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Options available for troubled mortgages and clients you cannot refinance

National Mortgage Professional
Jul 30, 2007

Mortgage market complexity foils consumers and undermines fair lendingMortgagePress.comForeclosure prevention The recent rise in foreclosures suggests that some borrowers are taking on debt that they have little or no capacity to repay, selecting products that are not suitable for their needs or signing up for mortgages that they don't understand. Two reports by Harvard University researchers contend that these are just some of the inevitable consequences of an increasingly complex mortgage market and a regulatory system that has failed to adapt to the dramatic changes that have transformed the mortgage lending landscape in recent years. Funded by a Ford Foundation grant to the Joint Center for Housing Studies of Harvard University, this new research examines the behavior of mortgage market participants and the emergence of new mortgage delivery channels linked to the rapid growth of higher risk sub-prime mortgages. "Despite the fact that our society values consumer choice," observes Nicolas P. Retsinas, Joint Center director, "the ability of consumers to make informed choices about complex mortgage products is limited. The situation facing consumers is made even more difficult by the widespread use of targeted incentives that encourage some mortgage brokers and loan officers to aggressively market confusing, and often more costly, sub-prime products to less-than-knowledgeable and often desperate borrowers." In a briefing held at the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., Ren S. Essene, one of the study authors, added, "Many of today's innovative loan structures seek to provide mortgages that help prospective homebuyers overcome affordability barriers, yet the push-marketing of inappropriate mortgage products to unsuspecting borrowers has the potential to harm individual families and spark a wave of foreclosures that can destabilize already fragile neighborhoods." Consumer and lender behavior also prompts ongoing fair lending concerns, as many minorities are especially vulnerable to the aggressive marketing tactics of what the study describes as "low-roaders." These concerns are magnified by the fact that the rise of sub-prime mortgage lending is linked to the rise of new and typically lightly regulated non-bank sub-prime mortgage specialists and their network of mortgage brokers, as well as new mortgage conduits that sell securities backed by higher-risk mortgages to the secondary market. "Unfortunately, many of these new players are subject to the least regulatory scrutiny," says William Apgar, one of the study authors. "As a result, the lack of effective and uniform regulatory oversight, along with the lack of readily available mortgage pricing data, results in a mortgage delivery system in which some borrowers pay more for mortgage credit and/or receive less favorable treatment than other similarly situated and equally credit-worthy borrowers." In addition to examining the root causes of consumer confusion in the mortgage market and the current rise in foreclosures, the studies point to the need to develop new forms of point-of-sale consumer assistance to enhance the ability of consumers to obtain manageable and fairly-priced loans. These initiatives include new telephone and online counseling services, where counselors are armed with the information needed to help consumers push back against today's aggressive push-marketing activity. In addition, the research suggests actions that the mortgage industry could take to effectively sanction mortgage market participants who exploit those consumers unable to fend for themselves. To ensure that all borrowers have access to the same set of consumer protections typically available in the prime market, the research suggests a series of actions that could promote greater regulatory uniformity. Reforms for oversight of the primary mortgage market include proposals to expand the reach of the Interagency Guidance on Nontraditional Mortgage Product Risks to include loans made by independent mortgage companies, legislation to extend existing Community Reinvestment Act oversight to cover all lending organizations and legislation that directs federal regulatory agencies to assume responsibility for the licensing of all mortgage brokers and loan officers that directly interact with consumers in the mortgage lending process. The research also suggests the need to create more uniform oversight of secondary market participants. These initiatives include efforts to strengthen monitoring of securities involving sub-prime mortgages, as well as efforts to hold secondary market investors accountable by eliminating or modifying existing legislation and regulations that limit assignee liability. Such efforts would substantially increase incentives for secondary market investors to more carefully consider whether the loans that they purchase comply with fair lending standards, as well as ensure that they are not the product of illegal or abusive lending practices. For more information, visit www.jchs.harvard.edu.
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