Carol H Tucker Passionate about knowledge management and organizational development, expert in loan servicing, virtual world denizen and community facilitator, and a DISNEY fan
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beladona Memorial Be warned:in this very rich environment where you can immerse yourself so completely, your emotions will become engaged -- and not everyone is cognizant of that. Among the many excellent features of SL, there is no auto-return on hearts, so be wary of where your's wanders...
Why would a lender give a mortgage to a borrower who can't afford to make the payments?
An article I ran across on Tuesday stated that the Fed has filed suit in Manhatten against Deutsche Bank claiming the bank committed fraud in order to join a government program that insures mortgages.
As reported in the WSJ, the bank points out that most of the violations happened before they acquired the mortgage brokers. "MortgageIT allegedly submitted mortgages that weren't eligible for the FHA insurance program and falsely certified that they had conducted due diligence as required by the program's rules." There seems to be little doubt that the lender had real quality control issues
But why did banks take such chances with borrowers who could not demonstrate the ability to pay? Yes, loans are the way that lenders make money -- but bear in mind, a lender does not make money on a loan that defaults. Yes the loans are secured, but the collarteral is a secondary or even tertiary source of repayment -- the cash flow of the borrower is what pays back the loan and the interest. The cost of foreclosure and the pains of collections make taking over the pledged colalteral property a dicey proposition and sometimes you are lucky to get out of the deal with the principal whole much less make your projected interest revenue! The bottom line is simple -- a mortgage loan gone sour is a loss.
One answer lies not in greed and avarice, but in a little-discussed regulatory requirement called CRA. The Community Re-Investment Act passed back in 1977 This was another one of those deceptively simple, good ideas that Congress had -- banks should be held accountable for serving the needs of their community. By 1995, the regs had real teeth and a low CRA rating could materially impact the operations of a bank, especially a community bank. Regulators would come in and examine the CRA files and the HMDA reports and literally complain that not enough disadvantaged [read folks with credit problems or uncertain incomes] were getting mortgages and able to buy homes, and they brought out some very big sticks with which to beat up senior management and the Boards of Directors to bring them in line
The main stick they used was the "M" in the CAMEL rating . These ratings are vitally important to the bank and having management rated a "2" or even a "3" because the organization was not being proactive enough on CRA mobilized the bankers to come up with innovations to make mortgages affordable for more people. Thus we see changes in the traditional mortgage loan structure and the advent of the infamous interest-only and adjustable-rate mortgages where payments are low initially. In addition there were changes in down-payment requirements and the amount of money a borrower had to bring to the settlement table -- 100% financing and even financing of the settlement costs were made available. To mitigate the risk, the lenders tried to hedge their bets and spread out the risk entailed: selling the loans on the secondary market, getting insurance to cover anything more than 80% LTV, and getting others to invest in the financing.
No cash on the table and artificially lowered payments -- yeah lots of people got mortgages who can't afford them when times got tough.
CEOExpress
