Tuesday, October 16, 2007

"What We Have Here is a Failure of Customer Service"

Local Democrats told mortgage lenders at a hearing yesterday to improve their “customer service”…or else. Today’s Boston Globe subprime story by reporter Ross Kerber is completely one-sided. The story repeats the rhetoric of very one-sided hearing called by Congressman Barney Frank, but his story provides nothing in the way of perspective.

A fisking:

US Representative Barney Frank yesterday suggested that subprime mortgage lenders will face tougher federal regulatory scrutiny unless they do more to work with their delinquent borrowers and help them avoid foreclosure.

“Do more work with their delinquent borrowers” is the Congressman’s euphemism for “absorb whatever loan losses are necessary to reduce foreclosures”.

Speaking words that could have come from the mouth of Don Corleone, Frank says:

"I want to serve notice. If these companies can't do a better job with service, their argument against regulation will be weaker," said Frank, the Newton Democrat who is chairman of the House Financial Services Committee, at a hearing in Roxbury yesterday.

That threat was a recurring point at this hearing

Frank arranged yesterday's hearing as part of his committee's fieldwork to gather input for federal legislation congressional Democrats are drawing up to deal with problems in the lending industry, such as the high incidence of expensive subprime mortgages in minority neighborhoods. The hearing included testimony from local leaders Governor Deval L. Patrick, Attorney General Martha Coakley, and Boston Mayor Thomas M. Menino, each of whom outlined steps they have taken to reduce the rate of foreclosures that have hit minority borrowers hardest.

However, there were no representatives for subprime lenders present at yesterday's hearing, so there was little disagreement about the extent of the foreclosure problem or the remedies for it. Several speakers endorsed the idea that community reinvestment rules that govern traditional banks should be extended to include subprime lenders as well, which would subject more of these companies to federal oversight.

Such a “hearing” sound more like and open meeting of a Democratic party caucus.

…Those two are among companies that made the largest number of loans with high interest rates in Massachusetts, according to new data presented yesterday by Jim Campen, a longtime mortgage industry analyst and now executive director of Americans for Fairness in Lending, a Boston group that was among several criticizing subprime lenders for preying on borrowers who don't qualify for traditional loans.

This “preying on borrowers” is the same exactly the same lender behavior that in earlier times of rising housing prices was called “helping poor people get aboard the housing escalator”.

Race played a part, many said. Among borrowers making more than $152,000 per year, for instance, 71 percent of African-Americans and 56 percent of Latinos received high-interest loans, versus just 9 percent of white borrowers, Campen's research found.

Next, the race card. The Globe dutifully reports that foreclosure may impact more minorities, as though foreclosure is a genetic-bourne disease like sickle-cell anemia.

Many of these were adjustable-rate mortgages, which accounted for just 10 percent of all loans last year but represented about half of those that went into foreclosure, said Lynn Browne, a Federal Reserve senior economist in Boston. Notably, many borrowers of such loans didn't get such attractive interest rates to start out, around 7 to 8 percent in recent years, a percentage point or more higher than conventional loans. Those subprime rates are often rising to 11 percent starting this year, Browne said, as the adjustable portion of the loans kick in. "I think it probably will get worse before it gets better," she said.

No mention that perhaps lower credit scores might have caused banks to charge more because of a higher risk of default? Oh, I forgot, this story is about foreclosure, not about default!

One way to reduce foreclosures would be for borrowers to work out better terms with their lenders, she said, underscoring the importance of improved customer service at many companies. Some borrowers who met their payments in recent years by now should be able to refinance their way out of the worst lending agreements, she said.

They “should” be able to refinance, but now the credit markets have recognized the increased risk of foreclosure and raised the risk premium. How evil of them.

Patrick described various steps his administration has taken to reduce foreclosures including a pending proposal to have lenders accept losses on foreclosed homes that sold below their market values.

Patrick didn’t describe his service on the Board of Directors at subprime lender Ameriquest, where he was paid over $1M to, in his own words “help Ameriquest deal with the allegations of predatory lending and to put in place policies that will protect low-income consumers”.

I doubt anyone in charge at such a one-sided hearing would ask Patrick to talk about this. It’s too bad there were no reporters around to ask.

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