Optimus sub-prime

Just before the Bush Administration announced its new mortgage-market plan, we got a visit from some activists who follow the issue closely and are proposing their own reform proposals. Paul Leonard, director of the Center for Responsible Lending, Kevin Stein, associate director of California Reinvestment Coalition, and Norma Paz Garcia, senior attorney at the west coast office of Consumers Union, are floating a range of proposals aimed at providing relief to borrowers on the verge of default.

Prime people in sub-prime loans

Kevin Stein: Almost everybody agrees that the lending that has occurred over the last few years has been bad. However we would define it. I would label it predatory. People would call it loose underwriting, lax underwriting. The regulators recognized this, the industry recognizes this. The GAO came out with a report a couple of weeks ago that you may have seen, and they count this as one of the few factors that explain what has happened: lax underwriting. Another factor that they identified is the ready access to Wall Street finance. And one of my favorite quotes is that quote from the guy who ran Ownit Mortgage Solutions, one of the first sub-prime lenders to go under, saying, They pay me more money, Wall Street pays me more money, to do a stated-income, no-verification loan. So what would you do? Everybody's incentive was to sell bad products to consumers at every step of the way, from the brokers to the lenders to the Wall Street securitizers to the investors who may not have been as aware of what was happening, but they knew what they were interested in and they knew what rates of return they enjoyed, and none of this was kind of, a, I think a bargain that the consumers were taking.

Jon Healey: Was the rate of return predicated, that Wall Street was seeking, predicated on having people pay significantly higher interest rates than otherwise they would have in the marketplace?

Norma Paz Garcia: At least.

Paul Leonard: Yes, I mean you have through yield-spread premiums, which are essentially incentives that lenders are offering, essentially kickbacks from brokers to lenders, stated income all raise interest rates and again, that starts with the securities and the appetite for investors to have higher returns. And I think one of the most telling things is that you can look at these rate sheets, and I was pleasantly surprised that yesterday's Wall Street Journal had a New Century rate sheet with a little mouseover where you could actually see these things, where we've actually been talking to people. Most consumers don't actually see rate sheets by the way; they're for the brokers. And so, again, most consumers I think don't know what they can and can't negotiate with their broker, what's the best rate they can get or not. But the fact of the matter is with I think all of the rate sheets we've looked at, for any borrower of a fixed credit quality, you could get a lower interest rate on a fully documented, 30-year fixed-rate mortgage than you could on a stated-income 2/28 mortgage. And again, I'm not sure that's a choice that is fully presented to borrowers in this circumstance. I don't know, I haven't been a shadow in the room for many of these conversations. But it strikes me that that's a lower rate, and that's for the life of the loan without any of the risks associated with...

Jon Healey: So even lower than the rate that they'd get for the first two years?

Paul Leonard: Yeah, it seems to me that that's the most stunning indictment of the system.

Eryn Brown: Well that's not for everybody though, that's for some borrowers.

Paul Leonard: In sub-prime. That's the standards on the sub-prime rate sheet.

Norma Paz Garcia: And all this goes back to is it really appropriate for the government to protect individuals from themselves? What we have found from talking to borrowers in these sorts of loans is that had they known what they were really getting into they would never have done it. And so this says to us that it's, it's more a situation where you have parties with unequal bargaining power and knowledge, and consumers who don't understand the complexities of mortgages are often at the mercy of the advice of people they consider to be professionals: brokers, lenders. And when you go to a lender who's saying one thing, and you believe that person, and you find yourself at the back end in a terrible position, what are you going to do? And this is really at the crux of the matter, you know, how much responsibility does each party take. And we believe in informed consumers and believe consumers should inform themselves, but at some point even really informed consumers understand all the complexities.

Paul Leonard: Not even the CEOs appear to have understood them...

Jon Healey: So in your view what is the percentage today of people who can afford to stay in a loan sans reset?

Paul Leonard: Without a reset?

Jon Healey: Uh huh.

Paul Leonard: Seventy percent of borrowers, at least a month ago, 70% of borrowers were current at reset.

No good deed goes unpunished

Kevin Stein: The conversation seems to be around loan modifications. And as far as modifying loans, that's a determination that would be made, right, so that what we're really I think all seeking are broad-scale loan modifications that would keep people in their homes, and this would be for people who cannot afford the reset, whatever the number would be.... I think there were two pieces to this: One is how culpable were the borrowers, I don't know if we all come in at exactly the same place, but we place most of the blame on the industry for victimizing people who really had no idea and putting them into products they really could not afford. The other part is an earliery suggestion about government intervening on behalf of the consumer. But we feel that loan modification is pretty much a win-win situation. It keeps the borrower in the home, and if we're talking about folks who were otherwise gonna be faced with unaffordable rate resets, then the investors win as well because collecting the same amount of money, which is not insignificant, is better than collecting nothing.

Jon Healey: The folk who don't win though are those who went in with their eyes open, um, knew that they could handle the reset, hoped they wouldn't get to that point, were expecting to be able to refi, after they developed some equity. They get caught in this, but they don't get relief, because they can afford the reset. Meanwhile other people who haven't been as financially prudent, they get relief? There was a story, I forget whether it was in our paper or not, but it was loaded with bitterness from these folk, saying: Look, I'm getting screwed but I'm gonna survive this, and I'm not getting help. These people are getting help. Where's the justice there?

Norma Paz Garcia: Well is it a question really of being not as careful or not being fully able to appreciate the situation. I don't think there's a complete answer to your question. I think that overall the goal should be to keep as many people in their homes as possible. And whatever we need to do to get there is something we ought to do to get there is something we ought to consider. And that's why we're looking very carefully at the proposals from the governor and the Assembly leadership. There are clearly going to be some losers in this, but that doesn't matter how we slice the pie, someone's going to lose. The question is what can we do to keep people in their homes, to keep the economy going, to keep the governments funded with property tax payments; I mean the impact on local governments here is tremendous, and now they say that the state budget is being impacted as well. I hear what you're saying, but there's a bigger picture.