STEVEN ANTONAKES
Cracking down on fraud
“It was all mortgages, all the time,” remarked Massachusetts Bankers Association Senior Vice President for Government Affairs David Floreen, offering up his assesment of 2007.
He’s not the only one who thinks so. Bankers and lenders across the state said much the same, and mortgage-related issues captured broad attention across the country throughout the past 12 months.
Loose underwriting on subprime loans led to increased loan delinquencies and foreclosures through 2007, wreaking havoc on borrowers, lenders, brokerages, and real estate and financial markets. The fallout extended far beyond American borders, while initiatives and rules designed to minimize the number of foreclosures and tighten oversight of the mortgage industry to prevent similar problems in the future ran the gamut from city programs to federal legislation.
“This was the perfect storm,” said Brian Driscoll, production manager at Amerihome Mortgage’s Winchester office. “And what we’ve seen is that those who took unreasonable risks were demolished.”
More than 200 national mortgage lenders shut their doors or greatly curtailed lending activity in the past 12 months, according to one Web site tracking the fallout of the mortgage meltdown.
Blame has fallen as fast and furious as the snow in two mid-December storms, with some singling out predatory mortgage brokers interested only in how much money they could make through fees and others pointing at borrowers, some of whom they say knowingly took advantage of cheap financing to speculate in housing and others who should have been more realistic about how much house they could afford.
Many insist that bad loans wouldn’t have been sold in the first place if it weren’t for Wall Street investors’ insatiable appetite for the securitized loans and their pricey pay-back schedules. Regulators and politicians also have been criticized for allowing the mortgage industry to evolve in an under-regulated environment.
Jim Blake, president and CEO of HarborOne Credit Union and chairman of the Massachusetts Credit Union League, said the problem with non-performing loans has become so widespread and affected global credit markets because it involves transferred risk.
“Today, it is almost impossible to trace who owns pieces of [securitized loans],” Blake said. “A fundamental flaw that occurred in the mortgage process is that everyone agreed that they were selling off a risk to somebody else downstream.”
While home prices kept rising, he said, the problem was invisible, since people were able to pay off their loans by refinancing.
“But when the entire system is under pressure, it becomes a systemic problem,” Blake said.
Mortgage companies and insurers of securitized mortgages got hit hard last year, but the problems actually began when housing prices started falling in many U.S. markets in 2005, Blake said. Mortgage insurers now are now running into trouble, much in the same way an automobile insurer would have financial problems if everyone got into an accident at once.
A Boston Federal Reserve Bank study recently found that home price declines triggered the nation’s foreclosure wave. But not everyone agrees. Boston-based Americans for Fairness in Lending Executive Director Jim Campen contends that the very fact that a number of mortgage loans were made to people who shouldn’t have had them drove up housing demand and prices.
Boston University Law Professor and Director of BU’s Morin Center for Banking and Financial Law Cornelius Hurley has suggested that U.S. government policies encouraging increased homeownership also encouraged lax lending criteria. That did, in fact, increase homeownership, but as the growing number of defaults suggests, not always in a sustainable manner. Policies supporting affordable rental housing, as opposed to homeownership, would be more appropriate, he suggested.
Whatever the root cause, there’s no arguing the facts. Massachusetts foreclosure numbers increased steadily through 2007. The Warren Group, parent company of Banker & Tradesman, reported that the number of foreclosure deeds lenders filed in Massachusetts through October was 6,234 – nearly triple the 2,112 filed through October 2006 and well above the total of 2,634 foreclosure deeds filed in all of 2006.
Complicating matters for borrowers, many national loan companies that originated subprime mortgages failed in 2007, sometimes taking their loan servicing contracts with them. Confusion over who owns and services loans also has become a problem for many troubled borrowers because so many mortgages now are sold on the secondary market as securities.
The closure of many mortgage companies also has affected jobs within the industry both nationally and locally.
The Massachusetts Mortgage Bankers Association estimates that as many as 20 percent to 30 percent of mortgage lending and brokerage jobs in the Bay State had been shed by year’s end. At present, 1,665 companies are licensed as lenders or brokers in the Bay State. However, the state Division of Banks predicts that when renewal applications for lender and broker licenses come due in May 2008, there will be fewer licensees for the first time in 15 years.
The Web site www.ml-implode.com, created and run by Georgia computer scientist Aaron Crowne, gained prominence in 2007 among lenders who watched it for news of which mortgage company would be next to “implode.”
Last week, the site listed 210 “major U.S. lenders” or loan divisions it said had gone out of business as a result of rising loan payment delinquencies and defaults. Among the major players no longer on the scene are Ameriquest, Option One, Wells Fargo Home Equity, National City’s Home Equity and Correspondent Lending arms, First Magnus, Summit Mortgage Co. and Washington Mutual’s subprime lending operations.
Many local lenders and brokers argue that changes in the housing market triggered the current foreclosure wave, and also predict that self-imposed changes in lending standards in reaction to rising defaults will help curb the crisis. In addition to the near total evaporation of subprime lending, private lenders in recent months have increased requirements for minimum borrower credit scores and loan-to-value ratios.
In November, government loan insurers Fannie Mae and Freddie Mac announced they would impose surcharges on loans made to borrowers with credit scores below 680 to better reflect risk-based pricing.
‘Overwhelming’ Change
Others in government, however, argue that more regulation and legislation is needed to fix problems within the mortgage industry.
The Massachusetts Division of Banks increasingly has focused on cracking down on fraud and predatory lending, putting unlicensed mortgage companies out of business, helping consumers caught in the middle when their mortgage companies went out of business, and creating and supporting changes to laws and regulations that would prevent similar problems from happening in the future, Commissioner Steven L. Antonakes said.
In April, at Gov. Deval Patrick’s request, DOB instituted a hotline that Massachusetts subprime borrowers facing foreclosure could call, with the idea that a stay of the proceedings would help them work out a better solution. Hotline staffers encouraged callers to seek financial counseling and then called their lenders to request temporary foreclosure stays. About 500 of 1,000 borrowers who called obtained stays, although not all successfully avoided foreclosures.
Antonakes, along with virtually the entire state Legislature, also supported a sweeping law passed in November that, among other changes, will require licensing of individual loan originators, require in-person counseling for first-time homebuyers and affirmative signed statements from borrowers accepting subprime adjustable loans, and make $5 million available to the Division of Banks – paid for by the $500 fee originators will pay to be licensed – to enforce licensing and counsel borrowers.
The DOB also increased minimum net-worth requirements for lender and broker firms in the Bay State for the first time since the state started licensing them in 1992, and State Attorney General Martha Coakley in October announced new regulations that will prohibit conflicts of interest between mortgage brokers and borrowers, and require lenders and brokers to “reasonably assess the borrower’s ability to pay back the loan” both at the outset and after any interest rate adjustments.
Bay State trade group officials have had mixed reactions to local legislative and regulatory changes. In a newsletter to members this month, the Massachusetts Bankers Association issued qualified approval of Coakley’s final regulations, stating it was “pleased” they would eliminate a state-required disclosure form that it claimed would duplicate disclosures mandated by the 1974 Real Estate Settlement Procedures Act (RESPA).
But MMBA and the Massachusetts Mortgage Association are wary about the regulations, and MMA Executive Director Denise Leonard, who owns her own lending company in Wakefield, has called the new $500 originator fee – which applies only to non-bank originators – “punitive.”
MMBA Executive Director Kevin Cuff said the trade group is concerned that the “far-reaching attempts by everyone to regulate and correct the industry have led to a piling on of initiatives, any one of which can be understandable, but in their entirety are overwhelming Â… If we were to correct in the fashion in which all regulation intended, mortgage lending as we know it would end today.”
Taking Stock
Not all banking and lending news focused in mortgage problems in 2007, however. Bay State bank mergers continued at a fast clip in 2007, including the unusual joining of Haverhill Bank and Northeast Community Credit Union under the bank’s charter. At least three banks – East Boston Savings, Danversbank and United Bank – announced full or partial conversions to become stock-owned entities, while one, the partially stock-owned Westborough Bank, took the rare step of re-mutualizing during a merger with Hudson Savings Bank in October.
A Federal Reserve Bank of Boston summary concluded that 34 completed mergers or acquisitions in 2007 made the New England region “one of the most active” in the past year.
Maine and Massachusetts financial institutions accounted for the “vast majority of merger activity,” the Fed report said.
The Massachusetts Bankers Association also filed and settled a lawsuit against TJX Cos., parent company of Marshall’s and TJ Maxx, in 2007, following the Framingham-based retailer’s admission that in 2006 a computer hacker stole information connected to more than 45 million consumer credit and debit cards.
The financial terms of the settlement were confidential, but MBA spokesman Bruce Spitzer said his organization, along with the Connecticut Bankers Association, Maine Association of Community Banks and three individual bank co-plaintiffs “settled because we achieved our objectives.
“The public is aware that banks were not at fault for the data breach, TJX is now PCI [payment card industry data security standards] compliant and, generally, the protection of customer data has improved across the industry,” Spitzer said.
Seventy percent of the country’s largest retailers now are PCI compliant, as opposed to just 40 percent six months ago, said MBA President Daniel J. Forte.
