-cost loan than white borrowers. Latinos were 2.3 times more likely to be issued a high cost home purchase loan than white borrowers. Similarly, for refinance loans, African Americans were 1.8 times more likely to be issued a high-cost loan than whites. Latinos were
1.4 times more likely to be burdened with a high refinance cost loan than white homeowners."

According to the report Detroit ranks first for risk of foreclosure.

Real Economy versus Banking Sector

On any day, you can find contradictory predictions for the U.S. economy as the subprime debacle expands. Yesterday, the Fed seemed to be saying,"Don't panic. The difficulty is limited to housing." Today, Federal Reserve Governor Randall Kroszner remarked that "Turmoil stemming from subprime mortgage delinquencies could dampen demand for homes and ultimately slow U.S. economic growth."(source)

Now here's the best part from the Reuters article:
"Kroszner, cautioning that his remarks were intended to be a survey of academic research rather than a commentary on the current financial situation, said crises in the banking sector can lead to disruptions in the real economy."

The banking sector versus the real economy? I suppose the real economy is where human beings do things like live and eat and work. You don't actually need currency to do those things. You could barter, raise your own food and use passive solar power. That would obviate the need for a banking sector. The fact is we have developed to a point where most aspects of what we do are financialized.

If you thought your house was primarily the place you live, you were wrong. When you "bought" your house (if you have a mortgage), the transaction created a debt instrument, which was turned into an investment vehicle, which became someone else's gamble. You happen to live there, but it was never merely your home. It was a poker chip among millions of tiny little poker chips on an earth-sized virtual game table.

No matter how much money central banks give troubled lenders, real people are in real pain in the real economy. The real economy is where human beings are hungry and homeless and sick. It is where people feel ashamed at being laid off or falling behind on the bills. It is where parents feel devastated at not being able to buy kids a new outfit for the first day of school. And they may even blame themselves for not earning enough at a poverty-wage-paying, real-economy job.

Will the subprime crisis reach beyond the housing sector? It already has. GM is cutting back fourth quarter production 10 percent in anticipation of lower demand. (source)

And ponder this, the financial sector is a huge part of the much vaunted "knowledge economy." Any room for fairness or compassion as we move forward?

Thursday Morning News Round Up

Michigan Cyber Safety Initiative--Attorney General Mike Cox announced a new program to teach kids about internet predators. Staffers from the Attorney General's office will train teachers in the program this fall.

Detroit Free Press--"A study by the Michigan Association of Home Builders found that 1.35 million Michigan households, or 35%, can afford only homes priced under $100,000, yet the average price was $139,155 in June." Be sure to scroll down in the article for a very enlightening graph displaying how many Michiganders can afford how much home. Shocking numbers.

Detroit Free Press--Nurses at Detroit Medical Center have been attempting to form a union since February.

Detroit News--Attention, bargain hunters. Chrysler announced six-year, no interest loans to stimulate sales. "The six-year loans are available to buyers of the Dodge Grand Caravan, Chrysler Town & Country long-wheel-based minivan, Dodge Dakota, Dodge Durango and Chrysler Aspen, Pinter said. Five-year loans, which began in May, are offered for purchases of the Jeep Liberty, Jeep Grand Cherokee and Chrysler Pacifica."

Globe and Mail--"Pending sales of existing U.S. homes plunged by a record 12.2 per cent in July, and private employers hired the fewest workers in more than four years in August, according to reports released yesterday."

Guardian Unlimited--"Updating its half-yearly forecasts for the global economy, the Paris-based Organisation for Economic Cooperation and Development added to growing pressure on the Federal Reserve to ease the pressure on US borrowers when it meets later this month." Translation: Experts abroad are very concerned about ongoing problems stemming from the subprime crisis.

New York Times--"Stocks slip as Fed says credit crisis is contained." Translation: We mustn't panic.

Mortgage Defaults in Britain Create Micro-Markets of Decline

Michigan may be one of the top states for residential foreclosures, but now even the Brits are getting in on the miserable action. This morning, the Guardian reports that Brits are facing "micro-markets of decline." That apt phrase may well describe the real estate situation in southeast lower Michigan and Detroit.

And this sounds extremely familiar:

The Royal Institution of Charter Surveyors "believes the trend will continue in 2008 as interest rates bite for homeowners whose fixed-rate deals have come to an end. It predicts repossessions will exceed 45,000 next year, a figure that would translate into 125 repossessions per day."

Britain's population is about five times that of Michigan, but 125 repossessions per day will affect tens of thousands of families and children.

Adjustable rate mortgages do not help people "afford" homes. Here, as in Britain, ARMs are at the heart of a default crisis. ARMs defer the moment of truth when a borrower must face the real limits of income and expenses, cash flow and variable interest rates.

Even a British accent cannot take away the sting of default and repossession.

Houses to Hedge Funds--The Great Chain of Owing

Subprime mortgage lending sits at the center of current global financial upheaval and at the same time in our backyard. How did this happen and what is happening in Michigan to protect consumers or borrowers?

How did we get here?
Prior to 1981, most mortgages were made through banks, credit unions and savings and loans–depository institutions. There was a high degree of local accountability as institutions would actually take in deposits and make long-term loans that would remain on their books. Loan officers were required to make sure borrowers could actually pay back the loan, because a bad loan meant a loss for the lender. In addition, depository institutions were interested in creating relationships with clients and communities.

Recession, deregulation and global influence
High interest rates during the recession of the 1970s decimated the savings and loans. Deregulation of the financial and securities sector in the 1980s and 1990s changed things even more dramatically. Mortgages went from local transactions between borrowers and lenders within communities to something entirely new–local transactions financed at a global level.

According to Kirt Gundry, Director of the Mortgage Examination and Investigation Section of the Michigan Office of Financial and Insurance Services (OFIS) “Mortgage lending is local in terms of the loan officer and the borrower, but it is global in terms of financing and where the lenders are. Most lenders, including banks, package loans and sell them on the secondary market. The secondary market will securitize those into big mortgage-backed debt instruments and then investors will purchase those bonds.”

Gundry sees a positive outcome from the current market,“Home ownership increased in this country because of the global marketplace and the greater access to credit. A lot of loans would not have been available in the old model.”

When borrowers begin to default though, the local once again becomes global and bites everyone in the mortgage-to-hedge-fund food chain. Homeowners face foreclosure, mortgage companies weaken or fold (American Home Mortgage, Countrywide), hedge funds vaporize (Bear Stearns among others), investors freak out, and central banks pump currency into the system to maintain liquidity and stave off a credit crunch.

An ounce of prevention
Here in Michigan, the Office of Financial and Insurance Services is responsible for licensing and examining mortgage companies. OFIS licenses entities–companies or sole proprietors, usually LLCs or corporations, due to liability issues. Loan officers work for licensees; there are no standards for loan officers. In Michigan, you could be a janitor one day and a mortgage loan officer the next.

OFIS recently issued best practices for subprime mortgage lending in Michigan reflecting recommendations from CSBS (Conference of State Bank Supervisors), AARMR (American Association of Residential Mortgage Regulators) and NACCA (National Association of Consumer Credit Administrators). But these are best practices, not regulations carrying the force of law. These amount to suggestions for prudent lending practices–the sorts of things that were standard procedure before deregulation.

Legal and profitable
Offering adjustable rate mortgages to subprime borrowers is not illegal.

Industry practices make it profitable for brokers to steer borrowers into inappropriate products. Lenders reward brokers/loan officers for steering customers into higher rate products when customers qualify for lower rates. The broker is given a bonus called a "yield spread premium." In a U.S. Senate Banking subcommittee meeting June 26, John Robbins, the chairman of the Mortgage Bankers Association, told senators,"Are yield-spread premiums abused? Absolutely. Do borrowers understand what they are paying in yield-spread premiums? The vast majority of time they do not."(source)

Unclear Jurisdiction
According to Tim Doyle, Vice President with the Conference of State Bank Supervisors, issues of jurisdiction are still being worked out between the states and the federal government in the courts.

Because of the diversity of corporate structures found among mortgage originators, states have had a tough time regulating them. This April, in Watters v. Wachovia the U.S. Supreme Court ruled that state-chartered subsidiaries of national banks are exempt from state regulation. OFIS Commissioner Watters had advocated for state regulation of state-chartered subsidiaries. Numerous organizations filed amicus briefs, as well as every state attorney general in the nation (including Washington D.C. and Puerto Rico).

Doyle says, "Consumers who are having difficulty with a financial institution do face confusion over where to turn for help, because in some states certain types of institutions are exempt from state regulation."

In spite of regulatory murkiness Doyle says that more and more responsibilities have been placed on states to supervise the mortgage industry, even as mortgage brokers have proliferated. "There are about 90,000 licensed mortgage brokers across the country and the state agency staffs in many states have not increased with the growing responsibilities."

How many examiners are enough?
OFIS has 13 examiners to oversee nearly 3200 mortgage companies.

Even though OFIS augments its in-house examiners with additional contract examiners, Gundry says, “there isn’t enough regulatory presence in the market place to really keep an eye on all these companies. It would take us over 10 years to examine every mortgage company in Michigan just once. If we had 36 examiners, we could get the examination cycle down to 2 years. It would then be similar to banks, trusts and credit unions that are on an 18 month cycle. In those depository institutions, an examiner is coming in the door every 18 months. We’re coming in the door only if we think there is a problem.”

Could a higher number of examiners in Michigan have mitigated the impact of subprime lending here? “If we had been on a 24-month cycle and kept up with new licensees I think we could have definitely prevented some of this,” he allows.

Why aren’t there more examiners?
Actually there are. Prior to last year, there were only 6 examiners for the entire state. Last year OFIS was able to add seven more. OFIS examiners are funded by licensing fees and activity fees, not the general fund, yet OFIS cannot hire more examiners without approval of house and senate appropriations committees. In the midst of the state budget crisis and hiring freeze, hiring additional examiners is highly unlikely.

Hope for the future
States are attempting to collaborate and share information with respect to licensing. In February OFIS announced its participation in developing a nationwide Residential Mortgage Licensing System. At that time, Commissioner Watters said, "the system will give us an increased ability to hold industry professionals accountable for their actions, and should help reduce fraud and other illegal or unethical behavior such as predatory lending.”(source) As of February, 29 states had agreed to participate in the system expected to launch in January of 2008.

Real protection
In spite of the vastness of the mortgage lending industry and the shortage of examiners, Gundry's office is carrying out a lot of enforcement. In some cases licenses are revoked; in the most extreme cases, loan officers are prohibited from working in Michigan. Prohibition results from some type of fraud such as: overstating income or assets, understating liabilities or forging documents, even falsifying entire applications. A list of prohibited loan officers is posted on the OFIS website.

Advice to borrowers
With an industry in chaos, what are borrowers to do? Gundry had some sound advice, "Potential borrowers can find HUD approved non-profit credit counselors to help evaluate their situation. If they are getting ready to close on a house, they might want to have an attorney review the documents before closing.”

And what if you are already in your home and unclear about the terms of your loan? “If you already have a mortgage, get your loan documents out, locate the note and find out if you have an adjustable rate loan. You might want to consider refinancing to a fixed rate loan before the ARM resets. If you can’t refinance in time, at least you will not be caught off guard when your payment increases.” The Detroit News reported last week that loan activity in Michigan increased in July due to borrowers seeking to refinance out of ARMs to fixed rate mortgages.

Helping consumers, education versus rescue
Debate on how best to help consumers rages in Michigan and every state. Some propose bailout funds for homeowners, others take a hard line saying borrowers should take responsibility for bad decisions. More consumer education is certainly needed. A bailout fund in Michigan seems completely out of the question given all the other budget pressures and disagreements facing the legislature.

For now, it is still buyer beware.

Subprime in Michigan: New Best Practices From OFIS

Defaults on subprime mortgages in the United States are at the heart of a global credit and finance crisis that has been rattling international markets for weeks. Today the BostonHerald reports that "France’s largest bank, BNP Paribas SA, announced that it was freezing about $2.2 billion worth of funds, citing the deteriorating subprime loan market in the U.S."

Subprime-backed hedge funds are all about repackaging really bad loans as a great investment opportunity--passing the buck or tossing the hot potato for profit.

As the U.S. housing bubble continues to pop, Michigan ranks fifth for foreclosures-- caught in the perfect storm of huge manufacturing job losses, subprime mortgages, unprecedented consumer debt, questionable mortgage lending practices and little regulation of the entire financial sector.

The Michigan Office of Financial and Insurance Services has issued regulatory best practices for mortgage originators that market and sell adjustable-rate mortgage products to subprime borrowers. (press release)

Michigan's OFIS has a big job--regulating HMOs, banks, domestic insurance companies, investment advisors, securities broker-dealers, consumer finance lenders, insurance agents and securities agents. It's a tough job, but someone has to try.

Since1981 the number of mortgage companies in Michigan has gone from zero to approximately 3,200.

And what are these best practices for subprime mortgage lending? You won't find a summary in the press release, but you can wade through the "regulatory guidance" yourself.

The document assumes subprime lending will continue.

The OFIS statement contains many shoulds, but not a single "must." These are not rules that must be followed. They are prudent measures that, if implemented, could spare a lot of consumers a lot of pain. Given the unfolding global financial news, they seem too little too late.

Offering risky ARM products to high risk borrowers might be immoral, but it isn't yet illegal.

Until federal government regulations or a global credit freeze stop non-depository lenders from making bad loans, caveat emptor.