>http://overlynuanced.blogspot.com/2008/10/cooling-hot-air-over-housingcredit.html
>
>My problem is that I can't get my head around what Freddie and Fannie
>are. The public/private split here is murky and it seems like there
>is something to the fact that they insured mortgages they didn't
>actually hold and that they bought a bundle of the securitized ones.
>On the other hand, they don't issue any, right? And they are separate
>from CRA. There is a game of three card monty here where CRA is
>impugned; Freddie and Fannie, which were both more and less than CRA
>in terms of actual government involvement had much more investor
>oriented pressure, like most of the rest of the finance industry. In
>this, I don't see any real difference between the market effect of
>these institutions and any other private credit rating agency except
>for the fact that there was some government involvement--and the
>Chinese and Russians were heavily invested as well. But on the latter
>count, the loans owned through GSEs are supposed to be government
>guaranteed. But what does that mean? Is it the same thing as FDIC?
>or is it more like a Federal version of Mortgage insurance?
>
>And how much heft do they really have. I've seen figures that say
>they own only a fraction of the loans, but they back up to 50% of the
>mortgages in the country. How is this related to all these other
>private mortgage brokers? To private mortgage insurers? In any case,
>this doesn't explain why companies were leveraged 30:1 or why
>securities became so popular or why the credit-default swaps were so
>widespread. except if they simply thought, once again, that banking on
>the fed would make them too big to fail. Maybe I'm devoting too much
>attention to the agenda set by someone else, but these seem like very
>mysterious institutions the more I look at them. And it seems
>endlessly possible to project all sorts of scenarios onto their role
>in the crisis since their agency can be inflected in all sorts of
>directions. But I'm hoping there is one that is more correct than
>others.
nice stuff. i can't help you much, and good luck figuring it out. i worked closely with one of those outfits for years and i never understood what the hell they do.
any way i did my own poking around and found these two articles, both of which were written before this particular wrinkle in the crisis. This first one is from the perspective of people at a Rainbow PUSH event where the author quotes:
"Sometimes the only avenue for a bank like Harris to meet its CRA goal was to buy loans from low- and moderate-income census tracts, and as we are now learning, there was really no way to know whether those bundles contained subprime, even predatory, loans."
I am wondering what you and others thing about the analysis. The other article is a study of the effects of subprime lending on Austin. What I found interesting is that some of this is governed by state law.
The CRA and the subprime market
In The Right Place today, I write about the complex interface of the Community Reinvestment Act (CRA) with subprime lending. Scroll down to read it.
At the Rainbow PUSH event, I also spoke briefly with John Taylor, President and CEO of the National Community Reinvestment Coalition, about the Community Reinvestment Act and its interface with the subprime lending business. At the event, Taylor called for Federal intervention and for lenders to restructure loans in danger of foreclosure. When asked which regulatory agency should be held responsible for fallout from poor lending practices he said the Federal Reserve. Taylor also said that we can expect many more foreclosures in September, October, November.
I have also heard that the majority of the foreclosures will have originated by yearend 2008.
Taylor said subprime borrowers would have been better off borrowing from banks because the banks care about their reputational risk.
"Brokers don't care about that," he said. "They are in they are out. They get their fee and they never see their loan again. It's not like Wall Street comes back to them and says 'You have to make good on this loan.' "
"The (mortgage brokers and mortgage bankers) are state regulated. They are not federally regulated. It depends on which state you are in, but for the most part they've gotten away with murder," he said.
"They are not regulated by CRA," he said. "Had they been regulated by CRA, we first would have been able to have public evaluations of these broker firms and mortgage companies, which would have spoken to these issues."
Echoing what I have heard elsewhere, Taylor said: "(A while back) Bank of America, and others were caught doing this stuff, and people started talking about it. They immediately got out of the business, because they did not want the reputational risk and they did not want to have to explain to their examiners why they were doing these kinds of loans for one set of people who were low income.
"What also happened," Taylor said, "was lack of enforcement. When Bill Clinton was in office, bank examiners would fail 12% of the institutions on their CRA exam. The Justice Department under Janet Reno also filed dozens of cases against financial institutions for violating the fair lending laws and the Fair Housing Act."
Taylor also said that since Clinton has been out of office that figure has dropped down to less than 2% and those were usually very small institutions, Taylor said. Since Clinton's administration there have also been very few referrals to the Justice Department or any action on the part of the Justice Department, he said.
Federal law in eye of subprime lending storm By Sally Duros
If the meltdown in the subprime mortgage market is the perfect storm where lenders looking for profits are converging with borrowers stretching too far to afford a home, then the eye of the storm is the Community Reinvestment Act (CRA).
The CRA was crafted 30 years ago this month, March 1977, as a federal antidote to redlining, which was a bank practice of withholding home loans or insurance from neighborhoods considered poor economic risks. The CRA requires a bank or thrift to lend throughout its entire market area, and to be evaluated to determine if it has met the credit needs of its entire community. The bank's records on its CRA-related activity are reported to financial regulators, who have the power to stop a bank from expanding or even shut it down if its CRA grade is poor.
On paper at least, the CRA is a powerful stick for keeping banks in line. But what could not have been anticipated 30 years ago is that CRA credits -- in a hot, technology-ridden lending market -- could become an even more powerful carrot.
Chicago banks worked hard to abide by the letter and spirit of the CRA. They brought bank resources, people and cash into schools and other agencies to strengthen the economic backbone of Chicago's less prosperous neighborhoods.
Here in Chicago -- and in general -- as bank ownership shifted from local banks to multinational banks to megabanks, the nature of CRA compliance changed. And federally regulated banks have found it harder and harder to lend in CRA- qualified zip codes.
"This is where you will see the difference between what banks will say in public versus what they say in private," says Robin S. Coffey, senior vice president of community affairs at Harris Bank, who will be leaving her job later this spring. "Internally, banks question whether there really is a market among low- and moderate-income families for their homeownership products. There is also a lot of turmoil inside the bank because the product-development teams are asking why we're spending all this time making a product we won't make any money on."
That's where the unregulated mortgage lender comes in. Its lending practices are not subject to the intense federal scrutiny that a bank like Harris faces. Unregulated lenders also are willing to take on the greater risk of lending in an economically disadvantaged neighborhood through their loose network of brokers.
Sometimes the only avenue for a bank like Harris to meet its CRA goal was to buy loans from low- and moderate-income census tracts, and as we are now learning, there was really no way to know whether those bundles contained subprime, even predatory, loans.
Coffey says, "Even though the banks were pretty good about saying 'no' to buying loans for CRA credit, when the regulators would come in, they would look at bank numbers and look at mortgage-broker numbers and say 'Hey! You are doing less than the mortgage brokers.'
"Well yeah, but we're doing responsible lending and they are not," she says.
Jim Capraro of the Greater Southwest Development Corp., who was doing community development work when the CRA was created, says, "(Federally chartered banks) are buying dots on the map. The dots are conveniently originated by someone else, so they don't get the originating cost. They are packaged up by the New Centuries of the world and then they are underwritten by the Lehman Brothers of the world. Then they are put into tranches so the bad loans are spread out with the good, so that ultimately the cost to the investor is minimal."
The way the portfolios of loans are passed down the line from bank to bank means that the dots would far outnumber the houses because the CRA credit from one mortgage can be shared by many banks.
"Unfortunately," Capraro says, "the victimization is not minimal at all. The cost to the borrow is not minimal at all. Neither is the cost to the neighborhoods around them."
Posted by Sally Duros on March 29, 2007 11:28 PM | Permalink http://blogs.suntimes.com/homes/2007/03/the_cra_and_the_subprime_marke.html
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Austin Focus Study October 2002 Consumers Union Southwest Regional Office
PDF Format
Rapid growth and a hot housing market resulted in rapidly increased lending since 1997-but thousands of Austin families now carry the heavy burden of high cost home debt as subprime lenders filled the gaps left by the prime market. As foreclosure postings rise steeply across Central Texas,(1) it's time to examine the potential impact of high cost home lending.
Austin remains a sharply divided city, with growth and prosperity disproportionately spread across the western hills while subprime lending is concentrated in the heavily minority near east central neighborhoods. Manufactured home lending dominates neighborhoods further east. Both subprime and manufactured home loans cost consumers more in long term interest and fees.
The Consumers Union study
This study uses 1997 to 2000 Home Mortgage Disclosure Act (HMDA) data to identify lending patterns for Austinites who purchased or refinanced a home.
Specifically, we identify patterns of subprime lending by borrower gender, race, and geographical area. Where necessary we combine four years of HMDA data to identify patterns in areas where lending is historically sparce (lower income areas, high minority areas) and patterns among individual lenders.(2)
Market growth
Austin's home loan market continued to grow through 2000, despite signs of an economic slowdown. The number of loans made increased by nearly 20 percent in 1998, 22.9% in 1999, and that burning growth only slowed down slightly by 2000.
Refinance lending peaked in 1998, due to low interest rates and the introduction of home equity lending, and has now dropped back again. Home improvement lending started to decline with the opening of the new home equity market and continues to decline, indicating a shift from home improvement loans to cash-out home equity lending.
Subprime lending boom
Prior to implementation of the new home equity laws, Texans bought, sold and refinanced their homes with very little help from the subprime mortgage industry. In 1997, loans from HUD- identified subprime companies in Austin accounted for 5.8 percent of all single family home secured loans.
That has now changed. By 2000, subprime companies made nearly 10 percent of all loans in Austin, and 28.4 percent of refinance loans. More than 4,000 families took a potentially high cost home loan from a subprime company.
Market gaps
In a hot housing market, who are the people who turn to subprime lenders? Some of the same people we have found to be underserved in the past.
Lending levels: Black and Hispanic families take home loans at a much lower rate than Whites compared to their proportion in the population. While the total number of home purchase loans made to minority borrowers increased from 1997 to 2000, the proportion of purchase loans going to Black and Hispanic borrowers actually decreased over that period. By 2000, only 3.3 percent of home purchase loans were made to Black borrowers, although Blacks represent 8.1 percent of the Austin/San Marcos MSA population. Similarly, lenders made only 10.8 percent of purchase loans to Hispanic applicants, although Hispanics represent 26.2 percent of the population in this area.(3) Subprime refinance lending grows to nearly 30% of all refinance lending by 2000, and nearly 60% of lending to Black borrowers
On the other hand, in the refinance market (where subprime lenders are most active) Black and Hispanic borrowers now represent a higher proportion of the overall loan pool than they did in 1997--and more than 40 percent of these borrowers are taking their loans from subprime companies. Subprime lenders appear to be successfully finding a new market for refinance loans among underserved minority borrowers.
Denial Rates (see tables left): Over the four year period, prime lenders denied Black and Hispanic applicants at nearly double the rate they denied White applicants (the denial ratio). Subprime companies also denied minorities at a higher rate than White applicants, but the gap was smaller. Only manufactured housing lenders denied White and minority applicants at about the same rate.(4)
At higher income levels (families earning more than 60k, or 1.5 times the state median income) subprime lender denial rates for minority borrowers are more similar to denial rates for Whites, while denial rates for prime lenders remain much higher. These findings indicate little change in the market since our 2000 analysis, which found high denial disparities even at the highest income levels (families earning more than $100,000 per year).
Conventional and FHA: Lenders offer most borrowers conventional loans, but approve a disproportionate number of FHA loans for minority borrowers. FHA loans typically cost more than conventional credit because borrowers must pay an FHA insurance premium of 2.5 percent of the loan amount up front and an insurance premium every month over the life of the loan. Borrowers with conventional credit may cancel Private Mortgage Insurance once they have adequate equity in their homes.
The majority of home purchase borrowers in the Austin San Marcos MSA (76.3 percent in 2000) obtained conventional loans and only 18.8 percent ended up with FHA loans. But 36.8 percent of home purchase loans to Black borrowers and 37.9 percent of loans to Hispanic borrowers were FHA loans in 2000. This is nearly the same share we reported two years ago.
On the other hand, almost all refinance loans to almost all borrowers were conventional loans. This may be partially explained, to the potential detriment of some credit worthy borrowers, by the sharp rise in subprime refinance.
Subprime market segments
In order to look more closely at subprime activity in the Austin San Marcos MSA, we combined four years of MSA level HMDA data and information from the new census. We found that subprime lending was concentrated among minority borrowers, women borrowers, and borrowers in neighborhoods with a higher concentration of elderly people.
The chart (right) describes the distribution of subprime loans according to the minority and elderly concentration in the census tract. High elderly tracts generally have a somewhat higher subprime penetration rate than low elderly tracts, and that rate increases as the minority concentration increases. In other words, tracts that are both high elderly and high minority tend to have higher subprime penetration, with some exceptions.
Nine Austin census tracts had a very high concentration of subprime refinance loans (more than 45 percent of loan volume over four years) and enough loans for closer study. All these tracts are east of IH35 and generally correspond to the East Austin high subprime areas on the map, p. 1 (representing subprime purchase, refinance and home improvement combined).
Within these high subprime tracts, Black women took a disproportionate share of loans from subprime companies (74 percent of loans to Black women in these tracts were subprime compared to 58.8 percent over the sample). Black men also took loans from subprime companies at a higher than average rate for this area (64 percent).
Two of these East Austin neighborhoods flank Martin Luther King Blvd, from IH35 to Webberville Road. From IH35 east to Airport Blvd., north of Martin Luther King Blvd, lies tract 4.02 (41 refinance loans: 20 subprime). This is a mixed ethnic area, 37 percent Black and 26 percent Hispanic, with 16.8 percent of the population over 65. These borrowers were also ethnically mixed, about one third Black, one third White and a few Hispanic or race unreported. But ten of 15 Black borrowers took loans from subprime companies, compared to only 2 of 13 White borrowers.
East of Airport Blvd, tract 21.09 (59 refinance loans: 40 from subprime companies) is 67 percent Black and 27 percent Hispanic, with 16.7 percent of the population over age 65. Nearly all of these refinance borrowers were Black (where race was identified), evenly split between men and women. Black women borrowed from subprime companies slightly more often than Black men.
While women took an only slightly greater share of subprime home purchase and home improvement loans, women received a far larger share of refinance loans from subprime companies. While 10.2 percent of men took refinance loans from subprime lenders, 16.9 percent of women did. Further, while subprime companies made only 7.5 percent of the refinance loans to White male borrowers over the four year period, these companies made 45.4 percent of the refinance loans to Black women. Black women got a far higher share of subprime loans than Black men. Because women still make less than men, we re-examined the same data for all borrowers earning more than $60,000 annually (1.5 times the state median family income). Generally, higher income women still took loans from subprime companies at a higher rate than their male counterparts, --with the notable exception that high income Black men took a greater share of subprime refinance loans than high income Black women. Higher income minority women took subprime loans at higher rates than White women.
Austin major lenders
The top fifteen Austin home purchase lenders in 2000 were all prime lenders, and many of these lenders had a lower share of the minority borrower market than their share of the Austin market as a whole.
Of the major bank lenders at the top of the Austin area market, Wells Fargo, Bank United and Guaranty Federal made relatively few loans to minority borrowers. On the other hand, Bank of America made more loans to Hispanic applicants than its Austin marketshare. Several prime mortgage companies specializing in FHA and VA loans made a notably greater share of loans to minority borrowers than their overall Austin marketshare--in line with our earlier findings that minority borrowers take FHA loans at a greater rate than White borrowers. National City Mortgage, a conventional mortgage lender, penetrated the market for both Black and Hispanic borrowers at a higher rate than its overall share as well.
Almost all the top fifteen Austin refinance lenders in 2000 made as great or greater a share of refinance loans to minority borrowers as their overall marketshare. Only Wells Fargo and Flagstar made relatively few refinance loans to minority borrowers. Bank One made more refinance loans to Hispanic borrowers than its overall share of the Austin refinance market.
On the other hand, five of the top fifteen refinance lenders in Austin were subprime companies, and these five companies alone made nearly half the refinance loans to Black borrowers and a quarter of the refinance loans to Hispanic borrowers. The top subprime refinance lender, Ameriquest, makes fixed and variable rate loans at initial rates ranging from 6 percent to 14.99 percent, with an average rate of 8 to 9.5 percent. In recent securitizations, about a quarter of borrowers have credit scores over 650.(5)
High cost refinance loans
When Texas inaugurated home equity lending, the state capped fees that could be charged at closing, gave consumers a 12 day "cooling off" period to consider the loan terms and a three day right of recission after closing. These protections were intended to prevent predatory practices from taking hold.
Yet today, closing costs routinely exceed the three percent cap set out in the Texas Constitution, and other problems have emerged. For example, an Austin couple reported paying a ten percent "loan origination fee" totaling $5,000 for a home equity loan. Unfortunately, the Office of Consumer Credit wrote them back to say that an "origination fee" paid to a lender (rather than a broker) is actually not a fee. Instead it is prepaid interest, and interest charges are not included in the three percent fee cap. Without an effective fee cap, consumers report paying thousands at closing for subprime refinance loans. And once they have made the mistake of taking a high cost refinance loan in the first place, it may cost thousands more in new closing charges to get out of that loan and take a new one at a lower interest rate.
This same Austin couple also reported that the lender required them to pay off unsecured debt as a condition of approval. Texas law currently states that a lender may not require a borrower to "apply the proceeds of the extension of credit to repay another debt except debt secured by the homestead or debt to another lender." The state takes the position that a lender "could require direct payment to creditors, especially if that action is needed to attain the desired income to debt ratio."
Recommendations
Home equity is the one of the most important ways families develop wealth over the long term. High cost refinance turns family wealth into cash, cash that is frequently turned back over to the lender in high loan fees.
To prevent the stripping of equity from the most vulnerable families, the Texas Legislature should reduce the fees associated with high cost home refinance. The AARP, the National Consumer Law Center (NCLC) and others have defined loans as "high cost" if they have an interest rate that equals or exceeds six percentage points over the weekly average yield on five year treasury bills (currently about 3.5 percent but more typically ranging from 4 to 6.5 percent over the period of this study). These groups also define "high cost" as loans that contain fees in excess of three percent of the loan amount.(6) The Texas Legislature should set standards for "high cost" loans:
prohibit the financing of fees, closing costs, or other lender charges (including "prepaid" points) if the fees rise above three percent of the loan amount (including lender fees).
require loan counseling for any borrower getting a high cost loan during the existing 12 day waiting period before the loan closes; and
prohibit lending without due regard to repayment ability. For all home equity lending we recommend:
limiting "discount points" to legitimate charges that actually provide a substantial benefit to consumers. The AARP, the Self Help Credit Union and NCLC have created standards for "Bona Fide Discount Points" that would eliminate many of the problem fees consumers face at closing. _______
Notes
1 Breyer, Michelle, "Foreclosure sale a boon for the savy," Austin American Statesman, October 2, 2002.
2 Owner occupied, single family refinance, purchase and home improvement loans, excluding loans made by HUD identified manufactured home lenders unless noted (a total of 156,112 loans over four years).
3 Office of the State Demographer, "Projections of the Population of Texas and Counties in Texas by Age, Sex and Race/Ethnicity for 2000-2040," December 2001, Austin-San Marcos MSA.
4 In order to retain a significant baseline of subprime, minority, high income borrowers for denial rate comparison, we elected in this analysis to combine four years of data for the Austin area.
5 Ameriquest Mortgage Prospectus, Form 424, Securities and Exchange Commission, June 21, 2001, September 2001, June 2, 2002, and August 21, 2002.
6 Consumer Complaint, Office of the Consumer Credit Commissioner, 1/25/1999.
http://www.consumersunion.org/finance/austin-rpt1002.htm --
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