Opinion: Not ready for prime time lending
Even mortgage lenders cannot begin to get their arms around the dramatic changes that have happened in the mortgage industry within the past several months. It is somewhat analogous to the fall of communism, where it seemed every day brought images of dramatic change that took generations to build. Although not draconian (or shallow) enough to equate the changes in the subprime mortgage market to that of the fall of communism, the speed of which the wave of change has appeared seemingly out of a coincidental presentation of events is interesting.
The modern day subprime mortgage market was the result of innovative yet "high stakes" political decisions by former President Bill Clinton and former Housing and Urban Development Secretary Henry Cisneros to push homeownership to record levels. Homeownership gains were not to be made on the backs of conventional borrowers but rather through emerging market penetration of black, Latino and Asian immigrant/first-time homebuyers and through HUD's instruction of Fannie Mae and Freddie Mac to employ strategies to fund more loans by providing more credit primarily to credit blemished borrowers. Wall Street was employed by the magical wand of the seemingly superhuman Fed Chairman, Alan Greenspan, who spun unprecedented loan performance through economic wizardry.
So what happened? Primarily, the real estate market cooled. There were limited new borrowers left following unprecedented productive years (857,000 loans closed in Massachusetts at the height in 2005). Mortgage professionals were left to fight for every loan. Companies overextended and Wall Street began to refuse the responsibility. Crash!
As complex as the policy was to drive increases to homeownership, it is equally complex to distribute blame for its failing. Mortgage brokers steered borrowers to loans that they could not afford. Appraisers inflated their objectivity under lender pressure to drive real estate prices. Lenders relaxed underwriting standards. Real estate agents drove up market prices because mortgage rates were at historic lows. Wall Street bought securities regardless of underwriting standards because of performance. The government was driving toward unattainable homeownership levels.
The Massachusetts mortgage industry has supported corrective actions to the subprime market on every front. They have warned consumers of its peril through a major media campaign. They have participated with regulators in proposing greater barriers to entry. They have supported the licensing, appropriate preparation, education and testing requirements for residential mortgage loan officers. They have called for (and received) a summit of the state's top foreclosers in order to negotiate cram downs and structure a refinancing program. They have called on our state lending agency MassHousing to partner in efforts to provide greater access to refinance programs for distressed borrowers. They have partnered with community organizations in support of home buying counseling and financial literacy. And, they have considered community-lending programs in order to provide the appropriate types of loans to the appropriate consumers.
We have much to improve in mortgage lending but the biggest disservice to the consumers of the commonwealth would be a credit retraction that would prevent access to the American Dream.
Kevin M. Cuff is the executive director of the Massachusetts Mortgage Bankers Association.
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