Punish crooks, don't over-regulate
First of all, I'd like to thank the L.A. Times for hosting this debate, and I look forward to this week's discussion.
In regards to the question, government regulators, legislators and law enforcement play a critical role in our industry, and their ability to keep the playing field level and free from bad actors is one of the strengths of the mortgage industry. One of the major problems in the last few years has been the increase in incidence of mortgage fraud. These crimes not only rob homeowners but also hurt future borrowers by gouging lenders for millions. It is clear that government and industry must continue to work together to put scam artists out of commission and uphold the integrity of the market.
Nationally, mortgage lenders are working with law enforcement, the FBI and state regulators to help root out mortgage fraud. This partnership must continue if we are to send the right message to criminals.
However, as media reports and headlines stoke fears, government must realize the danger of overreaching regulation. Regardless of any good intentions, legislation and/or regulation that significantly hinders the efforts of honest mortgage bankers will only end up hurting consumers. Stricter and more inflexible rules would almost certainly lead to a further tightening of credit, limiting access to capital and giving fewer people a chance at homeownership.
It is important to point out while there have been problems in the sub-prime market, close to 87% of California sub-prime loans are current and performing well, above the national average of 81%. This means that the vast majority of families with a sub-prime loan are making their payments and living the American dream. It's important that in the name of protecting future consumers we don't limit their ability to buy a home, especially here in California, where home prices are significantly higher than most of the nation.
One of the bedrocks of the mortgage industry is the need for successful companies to adapt to changing market conditions quickly. There is no better demonstration of this than the industry's response to the cooling of the sub-prime market in the last 18 months. Working with investors, our market has gone a long way to correcting itself through tighter underwriting standards and the reduction in use of some product types.
As a result of changing market conditions, investors have not been as interested in portfolios consisting primarily of sub-prime loans. This has resulted in a reduction in the availability of sub-prime mortgages because many lenders cannot generate the capital necessary to originate these loans unless they are able sell them to investors. As we've seen in previous economic cycles, the industry, out of necessity and survival, is quick to correct itself.
The bottom line is that any action that government takes must realize the negative unintended consequences that may result from overreaching regulation.
Robert A. Camerota is chairman of the California Mortgage Bankers Assn. and is currently the senior vice president and managing director of the consumer lending operations group for GMAC-ResCap.
Government works, markets don't
One of government's most critical roles in a free society is the protection of consumers in all spheres from auto safety to food safety to drug safety. This underlying tenet of America's social, economic and political policy extends not only to the protection of people's health but also to their lives and livelihoods. It is why we regulate the costs of public utilities. It is why we discourage monopolies. And it is why we protect the average American family's most important source of wealth and financial security: its home.
The sub-prime industry is fond of suggesting that it is their products that have made homeownership a reality for more Americans than ever before, but research produced by our organization, the Center for Responsible Lending, proves just the opposite. Our May 2007 report, "Subprime Lending: A Net Drain on Homeownership" [pdf] found that nearly 16% of all sub-prime loans originated since 1998 have ended or will end in foreclosure and the ultimate loss of homeownership.
Apparently, the market has failed to learn any lessons from the current sub-prime crisis. In preparation for a recent hearing before the U.S. Senate, our organization analyzed 10 recent offerings of mortgage-backed securities (investments made up of sub-prime loans). We found that despite the sub-prime market's implosion, the mortgage industry continues to churn out risky loans that will likely end up hurting, rather than helping, the sub-prime borrower.
In short, we found that 37% of first-quarter 2007 sub-prime loans were stated-income or low-documentation loans; 70% featured prepayment penalties and 77% featured adjustable interest rates.
Clearly the market has not corrected itself.
The problems in the sub-prime market are largely the result of products that were perfectly legal but by design were guaranteed to produce unacceptable and record-high levels of foreclosures. While we agree with the CMBA that mortgage fraud is a problem, eradicating fraud from the marketplace but allowing risky products and practices to remain will not protect the millions of homeowners whose mortgage brokers were acting within the bounds of the law but not of propriety.
The fact is that while the market got us into this mess, the market alone cannot get us out, nor will it prevent future problems when the housing market rebounds. We recommend that federal and California officials act to make the sub-prime market work for consumers, not just for brokers, lenders and investors. Loans approved with little or no income verification, loans with prepayment penalties and loans with large payment increases that clearly go beyond the means of low- and moderate-income families legal loans that essentially line the pockets of the industry but end up emptying the pockets of borrowers are the central problems of the sub-prime market, not fraud.
Brokers, lenders and Wall Street have proved that they are not up to the challenge of protecting the consumer. And to solve these problems, it is government not the market that must provide basic safeguards to protect borrowers.
Paul Leonard is the director of the California office of the Center for Responsible Lending.