Liveblogging the Marketplace of Ideas: Predatory Mortgage Lending
Welcome to the most recent installment of DMI's Marketplace of Ideas! I'm at the Pace Downtown Conference Center, waiting for the event to begin.
I'm pretty excited to hear from all the speakers this morning, since I've been hearing about all the great things they've done during my past two weeks at the DMI office. Minnesota Attorney General Lori Swanson sounds pretty impressive. Not only is she the first female attorney general in her state, but she has helped to enact the toughest anti-predatory lending laws in the nation. Minnesota's laws are actually being looked at as models for other state and federal legislation.
There will also be a panel discussion featuring Sarah Ludwig, Executive Director of the Neighborhood Economic Development Advocacy Project, New York City Councilman James Sanders, Jr., and Richard Neiman, New York State Superintendent of Banks.
Despite the fact that it's only 8 am, people seem pretty happy to be here. There's a nice sense of camaraderie in the room. I keep overhearing conversations from people who are complimenting the work of each others' organizations and talking about legislation that they're both excited about. I guess it's a good sign that all these folks who are working against predatory lending are at least on the same page and seem totally ready to cooperate and work together.
Mark Winston Griffith is the co-director of NEDAP (Neighborhood Economic Development Advocacy Program), and a DMI fellow. He talks a bit about himself and what he works on at DMI, a lot of issues that he says are "swirling" -- what a great word -- around the the foreclosure crisis. He also talks just a bit about the community education work that NEDAP does.
Then he talks about a little about DMI. "DMI has never been content to just argue theory," he says. Mark introduces Senator Charles Schumer -- New York's second term senator who has fought for all kinds of great progressive issues. Mark lists some of the committees that Schumer is involved with, and Schumer interjects. "It's not as good as it sounds," he says. The crowd chuckles.
"It's great to be here," says Schumer. "I really appreciate the work that the Drum Major Institute does."
Schumer calls the arguments over predatory lending the "nub" of where America is heading. He talks a bit about the two groups that run America -- "economic royalists" and the Christian Right. Schumer mentions that he's a person of faith, but that faith doesn't necessarily belong in government.
The economic royalists "basically run the Republican party." He talks a bit about some stories of people who don't want government regulation because they see that as government interfering in their lives. "Over the last forty years this group has created a platform" for the GOP.
Schumer has two words to describe this group: NARROW. GREED.
"You need government to be involved," he says. "The private sector is not going to solve this crisis by themselves."
We can't play on the Ronald Reagan platform anymore. "The world has changed."
Schumer takes a breath. "Predatory lending happened because we didn't have government regulation." He mentions the Wild, Wild, West of lending," -- unregulated mortgage brokers who have created the trouble. "This mythology that they went in there and helped these poor home owners become home buyers the first time is just that -- mythology."
Schumer gives the example of Frank Rogerio, a retired subway worker who lived in Ozone Park, Queens. Frank had payed half of a 30 year mortgage and was doing fine -- he could routinely afford his mortgage payments. But then it got worse -- he got diabetes, couldn't pay for health care. One day some mortgage worker called him up and convinced him to refinance his mortgage. Eventually Frank signed the document, without reading the papers.
Schumer admits he didn't even read his own mortgage document, and the audience chuckles. Of the $50,000 dollars that Frank was promised, Frank got $5700. The broker -- or as Schumer says, "that cowboy!" -- really cashed in. So Frank got no help with his health care and a MUCH higher mortgage.
"Frank is a typical person caught in this subprime crisis," says Schumer.
Done with the Frank story and the Wild West imagery, Schumer moves on to some statistics. He keep mentioning that financial institutions DO NOT want to foreclose -- it's just not worth it for them. "The Franks need some help, and the only place that they can get help is the government" he says.
Now Schumer is talking about the importance of nonprofits to help people in the subprime crisis - he knows his audience, perhaps?
Schumer is beginning to talk about possible solutions to the crisis. "We need money to help refinance these mortgages!" he says, and mentions the always-important Fannie and Freddie.
Two things: we need to regulate all mortgage brokers and regulate all mortgage lenders. He wants to be "tough" on them, he says. "Be tough and it'll work." Go Schumer.
Predatory mortgage lenders act like they're doing people a favor, helping all these home owners. But actually, only 9% of those receiving these loans are first time home owners -- the rest are refinanced.
"The group that is the most derelict here is the credit rating agencies." He says that we need to change the way these agencies work. "Guess who pays these agencies?" he asks. "The accountants!"
"This is NOT an issue where we're helpless." He says we just need to be "more regulatory" and "put up some dollars."
And then he moves on to announce Minnesota Attorney General Lori Swanson, putting on his glasses to read her bio.
"What fueled the mortgage mess?" she asks. She agrees with Schumer, saying that the problem was fueled by lack of regulation.
"The mortgage is like the American savings account." She says that mortgages have created the middle class, allowed kids to go to college, etc. And without mortgages, things just don't function right.
In MN 85% of all mortgage loans taken out in 2006 were cash-out refinancing. "What fueled the mortgage crisis is at the outset there's an unlevel playing field." She mentions the "mice-type" print and 30 pages of legalese that people are faced with during foreclosures.
Not only has subprime lending grown, but there's a lot of irresponsible behavior out there, she says. And then she's back to deregulation -- is that the word of the day? "Regulators were asleep at the switch!" she says.
More Minnesota statistics -- and yes, she says Minnesota as it's supposed to said -- with a real Minnesota accent.
"The number of foreclosures have nearly doubled in the past year, and quadrupled in the past four years," she says. Wow.
Now she's about to talk about the actual legislation. First, state income fraud. Brokers actually make stuff up for the applications, like people making ridiculous amounts of money making birdhouses. Birdhouses? Slight chuckle from the audience.
"Our legislation essentially bans stated-income loans," says Lori.
She also mentions teaser rates, and how her legislation addresses this. "The ability to repay has to contemplate whether the person can repay it when the payment goes up in two years."
Now mortgages. "It's the most important financial transaction and how Americans save money for the future." One mortgage company actually watched the movie Boiler Room to learn how to sell. And the brokers have "Power Hour," where they can't sit down until they actually make a sale. Doesn't a "Power Hour" actually have something to do with beer? Either way, the message is the same -- it's really irresponsible.
She says "it's not enough just to do no harm to the borrower. A mortgage broker should actually make sure that the loan does some good."
"We don't simply regulate the process, we regulate the product." She says that not only should the lending process be regulated, but the loans themselves should be sound. What a great line, Lori! I almost wish I was a mortgage company and could use that for my advertising slogan.
They banned pre-payment penalties for subprime loans. "Why penalize someone for paying back early?" she asks.
New topic -- now we're on to lessons learned.
Lori mentions her predatory lending study group. "All of us together are smarter that any of us alone." The study group had nonprofits, key legislators, people from the business community, ACORN, bankers, lenders, etc. The study group "put all their heads together" and put together the bill that she just described. "That was the vehicle for legislation," she says.
"If you want to move the boat better through the water, all oars really need to move in the same direction."
"Sometimes the people on our side of the aisle - the consumer advocate side of the aisle -- don't all move together." She's talking about how important it was to compromise, that there were things that she didn't like in the bill, but that was part of the deal of passing this legislation. And she says that including the business community was certainly helpful and contributed to the bill's passage.
"Don't let the perfect be the enemy of the good," she says. She's talking about being pragmatic here, and mentions "tilting at windmills." "You can't take on the whole world." The bill doesn't regulate national and state banks, which actually helped to get the bill passed. She choose not to regulate them because federal law would have preempted the legislation. State and federal banks were already highly regulated and therefore not participating in the worst of these practices. In fact, when she spoke to state and federal banks about the law, they insisted that they were not involved in predatory practices and the law didn't need to apply to them -- and she agreed, which was why she was able to get the state banks to support the law.
On the subject of lobbyists, she says: "Get someone in government on your side." When FDR took office there were 12 lobbyists, and now there's 60 lobbyists for every member of Congress, she says. Or "60 close and immediate best friends" per congressmember! She says that getting government on your side gives "credibility" to these issues.
"Shoot with a rifle, not a shotgun." Huh? But she explains. She's putting all her efforts into passing this bill, not others. So I guess the rifle is basically focusing your efforts.
Another lesson -- "have real life people tell the story." She had people from all parts of Minnesota come to the hearings and tell their own personal stories. They made an effort to have suburban people undergoing foreclosure talk about their experiences. That way opponents can't just isolate it by saying it's an inner city problem.
She also said there was some luck involved. But by luck she really meant lots of media and opinion/editorial support.
Done with the lessons.
She says that the MN law is being used as a model for federal legislation by Minnesota Congressman Keith Ellison. "States have been a laboratory of democracy," she says.
States tend to be the regulators these days, she says. "I hope this can provide some tools," she says of her bill. "There are big problems where the regulators weren't really regulating," despite warnings about this problem from states and advocates for years.
She really wants the lessons she learned to be shared with others.
Big round of applause from the audience, and now we're on to the panel.
The five member panel is getting organized, shuffling through papers, drinking water, etc. Andrea Batista Schlesinger starts things off -- she'll be moderating. "We try to highlight policies that are progressive, effective, and proven."
"The end result of this event is that I'm currently driving my mortgage broker crazy," she says, mentioning that she's in the process of buying a home. Another audience chuckle.
Andrea introduces the panel, starting with Sarah Ludwig from NEDAP.
Andrea: Have we done this to ourselves by accepting that home ownership is the realization of the American dream?
Sarah: We work with community based groups who are interested in home ownership as a vehicle for asset-building.
She mentions the "transfer of wealth" from "communities of color" to "pockets of corporate greed."
Now James Sanders, Jr., a City Councilman from Queens. Andrea talks about the subprime section, and asks James about the impact on this population. "I think it's difficult to recognize the difference between a subprime loan and a predatory loan," he says. James says that subprime loans aren't all bad -- that sometimes subprime loans can help people to "realize the American Dream."
"I agree that from my point of view this is a crime begging for a law," he says. "We have yet to come up with those things."
"We do need to regulate this whole matter, but we need to make sure we don't throw out the baby with the bathwater."
Sarah's looking anxious -- I don't think she agrees, or she's just not that in to throwing out babies.
Wait, first option. "Subprime loans are so disproportionately made to people of color that they're baring the brunt of the foreclosure crisis!" she says. She definitely feels passionately about this issue. "They are SO CONCENTRATED in neighborhoods of color," she says, citing a study by the Center for Responsible Lending, which showed net home loss in communities of color as result of these lending practices.
'We're way past the point of making these distinctions," she says to Sanders. Yes, great dialogue already!
James responds, saying that "the devices are flawed," but we have to allow these people to reach the American dream!
Andrea tells a joke: I slipped the panel a twenty so they'd disagree, but I didn't know it'd be this early! It's only 9:15!
Audience laughs. Ha.
Andrea introduces Richard Neiman, the New York State Superintendent of Banking.
Richard begins by talking about the importance of the states, and says he totally agrees with Lori. She's nodding -- they're definitely on the same page. He's talking about regulation, all the entities and mortgage brokerages in NY. He mentions a bill that NY passed that requires the licensing of mortgage loan originators -- sort of like the model that is used with stockbrokers. They'll even be fingerprinted! It's be national, so a broker who gets in trouble in CA can't go to New York and fool even more people.
Richard mentions "registration, supervision, and enforcement" -- he thinks that the state should take care of these three. We don't need more federal bureaucracy for these things, he says.
Andrea tries to involve Lori in the conversation. Lori is back to talking about how in MN they don't regulate national banks -- "water does find the crack" - she says, saying that national banks are now hiring brokers to fill that spot that was left open by the new regulations. The banks that once said they were above these practices are now doing those same things themselves.
Now Richard is talking about large banks. Andrea asks him to explain the "origination process" and the role of big banks in the process. She wants a "101," she says
"It's not that complicated," says Richard. "But it is complicated."
He says that a lot of the issues from the subprime process go back to the securitization process. "There was a lack of accountability on any one investor," he says.
James is back, talking about the big banks. "The banks are keeping this thing alive," he says. "I would argue that they're more guilty than these folks on the ground looking around to con people."
Sarah is back to the "101," talking about loan organization. "The broker has every incentive to make as high a volume of loans as possible." She says the lender is all for turning a blind eye to abusive features of loans. So the borrower isn't really taken into account.
Each investor holds a piece of the pie because of the loan securitization. "It severs the liability of the lender to the borrower," she says. Of course, good point.
And Sarah has a new point. She mentions the servicers of the loans -- we can't leave them out of the policy.
Back to Andrea. She wants to move away from policy for a bit. She's reading a controversial statement from a press conference by Mayor Bloomberg. He said, "And it’s very sad, but it’s not something that the city can really do anything about. And I’m not even sure it’s something that the state or federal government can do something about. This is the marketplace at work and people should not try to live beyond their means."
The panel is about to differ.
Richard begins talking about process and solutions -- data collection by area, outreach to community groups, refinancing tools.
James says he "humbly" disagrees with "our mayor." He thinks the city needs to "come up with vehicles" to help people faced with subprime loans. "The invisible hand is not God," he says. Government needs to help people, and financial institutions can be "allowed and empowered" by government.
Sarah: "It's an ironic position for the mayor to take." She mentions a NYC program that works with a lot of these issues. She says that a citywide program will be unveiled in the coming weeks to follow up.
She mentions New Yorkers for Responsible Lending.
In 2002 New York passed a predatory lending law -- it's on the books, but only goes after the most egregious cases. So the group drafted a bill. She says that "when we came up for air" they talked to the study group in MN, and found that a lot of the stuff that they had come up with was a "mirror image" of the MN law.
And then Lori reminds people that she's from Minnesota, and can address this. Right.
"We all support the free market," she says. And that the job of government is to regulate the "excesses of the free market when it goes awry."
"Only when it started affecting Wall Street, and not Main Street, did federal regulators start caring." She's so quotable!
She says you wouldn't allow a toaster to be sold that has a one in five chance of having a faulty cord and burning down a house -- why do we do that with mortgages?
Sarah's turn: "Borrowers don't underwrite mortgages, lenders do."
Pause, while people think about Sarah's statement.
Andrea has a question for James to keep conversation going.
James responds by talking about the 2002 law, and saying that the original version was defeated. "Financial institutions should not lend to anyone who cannot pay them back." He says that large banks "took us to task."
Lori mentions the "silent majority" -- that when an issue effects everybody, they won't all show up and lobby for it. And she also mentions the "power of the grassroots," and how successful they were in passing the Minnesota legislation. "The best thing we had going for us was the grassroots effort," she says. "They were relentless in lobbying."
Richard: The reason I think this will become a national issue is because of stories like that headline in the Wall Street Journal today...
Andrea interrupts -- "We planned that." Audience laughter.
Richard's back: Overall, there will be a lot of support for this issue.
Sarah: The fact that we have to clamor that the banks clarify that borrowers can pay the bill is mind-boggling....there's a sort of trust that people have in the real estate professions, and we need to have a legal duty that they represent the interests of the borrowers.
Andrea: I have a "financial literacy pet peeve." Is there a risk that all of this effort will move towards educating consumers and thereby giving institutions an easy way out?
Sarah jumps on the question. "That's where we've been for the last decade!" she says. She's really passionate about this issue. "There's this eerie chorus that we've heard for the last decade," she says. She says that in response to advocates' concerns about predatory practices, firms are always repeating that we just need more financial education. "It's like teaching people to not eat toxic food!" she says, implying that maybe toxic food should be regulated, too?
Lori totally agrees with Sarah. Companies blame the consumer.
Andrea jokes that she's going to stick with her rent stabilized apartment, which leads to another laugh from the audience.
Guest questioner time! First up is Connecticut State Representative Chris Perone. He starts by congratulating the panel, and then asks "What happens when a bill goes into law like this on a federal level?" He asks how they're working to head off lobbyists that are fighting the bill.
Andrea laughs, saying that you know an issue is serious when the metaphors are violent.
Lori decides to answer the question. "The two things you don't want to get made are legislation and sausage," she says. It's a tough process.
Sarah: As states start to enact meaningful laws the pressure will build up over time. We need some more time to suggest more responsible lending laws.
Next guest questioner, Pamela Owens from the National Federation of Community Development Credit Unions. She starts by saying she wants to move to Minnesota, but then Chris Perone suggests Connecticut! The audience chuckles.
Pamela tells a story about a maid in New York who makes about $1200 a month and yet her lender wrote on her loan that she's a "domestic engineer." In the process of processing, "domestic" got taken off, and now the maid is an engineer who makes $5000 a month and has a ridiculously high mortgage.
Pamela, who is a financial educator herself, agrees that education is important but is not a substitution for regulation.
Now they've moved to open questions. First one is about gentrification, and the relationship between gentrification and loaning issues. "There's always the other side of the coin," she says. "There's the foreclosures, but then someone is always snapping up these properties."
James wants to speak about his district. "The crisis is in one sense too new to see who's buying." Developers are now turning into renters, he says. He says that it's not so much gentrification, but a problem of concentration of poverty. He says these communities have a "week civic structure" to absorb needy people.
Richard says there's definitely a gentrification connection. He says that developers are definitely moving in to the minority communities that are hit hardest by subprime lending issues.
Sarah chimes in, mentioning the mapping that her organization has done. "There are some blocks in Central Brooklyn where there are between five and ten foreclosure applications all in the same area!"
She wraps it up -- the issue isn't fueled by gentrification, but certainly connected and intertwined. NYU will be releasing a study on these connections in the near future.
New question from the audience. The questioner says that his parents bought their first home with a subprime loan, and have refinanced since with predatory loans. "How do you prevent a regular Joe like him from buying whatever he wants and being that impulse buyer?"
James has an answer: "There's very little that the government can do to force people to act in what we would think is a responsible fashion." He says that financial institutions are trying to convince people to take the equity out of their homes -- that's problematic.
Audience question about private enforcement against predatory lending.
Lori has an answer. "The more cops on the beat, the better." She says that competition and turf wars can be a good thing, so that laws will get enforced. So private and state enforcement could work.
Another question: What about the con artist element of it? She mentions some of the stories that the panel has told.
James mentions that the con artists are being "seemingly awarded," and there's no systemic response to the problem.
Sarah agrees, and says that they're working on getting district attorney's officers to be better enforcers of a law that's already on the books.
And last question! Audience member mentions two problems: lack of access to credit and the lack of defenses in the foreclosure process.
Sarah says that there are defenses, and that legal services people "spend all of their waking hours" working on these issues.
Andrea wraps things up, but says she's going to give everyone on the panel one more chance to say something. She asks them what they would be saying on this issue if they were a presidential candidate.
"Tough question!" says Sarah. She thinks these practices need to be outlawed, but also that the millions that have already been aggrieved by these processes need to be helped. So you can't just prevent the problem in the future -- you have to deal with the present. "We need to make sure that servicers and the investors find ways to work with borrowers to make these loans fair loans." She says we need laws like Lori's at the national level. The national standard has to have "teeth" -- liability to borrowers.
Richard's turn. He says we need to learn form the past to work in the present. "This crisis is so complex and so widespread." He says we really need a communicative effort between government, non-profits, and philanthropy for a coordinated effort.
James: The federal government doesn't only need to deal with the problem, but we have to make sure that the financial institutions can't do this again. There's so much money to be made that this is akin to a pyramid scheme.
He says that we need to give the people more than education. He suggests moving all financial institutions under the umbrella of the CRA (Credit Reform Act).
Lori starts by thanking all the people in the room who are working on this issue. She says the biggest issue is a "philosophical one," because ordinary people are falling through the cracks. She says the government needs to level the playing field for ordinary people. It's not just about this issue -- it's about the whole philosophy.
Andrea concludes by giving a plug for the DMI Blog! Yes! She says the conversation will continue here, so please help us continue the conversation!
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Check out two video cilps from the event.
Senator Schumer announces his new lending bill
and Councilman Sander's responds to Mayor Bloomberg's assertion that the government can not address the mortgage loan crisis.