JAMES W. BLAKE
Lenders ‘took advantage’
Addressing the state’s growing mortgage crisis will require joint public and private efforts and will probably cost taxpayers money.
But the alternative – a spiraling downturn in the Massachusetts economy as homes foreclose and values decrease in the most-affected neighborhoods – would be far worse.
Those were the conclusions of a long-awaited report produced following a mortgage industry summit organized by the state Division of Banks last fall. The group of 49 government officials, lenders and consumer advocates who participated in the summit – organized into working groups on regulatory enforcement and consumer education – offered more than a dozen suggestions on how Massachusetts can address rapidly rising foreclosures and increasing evidence of mortgage fraud.
Suggested solutions range from requiring licensing of loan originators to making mortgage fraud a criminal offense. The report, issued earlier this month, makes note of the fact that the Bay State’s foreclosure laws have barely changed since their enactment in 1857.
Meanwhile, the foreclosure problem that spurred the mortgage summit and subsequent report is worsening. First-quarter foreclosure statistics compiled by Banker & Tradesman’s parent company, The Warren Group, show foreclosure activity has increased since the start of the year.
The data show that 6,395 petitions to foreclose were filed at Massachusetts Land Court in the first three months of the year. The petitions are the first step in the foreclosure process taken by lenders when borrowers fall too far behind on their payments.
In addition, just over 3,100 foreclosure auction notices – about one for every two petitions filed – also were advertised in newspapers across the state between January and March this year, an indication that a larger number of troubled properties are moving deeper into the foreclosure process.
In all of 2006, 18,926 petitions to foreclose were filed in the Bay State and 6,720 auction notices were advertised, up sharply from the prior year when there were 11,155 petitions and 4,620 auction notices. In both those years, roughly one auction notice was advertised for every three petitions filed.
Not all troubled properties end up in foreclosure – some borrowers are able to refinance their loan, sell their home or otherwise resolve financial difficulty. However, the slumping real estate market now has made selling a less viable option for many.
In Massachusetts, the problem is worse than elsewhere, and worse now than ever before, said James W. Blake, president and chief executive officer of HarborOne Credit Union, a $1.3 billion institution based in Brockton.
“Last year [the number of petitions to foreclose] was higher than any year in the history of the state, and this year is going to be worse,” said Blake, who participated in the summit’s Consumer Education and Foreclosure Assistance Task Force.
While news outlets report more foreclosures overall in other states such as Colorado, California, Florida and Texas, the problem is may be more acute for the typical homeowner here, Blake said. The high-profile foreclosure problems in some other markets were in part driven by speculative investment purchases and home-flipping, which was not as prevalent in the Bay State. In Massachusetts, where home prices had risen to extremely high levels during the real estate boom in the first half of the decade, some lenders “took advantage of people who had a real strong desire to get into a home, but didn’t have the financial sophistication equivalent to the product.”
It’s no accident that the highest foreclosure rates in Massachusetts are in old, industrialized cities such as Brockton, Springfield and Lawrence, he said, because those cities have immigrant populations with less money, more language barriers and often less financial education.
There were instances in those cities where someone with an annual income of as little as $55,000 possessed a $500,000 mortgage, he added.
“You don’t even have to run the numbers to know that doesn’t make sense,” he said.
Blake said he supports a recommendation outlined in the report to create a new mortgage product. The so-called Community Relief Mortgage would be a 40-year mortgage, not subject to private mortgage insurance and would start at an interest rate of about 5 percent. The interest rate would remain stable for 10 years and would never exceed the original 40-year market rate plus 1 percent.
The product could be offered to borrowers who are in the process of or at risk of foreclosure but could still qualify for refinancing with flexible underwriting and credit enhancements, Blake said.
Lenders – especially those who originated loans heading into foreclosure – would be encouraged to sell the Community Relief Mortgage, but it also might require government or private, nonprofit investment to make the product work, summit participants acknowledged.
Blake agreed it could be a challenge to convince people that public money should be used to patch up private loans, but said the foreclosure problem won’t go away if ignored. In fact, he predicted, economic decline stemming from foreclosures would cost much more to fix later than if taxpayers and industry players proactively address the problem now.
Summit participants also suggested increasing license and examination fees for mortgage companies, as well as placing minimum initial capital requirements on lenders that wish to enter the field.
Annual license fees for lending and mortgage brokerage companies have not changed since Massachusetts first instituted them in 1992, and the number of licensed lenders and brokers has risen from 150 to more than 2,000 in that time, with no accompanying increase in resources for regulatory enforcement by the Division of Banks.
Barriers to entry into the field were set purposefully low, in the beginning, to accommodate businesses grandfathered in when licensing requirements went into effect, and encourage competition and consumer choice, according to the report – which also suggests that the current climate indicates those barriers now are set too low, sometimes allowing less-than-professional players to operate in the market too easily.
“At a minimum, [license] fees should be raised to account for the rise in inflation,” the report suggests. That would mean current annual license fees would rise from $500 to $750 for mortgage brokers, and from $1,000 to $1,500 for lenders. Per-branch annual fees also would rise, from $50 to $75.
Creating a Roadmap
The Massachusetts Mortgage Association agrees that license fees should be increased, said its executive director, Denise Leonard, as long the money is directed toward additional regulatory enforcement.
In concept, at least, MMA also would support another summit recommendation to increase the initial start-up capital requirement for companies entering the mortgage lending field, Leonard said.
No actual change in capital requirements has been proposed, but Jon Skarin, director of federal legislative and regulatory policy of the Massachusetts Bankers Association, said MBA would strongly support such an initiative.
“You need a considerable amount of capital, $8 million to $10 million, to open a bank [which also does mortgage lending],” he said.
Licensing Massachusetts’ estimated 30,000 individual loan originators, rather than just the companies for which they work as is currently the case, has been high on the Massachusetts Mortgage Association’s agenda this year and is another recommendation of the summit task force. The Massachusetts Bankers Association, however, opposes such a measure and is advocating public policy focused on cracking down more heavily on brokers who have committed fraud.
Indeed, making mortgage fraud a felony in Massachusetts, with penalties of up to 10 years’ imprisonment and a $50,000 fine for individual cases, was yet another recommendation of the report.
Massachusetts will probably start licensing originators because the Division of Banks supports the measure, predicted Kathleen Schreck, sales manager at Mortgage Network in Danvers and a summit participant.
“I think the only problem is whether they have the funds to enforce it,” she said. “Hopefully the cost of a license will cover that.”
Daniel Crane, head of the state Office of Consumer Affairs and Business Regulation, which oversees the Division of Banks, said he thinks Massachusetts should join other states that already license originators, since it would help regulators to track their progress and education more efficiently.
He said license fees would support the cost of increased supervision, which he estimated would be $2 million annually.
Crane said the licensing of individual mortgage brokers, if implemented in tandem with other proposals resulting from the mortgage summit, would be a great collective help toward providing the many players who hold a stake in Massachusetts’ lending industry with a roadmap for effectively addressing the problem of rising foreclosures.
“They [the report’s recommendations] will be very useful as the administration [of Gov. Deval Patrick] moves forward with efforts to combat this troubling trend,” he said.
