In Massachusetts, the foreclosure rate is up 76 percent in the past year, with 1,000 foreclosures in Boston in the past six months. The wave of foreclosures is not expected to crest until 2008, when many variable-rate mortgages readjust.
“The problem of mortgage foreclosures is only going to worsen so acting now with bold measures is critically important,” said House Speaker Salvatore F. DiMasi. “In passing this legislation, the House of Representatives voted to protect future home-buyers from predatory lending and bring meaningful help to those facing foreclosure.”
“While we clearly had some unscrupulous actors working in the mortgage industry, the real problem was that homebuyers were not financially astute to see through the double talk,” said Representative Ronald Mariano (D-Quincy), chairman of the Joint Committee on Financial Services and sponsor of the bill. “This legislation takes an important step to help level the playing field and give consumers the financial information they need to make educated decisions.”
Under this legislation, homeowners would be protected from foreclosure by the 90 day right-to-cure provision, which would require lenders to give homeowners 90 days to repay the interest and payment balance accumulated, before starting foreclosure proceedings.
If the borrower successfully completes this payment, their mortgage would be reinstated without penalty or foreclosure. This clause insures that consumers are not saddled with the weight of enormous legal fees associated with a foreclosure filing for simply falling behind on payments for a short period.
This bill will also encourage mortgage lenders to work with borrowers to avoid foreclosures in the coming months and years. Under this legislation, mortgage lenders will be motivated to shift adjustable rate mortgages to fixed rates. Borrowers can request to extend the length of their loan or increase their interest rate to achieve a fixed rate if they pay lenders a 1 percent fee on the cost of their mortgage. This one-time fee would enable mortgage holders to secure a fixed rate and encourage lenders to provide this security to homeowners.
Hoping to guard against future problems, the bill would require licensure of 20,000 loan originators with an annual license fee of $500, allocating $3 million to employ regulators under the Division of Banking to more aggressively regulate mortgage lending practices across the Commonwealth.
The bill also mandates that the Division of Banks keep a record of the mortgage practices of each loan originator in Massachusetts. The DOB will evaluate this information and rate lenders performance in the market. Poor performance may result in loss of license. By giving the commissioner the authority to hold these lenders accountable, questionable lending practices will be sharply curtailed.
Unique to this bill is the creation of counseling requirements for first-time homebuyers entering into subprime loans to insure they fully understand the financial commitment of their home loan.
The bill also:
* Adds reporting requirements for non-bank lenders of more than 50 loans.
* Protects renters as tenants-at-will, post-foreclosure.
* Creates a pilot program for impacted communities provides $2 million for foreclosure and mortgage counseling centers.
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the incredibly sleazy practice, documented today by Steve Bailey, of lenders paying brokers higher commissions for loans made at higher rates, with extra bonuses for loans with big prepayment penalties?
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Unbelievable. That should stop now. Shouldn’t the House bill address it directly, instead of just relying on “counseling”?
David — that practice is actually dealt with in the regulations (940 CMR, Part 8) issued by the Attorney General earlier this week. Mortgage brokers will be required to disclose any conflicts of interest, including whether their compensation will increase if they put the borrower in a more expensive loan. Also, lenders will be required to treat similarly-situated borrowers the same when making decisions about loan pricing. The AG regs are available here (warning — PDF)
Disclosure is great, FWIW. But seems to me there’s a good case for going further — and also doing it in law, rather than in regulation. An ongoing conversation, no doubt.
I agree, but I think the solution may be a bit more radical than substituting a statute for a regulation. Maybe we need to do more than impose a reasonableness requirement on lenders, as the new AG regs do. Maybe we need to align the incentives of the intermediaries in the mortgage market with the incentives of the investors who ultimately bear the risk of the loans by requiring brokers and originating mortgagees to hold a percentage of the mortgages that they sell to investors. There’s no better way to make sure that lenders are concerned about their borrowers’ credit.
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TedF
…to pay off my mortgage for a place I could AFFORD?
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Where are MY flat screen TV’s, trips to Cancun, and other things I gave up to live WITHIN MY MEANS? And PAY MY DEBTS AND TAXES?
The government will take care of your home largess, and with SCHIP expansion, you’ll have the cash to buy those big TVs and foreign trips. Money for nothing and SCHIPs for free….
but that was offset by a “6” for the excellent Mark Knopfler reference.
…you approve of credit card issuers who offer low teaser rates to suck customers into accepting their credit cards, but whose credit card “agreements” in 3 point type indicate that the rates will mushroom after 6 months (or so).
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The first time we got a mortage, the papers were about 1/8th inch thick. The last time we did a re-mortgage (since paid off) a mere 10 years later, the papers were about 1 inch thick.
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I’m a lawyer and insist on reading and understanding every thing I sign. Just how many people do you believe are in the same situation?
Hey lets make another $3 mil a year agency that will not address the situation. Most of the foreclosures are because people are stupid. You want to slow down the number of foreclosures, mandate that this formula be completed on all mortgage paperwork:
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blockquote>Monthly Mortgage payment =
Home owner insurance per month=
Car payment(s) per month=
Car Insurance per month=
Monthly living expenses=
Total of above=
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Monthly Salary=
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If you monthly salary is less then total of above, or even close, YOU CAN NOT AFFORD THE HOUSE.
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I bought a small shitty place in Randolph (not the best town ya know) because I could afford it. Why should I feel bad for people who made bad personal decisions, that no one forced them to make, and now they are being foreclosed on a house that you couldn’t afford in the first place.
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You know, here are some other things that should be on the paperwork. If you are only qualified for a variable rate mortgage, you probably can’t afford the house. If you can only make the payments by getting an interest only mortgage, you can’t afford the house.
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You can’t legislate personal responsibility. It’s Darwin in action.
“most of the foreclosures are because people are stupid” is just plain wrong for most definitions of stupid.
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Half of all foreclosures are caused, at least in part, by medical problems Stupid of them for getting sick or for caring for somebody who was sick. Then there’s those stupid people who lose their job to outsourcing, mechanization, or changes in the economy.
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And btw, they still have to pay their bills or they get foreclosed. The legislation simply builds in a fee-free grace period of 90 days to help those who are really close to the line stay on the “not foreclosed” side of it. It will reduce foreclosures by a smidge, which will help stabilize the markets.
The article you sited relies on self reported reasons for foreclosure.
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Forgive me if I don’t relay on self reported reasons for failure. Especially when the answers are multiple choice, so they can either choose “the loan was un-affordable from the beginning” or one of seven medical excuses.
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I also have a problem with the fact that the study include alcohol and drug abuse and gambling as medical problems.
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I still have yet to see anything that dislodges me of my opinion that the vast majority of people who are being foreclosed upon are not there due to poor decision making.
…to make the predictable crack about being sick of making payments.
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When I worked in the Lege, my boss was a terror with constituents asking for help. Do you have HBO? Do you have a cell phone? More than ONE cell phone? Have you gone on a cruise? How new is your car? MANY people never thought of financial problems in these terms.
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Now, mind you, he was the string-and-tinfoil-ball-saver of all time, but he had a point about many of these things. It’s why we changed the bankruptcy laws not long ago – because people were not only entranced by the shiny things, but felt entitled to them and aggreived when they went lacking.
Sorry PP – you’re not getting away with this one.
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If it were so clear that people were simply “being stupid” and clearly living outside of their means, then why did the lenders lend in the first place? You can blame the individuals/families for not making their payments all you want, but they did not have to recieve a loan — the lenders made the choice.
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It’s really a win-win for unscrupulous lenders — if you pay, they get excessive rates, and if you don’t, they get the house. (I want to make clear that many (likely most) lenders are not “unscrupulous”…but many are, and helped to execerbate the problem).
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Whether this legislation is the correct tool to combat the basic problem here is still to be seen, though it appears to be a step in the right direction. What is really odd, however, is your ignoring that fact that lenders play a pretty major role in the process — like approving the loan in the first place. If it is approval of a loan to someone who can’t afford it, then the lender has abdicated responsibility as well.
It has to do with mortgage securitization. The banks would loan money out for mortgages, then sell the mortgages on the secondary market to large investment banks. Those banks would then put a few thousand mortgages into a group and sell bonds backed by the value of the houses to investors.
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The local banks were paid based on how many mortgages they sold. They only actually held the mortgages for a few weeks, so they had almost no default risk. As long as you made your first payment, they could sell your loan.
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The large investment banks were also paid fees based on how many bonds they sold. Once they sold the bonds, they no longer had any risk from the mortgages. Again, there is only a very small window between when they acquire the mortgage and when they offload the risk onto investors.
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The investors mostly didn’t know what they were buying. The bond rating agencies rated the bonds as high quality bonds. Many large banks and hedge funds bought them, assuming that the credit ratings had been determined properly.
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So the reason that all these bad loans were made is that there were enough intermediate steps between the people borrowing money they could never pay back and the people lending them money that the credit risk could be obscured. There are hundreds (maybe thousands) of news stories about this starting in late July. It has caused some amount of panic in the financial world, because there are trillions of dollars invested in these mortgage backed securities, and nobody is sure how much they are actually worth.
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There may or may not be lawsuits against the credit rating agencies for rating all of these bonds so highly. But I suspect that the rating agencies will manage to show that they were basing their analysis on something reasonable enough that they will get away with it.
what was their incentive to overestimate? I mean, if you want to argue that it was too time intensive to investigate every loan, that explains error — but not consistent error in the same direction.
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Why were they under-representing the risk?
Regarding stomv’s The agencies what was their incentive to overestimate?, from what I have read, the securities ratings agencies are hired by the securities’ offerors, not the prospective buyers If that’s correct, there is an obvious conflict of interest: if the securities ratings agencies do no “play along” with the obvious desires of the offerors, they won’t be hired next time.
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Regarding jkw’s The banks weren’t lending their own money. It has to do with mortgage securitization. The banks would loan money out for mortgages, then sell the mortgages on the secondary market to large investment banks. I suspect that you are being too kind to the banks. Reading between more than a few lines, it seems that banks aren’t really lending any of their own money. The last time we did a re-finance (1995), the entity that did the refinancing was a subsidiary of the bank holding company. That subsidiary was not itself a bank (the bank holding company obviously did have other subsidiaries that actually were banks). That entity was obviously operating as an agent for the “large investment banks” that you mentioned.
and I agree that the source I made isn’t the end-all-be-all.
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My point is simple: it is neither fair nor appropriate to suggest that somebody who fails to pay their mortgage because of unforseen medical problems or unforseen employment difficulty beyond the control of the mortgagee is “stupid”.
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What percentage is this the case? I contend that it’s large enough that to simply suggest myopic and irresponsible purchasing as the cause for mortgage problems is crap.
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So some people get in over their head? Yip. Do some people get a mortgage and then act irresponsibly with other purchases? Yip. However there are a large chunk of people for whom that doesn’t apply: they behaved rationally and responsibility and still got whacked. Those aren’t stupid people; those are unlucky people.
Has there been an increase in serious medical problems? Has there been an increase in unemployment? I believe our unemployment rate is still fairly low, so increasing foreclosure rates cannot be due to people losing their jobs. I don’t know of any statistics about huge medical bills, but I doubt that has increased enough to explain the foreclosure rate change.
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What has changed is that house prices are no longer rising. It is no longer possible to refinance (or sell) out of debt when you fall behind on payments. The other factor that has changed is that many adjustable rate mortgages are adjusting for the first time from low introductory rates. Given that these two factors explain the increase in the foreclosure rate better than anything else, the only rational conclusion is that people were buying houses they couldn’t afford. Calling them irresponsible is unpopular, but also true.
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People who don’t have any ability to save money should not buy a house. Unforeseen expenses will come up in everybody’s life. If you can only afford to buy a house if you assume that you won’t have any large, unexpected expenses, you won’t lose your job, and interest rates will remain at their lowest level in 40 years, you can’t afford the house. Buying it anyway is irresponsible and stupid. The expected result is that you will lose your house as soon as anything goes wrong in your life.
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The current situation is not that lots of responsible people are unlucky and losing their houses. There are a lot of irresponsible people losing their houses, a lot of lucky irresponsible people who won’t lose their houses for a few more years, and a small number of irresponsible, unlucky people losing their houses too.
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People really should have known better than to buy into a housing bubble just a few years after the Tech Stock bubble. The principle of financial bubbles had just been clearly and publicly demonstrated. Ignorance required willful stupidity.
Marzill, Murphy and Natale?
And why can’t I find that information anywhere?
Hi there. The bill in question is H4306 – An Act Protecting and Preserving Home Ownership.
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A pdf of the bill is online here:
http://www.mass.gov/…
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On the General Court website you can search for bills, obtain bill histories, text of bills, read the journal of each session and obtain roll call votes. The site is: http://www.mass.gov/…
Thank you very much for the answer.
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I am well aware of the bill searching, but tried to do so unsuccessfully with the limited amount of information I knew about the bill. Knowing which bill it is is quite helpful.
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Again, thank you.