April 30, 2007
After the collapse | A conversation with Will Lund, director of the state Office of Consumer Credit Regulation, on the ripple effect of the subprime mortgage market implosion
By Scott Sutherland
For much of the past year, it's been almost impossible to miss the daily updates of the gradual then sudden collapse of the subprime mortgage loan market. Over the past 12 months, according to The New York Times, at least 50 subprime lenders, beseiged by borrower defaults, have shut down or sought buyers; earlier this month, New Century Financial, the nation's biggest independent supbrime lender, filed for bankruptcy protection. More than one-eighth of subprime mortgages were delinquent in the fourth quarter of 2006, and foreclosures rose 47% last month from a year earlier, the Times reported.
As the spring house-selling season approaches, the subprime debacle is again raising its head. In the last few weeks, the National Association of Realtors has predicted that the subprime ripple effect will make it tougher for borrowers to get mortgages, and will also cause home prices to fall this year for the first time on record. Experts predict that as subprime lenders continue to freeze operations or go out of business, the inventory of housing stock will increase and demand will weaken, resulting in falling prices and flagging interest among prospective buyers.
That trend is already showing up in some Maine housing markets. According to the Maine Real Estate Information Service Inc., York County, for the quarter ended in February, experienced a 7.64% drop in the number of units sold compared to the previous year, while the median price dipped a little over two percent. (Cumberland County, by comparison, saw the number of units sold increase 7.87% during that same period, with median sale prices increasing 1.47%.) Statewide, the median sale price increased 1.05% for the quarter, while the number of units sold dropped 3.64% ˆ hardly a promising pre-season for home sellers.
As the residential market awaits the next bit of bad news, lawmakers in Augusta are considering legislation that would make it tougher for subprime lenders ˆ also known as lenders of high-cost mortgages ˆ to repeat their track record of the past several years, when they heaped high-cost, fee-laden loans upon consumers with sub-par credit. The bill, called the "Maine Homeowner Protection Act," was being considered as this issue of Mainebiz went to press, and is likely to have a public hearing in early May. As crafted, the bill, sponsored by House Speaker Glenn Cummings (D-Portland) and supported by more than 100 legislators, would limit the fees that lenders can charge customers; prevent lenders from charging penalties when borrowers paid off high-cost mortgages ahead of schedule; require lenders to consider a borrower's income before making a loan; protect consumers' ability to take lenders to court; require consumers who are taking out a high-cost mortgage to receive credit counseling; give the Attorney General's office authority to prosecute lenders; and create two new enforcement positions in the state Office of Consumer Credit Regulation.
Mainebiz recently spoke to Will Lund, director of the Office of Consumer Credit Regulation, about the aftermath of the subprime implosion and how it continues to play out among consumers in Maine. The following is an edited transcript.
Mainebiz: How fast did the pool of non-traditional or non-bank lenders, the ones who make most of the subprime and high-cost loans, grow?
Will Lund: The growth and volume have been incredible. It wasn't that long ago that we had 15 non-bank mortgage lenders doing business in the state. Now it's between 800 and 900 companies all over the country that are licensed to make mortgages in Maine. Those companies have made more than $3 billion in loans each year for the past couple of years in Maine ˆ eight years ago it was at $1 billion. The volume of loans is equal to that of banks and credit unions. It's really accelerated in the past three or four years. There have been years where the volume of these kinds of loans doubled each year.
How has all this activity affected your regulatory duties?
We regulate any non-bank consumer financial service doing business in the state of Maine, so that includes collection agencies, auto dealers that sell on credit, rent-to-own businesses, payroll processors ˆ a lot of different kinds of businesses.
About 18 months go, we began registering individual loan officers who work for those non-bank lenders. It used to be that someone would be found to have conducted some kind of improper activity at one of those companies, and they'd be let go, but then they'd just hook up with another lender and do the same thing. We realized we had to go deeper with how we monitored these companies.
We now have 12 people in our office keeping track of 18,000 individuals employed by these non-bank lenders all over the country. This year, we implemented education requirements for those officers; to do business in the state, they have to demonstrate that they've received 12 hours of ethics education, or education related to doing business in Maine. That requirement has directly led to us revoking the registrations of three individuals in the past month. The bottom line is that now you can't do something wrong, get fired and just move along to another company.
How large a problem are loans that you would describe as "predatory"?
Our office averages 600 written complaints a year, for all the different kinds of businesses we regulate. Maybe 15% of those are related to mortgage loans. Almost every complaint of predatory lending involves the consumer saying someone told them something that wasn't reflected in the paperwork, so we have to call someone a liar. A mortgage complaint also takes us 10 times longer to deal with because of its complexity. It takes an awful lot longer than writing to Equifax to straighten something out.
Who's getting hit hardest by this kind of lending in Maine?
It's the consumers who can least afford it, the ones who can't use the marketplace to their advantage ˆ they might be young, or old, and many of them are unsophisticated when it comes to this kind of transaction. Lenders and brokers convince these people that they're working hard and are getting the best deal for them. Folks who fall victim to this think their own credit is no good, and that they have no bargaining power, and that they need to comply with whatever these lenders offer them. I don't disagree with people who say Maine is at least as susceptible to these kinds of practices as anywhere else, because we tend to be cash poor but property or house rich. A lot of low-income people in Maine still own homes. If these high-cost mortgage schemes result in deals where equity is skimmed from property, that's a bad, bad result.
High-cost loans have cooled off along with everything else in the residential mortgage market. Once the market warms up again, how much of a problem will this be?
If states like Maine impose standards on the lenders, we can control it. In the [Cummings] bill, the standard we use is "net tangible benefit," the idea that a loan cannot be made unless it results in a net tangible benefit for the consumer. The problems we've seen happen because in our opinion loan officers are more interested in making the sale than in the welfare of the borrowers. A common misperception among consumers is that the officer or broker is on their side, but this is a for-profit business and there's no legal obligation to operate in a way that's beneficial to consumers.
A key part of the bill that [Rep. Cummings] pushed relates to what happens when a mortgage enters the secondary market. A loan might be made here in the state, then bought and sold several times until it ends up in the portfolio of an investor. The question is, does the owner of that loan bear any responsibility for any wrongdoing that may have happened when the loan was first made? Under the concept of assignee liability, some measure of liability would follow the loan, so the consumer would have some measure of recourse against whoever bought the loan.
This is a real hot potato, though, because there's danger with this kind of assignee liability. The purchasing and selling of these loans is a real economic engine; money flows out and comes back to buy more loans, and if the state doesn't think this through, it can have an impact on the value of those loans on the secondary market. If you're an investor in New York, you'll want to know about any liability related to the loan at the state level. [Rep. Cummings] feels this is appropriate to apply to [high-cost] loans, and I've come around to that way of thinking. Investors have an interest in buying loans that were properly made, to limit their risk for wrongdoing.
As the spring house-selling season approaches, the subprime debacle is again raising its head. In the last few weeks, the National Association of Realtors has predicted that the subprime ripple effect will make it tougher for borrowers to get mortgages, and will also cause home prices to fall this year for the first time on record. Experts predict that as subprime lenders continue to freeze operations or go out of business, the inventory of housing stock will increase and demand will weaken, resulting in falling prices and flagging interest among prospective buyers.
That trend is already showing up in some Maine housing markets. According to the Maine Real Estate Information Service Inc., York County, for the quarter ended in February, experienced a 7.64% drop in the number of units sold compared to the previous year, while the median price dipped a little over two percent. (Cumberland County, by comparison, saw the number of units sold increase 7.87% during that same period, with median sale prices increasing 1.47%.) Statewide, the median sale price increased 1.05% for the quarter, while the number of units sold dropped 3.64% ˆ hardly a promising pre-season for home sellers.
As the residential market awaits the next bit of bad news, lawmakers in Augusta are considering legislation that would make it tougher for subprime lenders ˆ also known as lenders of high-cost mortgages ˆ to repeat their track record of the past several years, when they heaped high-cost, fee-laden loans upon consumers with sub-par credit. The bill, called the "Maine Homeowner Protection Act," was being considered as this issue of Mainebiz went to press, and is likely to have a public hearing in early May. As crafted, the bill, sponsored by House Speaker Glenn Cummings (D-Portland) and supported by more than 100 legislators, would limit the fees that lenders can charge customers; prevent lenders from charging penalties when borrowers paid off high-cost mortgages ahead of schedule; require lenders to consider a borrower's income before making a loan; protect consumers' ability to take lenders to court; require consumers who are taking out a high-cost mortgage to receive credit counseling; give the Attorney General's office authority to prosecute lenders; and create two new enforcement positions in the state Office of Consumer Credit Regulation.
Mainebiz recently spoke to Will Lund, director of the Office of Consumer Credit Regulation, about the aftermath of the subprime implosion and how it continues to play out among consumers in Maine. The following is an edited transcript.
Mainebiz: How fast did the pool of non-traditional or non-bank lenders, the ones who make most of the subprime and high-cost loans, grow?
Will Lund: The growth and volume have been incredible. It wasn't that long ago that we had 15 non-bank mortgage lenders doing business in the state. Now it's between 800 and 900 companies all over the country that are licensed to make mortgages in Maine. Those companies have made more than $3 billion in loans each year for the past couple of years in Maine ˆ eight years ago it was at $1 billion. The volume of loans is equal to that of banks and credit unions. It's really accelerated in the past three or four years. There have been years where the volume of these kinds of loans doubled each year.
How has all this activity affected your regulatory duties?
We regulate any non-bank consumer financial service doing business in the state of Maine, so that includes collection agencies, auto dealers that sell on credit, rent-to-own businesses, payroll processors ˆ a lot of different kinds of businesses.
About 18 months go, we began registering individual loan officers who work for those non-bank lenders. It used to be that someone would be found to have conducted some kind of improper activity at one of those companies, and they'd be let go, but then they'd just hook up with another lender and do the same thing. We realized we had to go deeper with how we monitored these companies.
We now have 12 people in our office keeping track of 18,000 individuals employed by these non-bank lenders all over the country. This year, we implemented education requirements for those officers; to do business in the state, they have to demonstrate that they've received 12 hours of ethics education, or education related to doing business in Maine. That requirement has directly led to us revoking the registrations of three individuals in the past month. The bottom line is that now you can't do something wrong, get fired and just move along to another company.
How large a problem are loans that you would describe as "predatory"?
Our office averages 600 written complaints a year, for all the different kinds of businesses we regulate. Maybe 15% of those are related to mortgage loans. Almost every complaint of predatory lending involves the consumer saying someone told them something that wasn't reflected in the paperwork, so we have to call someone a liar. A mortgage complaint also takes us 10 times longer to deal with because of its complexity. It takes an awful lot longer than writing to Equifax to straighten something out.
Who's getting hit hardest by this kind of lending in Maine?
It's the consumers who can least afford it, the ones who can't use the marketplace to their advantage ˆ they might be young, or old, and many of them are unsophisticated when it comes to this kind of transaction. Lenders and brokers convince these people that they're working hard and are getting the best deal for them. Folks who fall victim to this think their own credit is no good, and that they have no bargaining power, and that they need to comply with whatever these lenders offer them. I don't disagree with people who say Maine is at least as susceptible to these kinds of practices as anywhere else, because we tend to be cash poor but property or house rich. A lot of low-income people in Maine still own homes. If these high-cost mortgage schemes result in deals where equity is skimmed from property, that's a bad, bad result.
High-cost loans have cooled off along with everything else in the residential mortgage market. Once the market warms up again, how much of a problem will this be?
If states like Maine impose standards on the lenders, we can control it. In the [Cummings] bill, the standard we use is "net tangible benefit," the idea that a loan cannot be made unless it results in a net tangible benefit for the consumer. The problems we've seen happen because in our opinion loan officers are more interested in making the sale than in the welfare of the borrowers. A common misperception among consumers is that the officer or broker is on their side, but this is a for-profit business and there's no legal obligation to operate in a way that's beneficial to consumers.
A key part of the bill that [Rep. Cummings] pushed relates to what happens when a mortgage enters the secondary market. A loan might be made here in the state, then bought and sold several times until it ends up in the portfolio of an investor. The question is, does the owner of that loan bear any responsibility for any wrongdoing that may have happened when the loan was first made? Under the concept of assignee liability, some measure of liability would follow the loan, so the consumer would have some measure of recourse against whoever bought the loan.
This is a real hot potato, though, because there's danger with this kind of assignee liability. The purchasing and selling of these loans is a real economic engine; money flows out and comes back to buy more loans, and if the state doesn't think this through, it can have an impact on the value of those loans on the secondary market. If you're an investor in New York, you'll want to know about any liability related to the loan at the state level. [Rep. Cummings] feels this is appropriate to apply to [high-cost] loans, and I've come around to that way of thinking. Investors have an interest in buying loans that were properly made, to limit their risk for wrongdoing.
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