STEVEN L. ANTONAKES
Sees ‘troubling’ practices
Big brother is watching. That was the message delivered by Division of Banks Commissioner Steven L. Antonakes to the mortgage brokers, lenders and attorneys who converged on the Massachusetts Mortgage Bankers Association’s Learning Center in Burlington last Thursday to hear the state’s top banking regulator outline “The State of the Mortgage Industry for 2007.”
“We’re in interesting times,” MMBA Executive Director Kevin Cuff said while introducing Antonakes, who was first in a series of political and regulatory speakers the 400-member trade group has organized for the spring. The advent of the speaker series coincides with a recent spike in foreclosures and increased regulatory and legislative scrutiny of the mortgage industry.
Antonakes’ agency oversees nearly 270 state-chartered banks and credit unions, with combined assets of approximately $225 billion. It licenses and examines more than 5,000 non-bank companies, including mortgage lenders and brokers.
If legislation pending at the State House and supported by Gov. Deval Patrick succeeds in the coming two-year legislative session, the Division of Banks is poised to have licensing authority over some 30,000 to 40,000 individual, non-bank loan originators, as well.
Antonakes told the crowd he’s an optimist.
“However, I am sure we can all agree Â… that [the current problem of increasing foreclosures] is likely to get worse before it gets better,” he said.
His comments offered a peek into why regulators believe the problem has come to a head – and how they plan to address it.
“Unlike previous periods in which foreclosures have risen, the current spike nationally and here in Massachusetts does not appear to be as closely linked to traditional causes such as job loss, health issues or divorce,” he said.
The state does not have specific data tying homes in foreclosure to subprime mortgage loans on those homes. But the facts, Antonakes said, point in that direction.
Low barriers to entry into the mortgage-lending field and a booming home-sales and refinance economy, driven by low interest rates, led to the number of non-bank lenders in Massachusetts tripling in the past six years, to more 2,000 companies, Antonakes said. The recent appetite of Wall Street for higher interest-rate subprime loans and a virtual “explosion” in product types that confuse some consumers exacerbated the problem. More risky loans have been underwritten with reduced borrower-income documentation as lenders sought to meet investors’ and consumers’ demands, he suggested.
Meanwhile, historically low interest rates and rising home values – and deceptive practices by some lenders – enticed some consumers into signing loan agreements they could not fulfill, Antonakes said.
“Not an insignificant number of entities appear to have little or no concern relative to a borrower’s ability to actually repay their mortgage loan,” he said.
A recent report by the Federal Reserve Bank of Boston said that more than two-thirds of foreclosure filings in Massachusetts last year involved subprime loans.
Even as some in the audience privately commented that non-traditional loans such as pay-option adjustable-rate mortgages remain popular among consumers who still want a home, Antonakes said he’s raised concerns about the marketing of such loans to the wrong type of consumer for more than a year.
They are appropriate only in limited circumstances, he said.
“The specific use of interest-only loans and option ARMs, not as a wealth management tool, but as a means of allowing consumers an opportunity to purchase a home they otherwise wouldn’t be able to afford, is troubling,” he said.
State officials now are considering banning another non-traditional loan type, reduced-income documentation loans, in Massachusetts. Those also are rarely appropriate for the first-time homebuyer or one with marginal credit, Antoankes said.
Responding to one questioner’s plea that his agency consider that it may, in fact, be “legislating against the victims here – the lenders,” who are trying to put consumers in the home they want, Antonakes said that while there’s blame to go around, the industry should understand that regulatory controls on mortgage lending will be tightening.
Lenders and brokers should look to the cease-and-desist orders the DOB issued last summer to mortgage issuers that were unlicensed or found to be intentionally overstating income on reduced-documentation loans, or engaging in other deceptive practices, he said, as a predictor of what’s to come.
New federal guidance on non-traditional mortgages was finalized last fall, and later introduced in parallel form by regulators in 29 states, including Massachusetts, so that all entities issuing mortgages would be covered. Antonakes said that move also should serve as a word to the wise about the future of mortgage regulation.
The guidance instructs lenders to carefully evaluate a borrower’s ability to repay an adjustable-rate loan beyond the initial teaser rate.
Tightening Cycle
Following the event, mortgage industry practitioners offered their own assessments of the current lending environment.
“We’re actually doing quite well this year,” said Chris Smith, owner of Capstone Mortgage in Lexington. “We’re seeing a definite pick-up in purchases. Interest rates are good.”
Smith said borrowers who approach her generally qualify for the loans they seek, but added that she’s upfront with those who want help financing a purchase they cannot afford.
“We had one buyer come to us who had a low, but stable income” and was interested in a home that was too expensive, she said. “She had come to us saying she’d heard of the interest-only loans. I told her, ‘You should not buy a home that’s beyond your means.'”
She said she thinks the client will come back to her after finding a home she can better afford.
If not, she said, “someone may help her, but it won’t be me.”
A North Shore brokerage company owner who declined to give his name said he thinks he knows what’s behind today’s foreclosure crisis.
“People went to the well,” he said, taking out home equity loans to maintain their lifestyles as they saw their home values appreciate beyond anyone’s expectation in the early 2000s.
Now, the loans are coming due, home values are declining, and there’s no more equity to be had.
Allen B. King, a part-time mortgage originator with Shrewsbury-based Drew Mortgage and a member of the MMBA Education Committee who’s worked in the industry for 35 years, said history offers a valuable perspective on today’s market.
He recalled the real estate boom of the mid-1980s and the ensuing crash of the early 1990s. Many banks failed during that period because of improperly underwritten loans, he said – which is probably one reason why local banks, for the most part, did not make the loans that are in trouble today.
King, however, suggested that the party for lenders and homebuyers alike is over.
As regulations tighten, fewer buyers will be eligible to purchase a home, he said. And as investors stop accepting certain types of loans or underwriting, there will be less money out there to fund the demand.
“The commissioner said it well,” King said. “You can’t put people into housing and expect them to stay there if, in the end, they can’t afford it.”
