TheMReport — News and strategies for the evolving mortgage marketplace.
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The Latest SERVICING Or ig i nat ion Center for Responsible Lending, the mortgage industry's fastest way forward requires more focus on limiting financial risks for homeowners. A F rom 2008 through 2011, 414 banks failed across the nation, resulting in estimated costs to the Deposit Insurance Fund (DIF) of about $42.8 billion, according to a recent report by the Government Accountability Office (GAO). Thus far, the DIF has doled out about $16.2 billion in shared loss payments, and it is expected to pay about $26.6 billion more. In order to minimize losses, the FDIC entered shared loss agreements for 281 out of the total 414 failed institutions. In a shared loss agreement, the FDIC agrees to incur part of the losses when another bank agrees to purchase the failed bank. The GAO found that in many cases the purchasing institutions would not have been willing to absorb the shuttered banks without a shared loss agreement with the FDIC. The FDIC estimates liquidating all failed banks' assets would cost the DIF $40 billion more than the current costs through the shared loss agreements. Additionally, the FDIC suggests shared loss agreements ensure "reductions in immediate cash needs, less disruption to failed bank customers, and the movement of assets quickly into the private sector," according to the GAO. When examining the cause of bank failures from 2008 through 2011, the GAO found banks with less than $1 billion in assets were especially vulnerable to commercial real estate losses. The GAO also found instances of "nontraditional, riskier funding sources" and "weak underwriting and credit administration practices" in many failed banks. Both the Treasury and the Financial Stability Forum's Working Group on Loss Provisioning suggest "earlier recognition of loan losses could have potentially lessened the impact of the crisis," according to the GAO's report. In response to this line of thinking, the Financial Accounting Standards Board issued a proposal for a forward-looking loan loss provisioning model. In 10 states, 10 or more commercial banks or thrifts failed during the four-year period. While those states represent geographically diverse areas, they also tend to cluster in regions. For example, the West and Pacific Northwest have a group of four states (California, Washington, Arizona, and Nevada) with 10 or more failures, as does the area near the Great Lakes (Minnesota, Illinois, Michigan, and Missouri). The M Report se c on da r y m a r k e t example, African-American borrowers were 2.8 times as likely to receive a high interest rate, while Latino borrowers were 2.3 times as likely to receive a loan with a prepayment penalty. The result, the report says, is the "largest documented wealth gap ever between white households and families of color." Adding to the problem is the fact that the current marketplace is leaning toward a dual mortgage market "where only the highest-wealth borrowers with near-perfect credit can gain access to the conventional market, while lower-income and minority borrowers who can be successful homeowners are relegated to more expensive FHA loans, or find credit largely unavailable." With that risk in mind, CRL makes three recommendations going forward. First, "[p]olicymakers should not weaken or undermine the mortgage reforms established in the Wall Street Reform and Consumer Protection Act, because this could result in future abusive lending and the possibility of a new foreclosure crisis." Second, servicers and policymakers should promote reasonable foreclosure alternatives, including providing full and fair consideration to loan modifications. Finally, mortgage finance reform needs to keep a balance between borrower protections and broad market access. In the report's foreword, Systemic Risk Council chair Sheila Bair emphasizes the importance of these reforms and warns of the fallout that may occur if CRL's recommendations go unheeded: "If abusive lending practices are not reformed, we again will all pay dearly," Bair writes. "Abusive practices not only harm the family that loses its home to an unaffordable mortgage . . . they also profoundly harm neighborhoods, communities, and cities and hold back our entire economy." Providing insight into the stability of the nation's financial institutions, the Government Accountability Office evaluated the impact of failed banks. a na ly t ic s new report from the Center for Responsible Lending (CRL) asserts that while changing reforms have mitigated the impact of pre-crisis lending behaviors, the mortgage industry still has a long way to go before it's completely out of the woods. The report, titled "The State of Lending in America and Its Impact on U.S. Households," is the first in a series of three documents created to examine how the common working family is coping with debt and stagnant incomes. The report covers major CRL findings and incorporates research from the Federal Reserve, the Pew Research Center, and the Consumer Financial Protection Bureau (CFPB). The report suggests that although there are numerous financial risks associated with purchasing a home, homeownership is still one of the safest, most accessible ways to build wealth in the United States. The equity acquired through long-term homeownership is often used to pay for retirement, unemployment, college, and healthcare—all categories that receive relatively little subsidization from the government—making "the American dream" all the more important for families. However, poor consumer protection and predatory lending practices have made the achievement of that dream a problem for many households. According to CRL, the "spillover" cost of foreclosures brought on by the financial crisis has wiped out nearly $2 trillion in family wealth, turning back the clock on previous equity gains. That damage has yet to be addressed, the report says. CRL also points to evidence of discrimination in predatory lending. In general, non-white borrowers between 2004 and 2008 were much more likely to see risky features in their loans, including prepayment penalties and higher rates. For s e r v ic i ng Abusive Practices Learning from Leading Reform Post-Recession Initiatives Bank Collapses According to a new study from the | 51