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Monday, April 23, 2007

Massachusetts Mortgage Summit Recommendations

by Tanta on 4/23/2007 06:43:00 AM

In late 2006, the Massachsetts Commissioner of Banks convened a "Mortgage Summit" to address issues of foreclosures, predatory lending, and mortgage fraud. The report of the working groups formed at the summit was published on April 11, 2007, and is definitely worth a read for anyone interested in the issue of regulating lending practices or dealing with a foreclosure epidemic.

I will say, as I've said before, that one frequently sees--and the Massachusetts report is no exception--the objection arising to certain legislative or regulatory reforms that it involves the potential for increased costs of mortgage credit. In the Massachusetts example, the proposal to require judicial foreclosures in all cases is met with the utterly predictable response from the lending industry that such a requirement makes foreclosures more expensive, and that lenders would pass such costs on in the form of marginally more expensive mortgage rates.

What frustrates me is that no one--including the Massachusetts task force--is coming back with the response of "And so?" I have some dusty old Econ 101 textbook that is probably filled with a fair amount of nonsense, but I remember it implying that moral hazards can be dealt with by imposing failure costs on the risk-taker. From a rather different economic perspective, I note that extremely cheap mortgage credit, backed by cheaper non-judicial foreclosure options, has really done a lot for us lately.

There is also the predictable claim that regulation of predatory or potentially predatory loan products or brokering relationships would "hurt the poor." This, coming out of the mouths of for-profit lenders, is pretty rich. The idea seems to be that "suitability standards" are OK for middle-class financially-literate people, but they get in the way of making loans to low-to-mod income wage earners who may not have been through Econ 101 and don't run Excel. I'll go on record with the thought that anyone who believes that "democratizing" homeownership means that the poor are helped most by getting loans at any cost is full of MBS.

For discussion purposes, here are a few of the recommendations the working groups were able to agree on (which doesn't mean they'll happen, of course, unless and until not just MA but other states get on board with regulating and legislating these issues).

• Pre-payment penalties should not be charged after the initial reset period of an ARM product.

• Full, simple, and clear disclosure of all the features of the loan that might affect the monthly payment and borrower equity, should be provided.

• Full, simple, and clear disclosure of the incremental cost of each of the risk layering features of the approved loan should be provided.

• Changes in loan terms at or just prior to closing that adversely affect the borrower by increasing costs, fees, or rates or changing other terms are inappropriate and should be considered predatory.

• Require that the name and license number of the mortgage broker be added to the mortgage so that it becomes a public record.

• Require all licensed mortgage lenders and mortgage brokers to report through the annual report to the Division of Banks the number of loans that they originated that went into foreclosure.

• Require all licensed mortgage lenders and mortgage brokers to report through the annual report to the Division of Banks the number of loans originated in Massachusetts that meet the definition of a high APR loan (HAL) under the Home Mortgage Disclosure Act (HMDA)7 and the percentage of all loans originated in Massachusetts that are HALs.

• Based on the HAL data reported by mortgage lenders and mortgage brokers, consideration should be given to the following:

1. If the majority of a lender’s or broker’s business are HALs, the lender or broker must disclose this to the customer in writing, along with information that better pricing and terms may be available from another lender.
2. If the majority of a mortgage lender’s or broker’ closed loan business is defined as HALs, a separate license designation could identify them as a High APR lender or broker. This High APR identification would also have to appear in all advertising.