Most mortgage brokers have acted responsibly in originating loans, a banking regulator said today. And while many parties -- including borrowers, Realtors, investment bankers and originators -- are responsible for the current chaos, inaccurate reports of failing companies have only made things worse.
Brokers accounted for $1.7 trillion of 2006 originations, John M. Reich, director of the Office of Thrift Supervision, said today. He said broker share of originations that year was 58 percent.
He made his comments at the National Association of Mortgage Brokers' Legislative & Regulatory Conference in Washington, D.C., according to a transcript of his prepared testimony released by OTS.
"Mortgage brokers have made significant contributions to help fulfill the aspirations of people to own homes," Reich told the group. "The majority of these mortgages were made responsibly; they helped finance homes for minorities and first-time homebuyers, and those who wanted to refinance into a better interest rate when rates were falling. They also helped qualified borrowers with impaired credit buy homes and repair their credit ratings."
But the director noted that serious lending abuses by a minority of originators have led some borrowers into foreclosure, disrupted world financial markets and cast a cloud over the industry. As a consequence, this year is the beginning of an era of legislative and regulatory reforms.
"How does it feel to be accused of this every day in newspapers, on TV, on the Internet, and by elected officials and candidates?" Reich rhetorically asked the group. "Certainly, inaccurate news reports and misinformation from some analysts can contribute significantly to the difficulties an institution experiences in weathering difficult financial conditions."
He suggested shoddy reporting, like inaccurately indicating a company is on the verge of bankruptcy, only exacerbates the difficulties of managing disruptions in the market.
Currently, one-in-five subprime loans is delinquent and the subprime foreclosure rate has risen from 3.34 percent in November 2006 to 7.65 percent a year later, Reich said. And the foreclosure rate for Alt-A loans has gone from 1.8 percent to 3.36 percent over the same period.
The director indicated that, in addition to the minority of irresponsible originators, Realtors and homeowners desiring the highest priced homes they could get were also a big part of the problem.
"And let's not forget that Wall Street deserves a share of the blame," Reich stated. "Investors' appetite for high-yielding subprime mortgage securities put a lot of pressure on the mortgage banking community to generate a high volume of loans without paying enough attention to quality."
He explained that lenders stopped holding most loans on their balance sheets in the 1990s because of the increasing popularity of the securitization model. As a result, lenders lowered underwriting standards since elevated risks could be passed on to investors at prices that did not reflect higher risk levels.
He noted ratings agencies, which investors relied on, "did not perform with distinction." After subprime loans began defaulting and cash flows slowed, the agencies downgraded the securities -- eliminating investor demand virtually overnight.
Reich called for immediate legislative and regulatory action, including House bill H.R. 3915 and Senate bill S. 2452, which address servicing arrangements, mortgage fraud, assignee liability, appraisals and foreclosure prevention counseling.
He said he supports provisions of H.R. 3915 that would establish national lending standards, create a national licensing registry for originators, require suitability analysis and limit liability to secondary market securitizers. The regulator commended brokers for supporting the licensing and registration requirements in the bill, which he acknowledged would place a burden on small mortgage brokers but would also prevent bad originators from hopping from company to company or from state to state.
"I also believe a proper balance is critical between prudent lending and constraints on credit to qualified borrowers," Reich added. "We must remember that subprime and Alt-A lending created homeownership opportunities for those who could not otherwise have bought a home -- particularly minorities, immigrants and first-time homebuyers. We must not let the pendulum swing so far that it prevents good borrowers from getting into homes of their own."