MBA Chair Quinn addresses industry issues at Chicago FedMortgagePress.comMBA, Kieran Quinn, Chicago Fed, sub-prime loan, HOPE NOW
Kieran P. Quinn, CMB, chairman of the Mortgage Bankers
Association (MBA) spoke today at the Federal Reserve Bank of
Chicago's 44th Annual Conference on Bank Structure and Competition
on May 16. In his remarks, Mr. Quinn spotlighted the work mortgage
servicers are doing to help at-risk borrowers and said that the
proper legislative and regulatory approach would allow servicers to
help more borrowers, while stabilizing the market and preventing a
reoccurrence of the events that resulted in the current
difficulties. Mr. Quinn cautioned that the wrong approach has the
potential to exacerbate the current troubles and deprive future
borrowers the opportunity to become homeowners.
Here are Mr. Quinn's remarks, as prepared for delivery:
"In recent speeches, Chairman Bernanke, Governor Krozner and
other Fed Board members have done an excellent job of laying out
the root causes of our current predicament; and the steps the
Federal Reserve-in conjunction with lenders, other regulators and
consumer groups- has taken to help borrowers today and bring
investor confidence back to the market.
We saw the breakdown in discipline across the board, innovations
streaking ahead of regulation, the near overnight anathema attached
to the words "sub-prime loan" and this body's unprecedented actions
to avoid a spreading credit crisis.
But I would like to add three points as an overlay to their
historical review:
The first is to shine a spotlight on the local economies of the
upper Midwest, and particularly the economy of Michigan. Even
without new products that were never subjected to a down economy,
whether through modeling or in day-to-day reality; even without
loosened underwriting, some ugly numbers would be coming out of
Michigan today.
Second are the conditions in what we've been calling the sand
states-California, Nevada, Arizona and Florida, in particular
California and Florida.
Those two states had the highest percentage of non-owner
occupied properties in the country-dangerous in itself. But combine
it with the nation's greatest appreciation in home prices and you
have a concoction that becomes deadly once housing values drop.
Which they did, and continue to do.
And third, while much has been said in general about problems in
the subprime market spreading to other parts of the economy, we
need to specifically acknowledge the increase in foreclosures and
delinquencies among Alt-A and prime mortgage loans. 30- and 60-day
delinquencies are up among those as well. That clearly speaks as
much to the unavailability of credit right now as it does to recent
history in terms of underwriting laxness and the type of loan
made.
Now, the above points are in no way stated to minimize the fact
that hundreds of thousands of loans were made that never should
have been made.
But as we seek solutions, we need to look at everything that's
in the mix. The recent HOPE NOW numbers, while showing the depth
and breadth of the crisis, also show a strong response. I don't
want to steal Faith's thunder before she walks you though the good
numbers that were just released. But I will say that the MBA's own
figures corroborate the trends Faith will be sharing with us.
One of those trends, the increase in actual modifications versus
simple repayment plans in the workouts, speaks both to the nature
of the loans coming through-the 2/28 and 3/27 ARMs-AND to the
extraordinary steps servicers have taken to help borrowers stay in
their homes.
Looking closer, we see that more than 430,000 of these 2/28 and
3/27 loans were scheduled to re-set in first quarter '08. Of those
that were current at the time of the re-set, only 553 have gone
into foreclosure- 553 out of 430,000.
14,418 of them were modified; the majority, nearly 64percent,
for terms of five years or longer. Finally, fully 203,000 of those
430,000 about to reset--47percent--were paid in full, either
through refinance or a sale.
Throughout this crisis, we as an industry have been proud of the
job our servicers are doing; with plenty of blame to go around,
they are the least deserving to be hit hard, yet they bear much of
the burden. I believe this quarter's numbers from HOPE NOW show why
we are so proud of our servicers. The efforts of the HOPE NOW
alliance to reach and help borrowers in trouble have been
invaluable.
Also interesting to note in the first quarter '08 statistics is
that prime loan repayment plans approached the volume of the
subprime repayment plans. Modifications were still overwhelmingly
in subprime loans, a reflection of the loan products and the
financial stability of the borrowers. But it again underscores the
fact that we are definitely seeing an increase in delinquencies in
the prime mortgage market as well.
Overall, the workouts to foreclosures ratio in the third and
fourth quarters of 2007 for prime and sub-prime loans combined was
about three to one, dropping to about 2.5 to one in first quarter
of 2008.
Over the past 10 years, the number of outstanding first
mortgages for owner-occupied homes has gone up by almost 19
percent. Part of this increase was due to demographics and part due
to lowering credit standards. As a result, the number of
foreclosures started has been a little over 900,000 per year,
versus 550,000 to 600,000 in the 1990s. With declining home prices
and tighter lending standards, the number of foreclosures could hit
1.8 million in 2008 and continue to rise through 2009. However,
aggressive Fed actions to increase liquidity in the market are
easing concern over the ARM re-sets left in the portfolio. I'm
speaking specifically of the moves that helped lower the LIBOR
rates to which many of these ARM products are tied.
So there is the background. What steps are we taking?
Last month, the Mortgage Bankers Association unveiled a 10-point
action agenda in three areas: to help the consumers; to restore
confidence and stability to the market; and to prevent a replay of
these problems in the future.
Let me highlight one or two initiatives from each category. To
help consumers, we support the issuance of tax-free Mortgage
Revenue Bonds by state Housing Finance Agencies. The proceeds would
be used to refinance mortgages for distressed borrowers.
To stabilize the marketplace, we continue to call for FHA
modernization and a single strong regulator for the GSE's with
powers like those of a bank regulator.
To help ensure against future abuses, we are strong advocates
for the licensing of virtually all originators, including brokers,
and the creation of a national database that can easily be accessed
by consumers. Borrowers would also have the peace of mind of
knowing that whether an agent or an actual lender, these
originators would be held accountable to professional
standards.
And to increase the transparency so necessary for trust in the
marketplace, we support simplifying processes and disclosures in a
way that predatory lending practices cannot hide in plain
sight.
That's a part of what the Mortgage Bankers Association is doing
on its own. As I said, we are major contributors of resources and
funding for the HOPE NOW Alliance. But we also want to work closely
with regulators and legislators.
We applaud the speed with which the Federal Reserve has acted,
and, for the most part, are in agreement with the actions already
taken and proposed. Specifically, the proposed HOEPA rule.
HOEPA clearly demonstrates a comprehensive and thoughtful
approach to modernizing the process. MBA has long supported a
uniform national lending standard as the best means of curbing
abusive lending practices and assuring the future availability of
mortgage credit. Responsible uniform standards are the best way to
protect consumers. They will maximize competition, lower costs and
increase choices for all consumers. While the proposed rule is not
broadly pre-emptive, it does set standards we believe will take us
in that direction. We appreciate the Boards efforts not to over
regulate and to strike the right balance between regulation and
allowing the marketplace to work efficiently. This will best serve
those consumers who are worthy of mortgage credit.
However, there are some aspects of the proposed rule with which
we disagree. MBA filed its comments with the Board of Governors
last month, and I would like to highlight one or two of the
disagreements. Please keep in mind that we do support most of the
proposed rule changes.
In a nutshell, in its desire to equitably cover all
eventualities, some of the definitions, prohibitions and penalties
are overly broad.
First is the definition of "non-prime" or "higher priced" loans.
By tying this to the amount that a loan's APR exceeds comparable
Treasury securities, we believe that many more loans than were
intended by this definition will be subjected to unnecessary
regulation. This will cut worthy borrowers out of
homeownership.
We also favor standards in the form of safe harbors to define
permissible lending behavior in regards to a borrower's ability to
repay, rather than the proposed rebuttable presumption of
non-compliance. Rebuttable presumptions invite unnecessary
litigation, while safe harbors assure appropriate conduct.
I would also ask that the Board reconsider holding lenders
liable for the conduct of independent third parties, such as
appraisers and brokers. While we want regulation concerning the
behavior of these third parties-and want restrictions to be backed
by real authority-it should not be driven by lender liability.
We are seeking laws and regulations under which we can function
smoothly and in our customers', as well as our own, best
interests.
We want laws and regulation that give no quarter to fraud and
irresponsible practices, and that will also set the table for safe
growth of what will soon be one of our industry's biggest
products-the reverse mortgage.
You don't need psychic powers to see this one coming. In the
fable of the Grasshopper and the Ant, baby boomers are the
grasshoppers. Many will find their "live for today" philosophy has
left them with few fiscal resources for a tomorrow that will be
longer than they planned for. Reverse mortgages represent a sane
and reasonable way for seniors to take advantage of the equity in
their homes. But they also represent an enormous opportunity for
those who would take advantage of a fairly arcane product marketed
to a more vulnerable population.
We have to get this one right. We need the proper regulations
and legislation in place to prevent abuse and at the same time
allow homeowners to make sound decisions in their best interest.
Decisions that can keep them in their homes. After all, at this
stage in their lives, there's no chance to rebuild a nest egg-we're
not talking about 30 year olds who may have made a costly mistake
in judgment.
The Mortgage Bankers Association's residential board of
governors is working on guidelines for industry best practices
moving forward. You can be sure that these reverse mortgages will
be dealt with specifically. We also want to make sure that our
recommended best practices align with regulations, so that the
industry is working hand in hand with regulators in a way that
makes good business sense for everyone.
I dare say that everyone in this room is in favor of free
markets. But I think we also realize that the invisible hand
guiding them can sometimes slap us in the face. Because even an
invisible hand needs the right information, and that takes the kind
of transparency, which translates into trust.
For the foreseeable future, we will speak of trust, and mean
trust but verify- and that is how it should be. For as good as we
became at spreading risk, we should be equally adept at spreading
responsibility. Spreading the acceptance of responsibility.
The sub-prime market will be back. It should be back. We were
always right in seeking to make permanent the idea that owning a
home isn't just for the wealthy. That is still an admirable goal.
And it will happen when we ease the fears and uncertainties of
those in the capital markets by what we do in the next few
months."
For more information, visit www.mortgagebankers.org.
