Lending by the government is not the solution to this foreclosure mess. Some transparency in appraisals and lending would be a good start.
Direct or Indirect, Mortgages Are Flawed
April Charney is a consumer lawyer in Florida and Arkansas and the manager of a lawyer-only Foreclosure Defense and Prevention listserv for Jacksonville Area Legal Aid.
October 16, 2012
Direct lending is one way that the government could get involved in the mortgage market, but remember: The government is already integrated vertically and horizontally and up to its eyeballs in this business.
For many Americans, mortgages themselves are a bad fit: individuals who might be injured and out of work for six months, or families that could go from two incomes to one, or households entering retirement and living on a fixed income. For these and many other income-sensitive and credit-precarious American families, we need to think beyond the mortgage -- not just add the government as another lender. And the current mortgage system already caters to the Americans who can comfortably afford a mortgage, with little risk of foreclosure -- the sort of borrowers to whom the government would want to issue mortgages.
For those who are eager to fault banks for messing up the mortgage market, it is worth considering that this country lacks sufficient income and creditworthy prospective residential borrowers to fuel a mortgage market of any meaningful size without significant up-front system-wide subsidies and without life-of-loan default prevention customer service built into the project.
Given this landscape, why did banks determine that it was acceptable to shareholder interests to disregard due diligence and other legal standards? Consider the risks the banks heaped on their shareholders (especially our pensions and state investments) by neglecting their legal obligations during the inflation of the most recent housing bubble.
The same arrogance, ignorance and greed that inflated the bubble also popped it, but the Fed’s desperately low interest rates won’t be a refinancing bonanza for banks, as some predict. Too many problems remain: we have failed to deal with exaggerated appraisals underlying the stinky mortgages and the refinancing deals. We have failed to deal with the losses to the banks resulting from bundling and the creation of "nothing-backed" securities. The banks continue to use false appraisals and "stated income" applications in the refinance process without requisite due diligence or compliance with traditional underwriting limitations. And we don't yet know the effect of a bogus refinancing will be, when the bank doing the refinancing doesn't own the loan or even have authority to refinance it.
That’s just a starting point for the drilling that needs to happen. From the trenches, I see a failure of the banks to mark to market. I question how this country will deal with an aging (and abandoned) housing stock. So many experts aren’t even talking about this. I also question why we listen to the banks’ reports and statements, after the track record. And finally, I seriously doubt the sustainability or stability of a mortgage market built overwhelmingly on refinances.
What’s the solution? Some transparency would be a start. Each bank should detail for each refinancing: the age of the home; the fair-market value or appraisal of the home; the original balance of the loan; the current balance of the loan; whether the loan is wholly owned or securitized; and whether the bank owns or services the loan. And we need a system to verify appraisals so that we can at least see a bottom to the value spiral in our lifetime.
Now let’s talk about where we go from here.
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