High-risk traps or low-credit tools?

Today, Camerota, chairman of the California Mortgage Bankers Assn. and Leonard, the Center for Responsible Lending's California office director discuss the ethics of lending. Yesterday, they focused on the scale of the subprime crisis and proposed solutions. Later this week, they'll debate the bailout proposals and more.

Punish predators; let the professionals flourish By Robert Camerota
Absolutely not. Predatory lending is generally defined as the deliberate deception of unsuspecting borrowers by intentionally placing them in loan products with significantly worse terms and/or higher costs than loans offered to similarly qualified consumers in the region for the primary purpose of enriching the originator and with little or no regard for the costs to the consumer. The short answer is that predatory lending has nothing to do with homeownership. This practice is most often perpetrated by individuals who are not in the business to put people in homes and see them succeed in the American dream, and are not in the business for the long run. They have seen an opportunity to make quick buck by taking advantage of people and have no concern for anyone but themselves.

This is not the mortgage lending industry I know and have spent the last 28 years advocating. Lenders who are committed to increasing and sustaining homeownership see nothing in common between "predatory lending," however you specifically define it, and responsible lending and homeownership.

The expansion of mortgage products beyond the typical 30-year fixed-rate loan has allowed the dream of homeownership to reach a new generation. As the question indicates, the overwhelming majority of these families are still paying their loans on time. It is difficult to argue with the recent increase in national homeownership to nearly 70%. That was no accident — lenders have responded to market conditions to help credit-worthy families move into their own homes and begin building lasting wealth.

That said, I worry about the consequences of accusations and loaded words like "predatory lending" being thrown about. It seems that every day we see a new study blasting the lending industry and subprime loans. Often the "facts" presented are based on worst-case scenarios that don't accurately represent the circumstances. I prefer to rely on hard data, as reported by the Mortgage Bankers Assn. Whenever you see statistics from the MBA, you must realize the unparalleled depth they provide — MBA statistics cover 85% of the total mortgage market, over 43 million home loans nationwide. No other group can claim to have such a clear picture of the state of the industry.

It is important that we restrain our urge to overreact to the cooling market we see now. We certainly don't want to go back to the days of one-size-fits-all lending, or see an artificial tightening of credit. My fear is that in the name of protecting consumers we would potentially lock out hundreds of thousands of families from homeownership. The bottom line is that dishonest actors preying on innocent consumer should face justice, and responsible lenders should be able to work with borrowers without excessive hindrance to help them reach their goal of homeownership.

Robert A. Camerota is chairman of the California Mortgage Bankers Assn. and the senior vice president and managing director of the consumer lending operations group for GMAC-ResCap.

More regulation needed By Paul Leonard
I have to take some issue with a number of your points today, Robert.

First, we've long maintained that there are clear distinctions between responsible sub-prime lending and predatory lending. But over the last few years, those lines have really blurred. No longer are predatory lenders limited to a few rogue actors in a large marketplace. Over the last few years, virtually the entire sub-prime industry has marketed core products that have predatory features — that is, they are guaranteed to fail when housing prices level off or decline. Loans with no income verification, no money down, no escrow accounts to pay taxes and insurance, and no evaluation of a borrower's ability to pay the loan beyond the initial low rate — this combination of features became all too common across the sub-prime industry.

And the levels of delinquencies and foreclosures — whether measured by the Mortgage Bankers Assn. (MBA), Lehman Brothers, bond rating agencies such as Fitch Ratings or my Center for Responsible Lending's own studies — are growing to historically high levels. The MBA's own recent data on foreclosures found that during the last quarter of 2006, new foreclosures on sub-prime loans were up 50% from the same period a year earlier. Among riskier sub-prime loans with adjustable interest rates, foreclosure starts shot up by 70% from the same period a year earlier. The dramatic shakeout of the sub-prime lending industry — with more than 90 companies going bankrupt or being sold, according to the Office of Federal Housing Oversight — is evidence that those business models were great for short-term profits but simply weren't sustainable for lenders or borrowers.

And while we can all celebrate homeownership rates reaching nearly 70%, we think that's a level that won't be sustainable either. In fact, with minorities being much more likely than whites to get sub-prime loans, the recent boom in sub-prime lending could very likely lead to the greatest loss of minority wealth in our nation's history.

Robert, I think we can both agree that the challenge before us is to balance the need for broad access to responsible mortgage products with the goal of providing adequate consumer protections that will foster sustainable homeownership. Federal regulators have only recently taken steps to return the sub-prime industry to historic, sound lending principles and away from the predatory products and practices of recent years.

On June 29, federal regulators set out new underwriting guidelines for federally regulated institutions. They clarified the need to evaluate a borrower's ability to pay, restricted use of stated-income loans and urged clearer disclosure of mortgage terms. These are a good first step, but they do not cover large nonbank lenders who still make a large share of all sub-prime loans.

More broad-reaching changes are needed. Congress has mandated that the Federal Reserve Board must define and prohibit unfair or deceptive practices for all mortgage loans, not just those made by federally regulated institutions. The Fed should use its power to require all lenders to abide one strong set of rules.

There are a number of proposals in Congress — including Sen. Charles Schumer's Senate bill to reign in the practices of both mortgage brokers and Wall Street firms. These kinds of changes are needed to provide a greater balance between consumer protections and access to credit.

Paul Leonard is the director of the California office of the Center for Responsible Lending.

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