In his years as a mortgage broker, Bill Enfinger didn’t consider it his job to assure a home loan made sense. The banks decided who qualified and who didn’t. He simply brought borrower and lender together.
In fact, Enfinger marveled at the deals banks approved for some of his clients during the heyday of subprime lending. “I knew it was risky,” he said.
With the results of foolish lending apparent in Georgia’s foreclosure rate and tumbling property values, the Georgia General Assembly will debate whether to require brokers and bankers to carefully evaluate whether a loan is likely to get repaid and whether it’s a good deal for the borrower.
About a dozen states have adopted such legislation, while federal regulators have approved rules to prevent the kind of risky lending that led to the mortgage meltdown. Congress is debating federal laws focused on reckless lending.
Whether the General Assembly will act this year is unclear, as lawmakers balance the state’s lender-friendly history with the reality of its crushing foreclosure problem. In the third quarter of 2009, payments on one in eight Georgia mortgages were at least 30 days late, the nation’s third-highest rate, according to the Mortgage Bankers Association.
The General Assembly will also consider a bill to slow down the foreclosure process. No state has a faster foreclosure process than Georgia.
Some in the mortgage lending industry argue that reforms are not needed because the market has already halted the reckless lending that led to the meltdown. But others say incentives remaining in the system could lead to another wave of trouble.
Sen. Bill Hamrick (R-Carrollton), lead sponsor of the mortgage lending bill, said changes are needed because subprime mortgage brokers often sold loans that consumers didn’t need or couldn’t afford.
“But the broker certainly benefited,” Hamrick said, “because they got a fee and didn’t have to worry about whether the loan got repaid.”
Hamrick’s bill passed the Senate with bipartisan support last year, but it faltered in the House after key House leaders opposed a push to broaden it.
Hamrick’s bill focuses on subprime loans, where most of the lending abuses occurred.
It would require that lenders verify a borrower’s income and debts to ensure payments are affordable. It would require mortgage brokers to act on behalf of clients without regard to their own financial gains.
Brokers could no longer earn part of their compensation through “yield spread premiums,” fees for placing a borrower in a loan with an interest rate above the best rate the borrower qualified for.
The bill would also ban a refinance unless it offered the borrower tangible benefit — frequently not the case in subprime loans in recent years.
Hamrick said his legislation is designed to stop brokers from putting consumers in loans that are lucrative for the broker instead of offering the lowest rate available.
“There’s too much incentive to take advantage of the knowledge the broker has over the borrower in a lot of cases,” he said.
Woman got a ‘liar loan’
Supporters of mortgage lending reform have consumers like Johnnie M. Perkins in mind.
In 2007, Perkins refinanced the mortgage on the split-level DeKalb County house she bought in 1994. A former nursing assistant, Perkins is 63 and has been disabled since suffering a back injury in a 1992 car accident. She lives on her Social Security disability check.
She looked into a refinance loan because she was desperate to pay off thousands of dollars in credit card debt. She called a broker in Bill Enfinger’s Columbus-based company for help.
Enfinger said Perkins’ debts kept her from qualifying for a traditional prime loan. But Enfinger said lenders in 2007 permitted loans without income documentation if a borrower had decent credit and some equity in the house. “They were called liar loans, basically,” he said.
That’s what Perkins ended up with. Even though Perkins said she provided her income information, her application showed no income whatsoever.
At the time, her monthly gross income was $1,168. Her new payment, including taxes and insurance: $971.50.
Perkins said she was told the payment would be $767 and would wipe out her other debts. That would have put her in a better financial position. She said she found out right before the closing that the actual payment, including escrow charges she didn’t expect, would be more than $200 higher and still wouldn’t pay off all her credit cards. She said she also did not realize the company did not report her income on the application.
“I was just desperate to get out of credit card debt,” she said. She reluctantly signed the papers, a decision she now regrets.
The loan, made by now defunct NetBank, has actually become a much bigger threat to Perkins’ financial stability than the credit card bills ever were.
Perkins’ loan clearly would have failed the sort of affordability test required by the proposed legislation.
Because the mortgage payment eats so much of her income, she’s resorted to credit cards again to cover living expenses. “It was just a bad, bad business deal I made, thinking I was doing something to set myself free,” Perkins said.
Jennifer Staack, an Atlanta Legal Aid attorney trying to help Perkins negotiate with Fannie Mae, the current owner of the loan, said Perkins’ ability to repay was never considered.
“If the mortgage companies had to actually look at affordability, that would stop a lot of these loans,” she said.
Easy to point fingers
Attorneys at Legal Aid have complained for years that lenders were making unaffordable mortgage loans to senior citizens on fixed incomes.
Enfinger said his company didn’t push anyone into their loans and clearly disclosed the terms. He said he simply sold products offered by banks. The banks knew Wall Street would package loans and sell the risk to investors; proposed federal legislation would encourage caution by requiring banks to retain some financial interest in loans they originate.
“Once you get in a pinch, it’s easy to point the finger and say, ‘Oh, they put me in the loan,’” he said. “You didn’t have to sign the papers, you know.”
Housing advocates say, however, that many borrowers were misled about the terms of their loans during the subprime boom. And Hamrick said brokers had financial incentives to steer borrowers away from the best deal.
Federal regulators have ordered improved disclosures on mortgage forms that describe the terms of a loan.
Enfinger said brokers are getting more than their share of blame for the meltdown. He said new disclosure requirements prompted him not to renew his company’s mortgage broker license. He will operate within a bank, instead, he said.
On Perkins’ loan, the broker earned $2,886 in fees and $512 from a yield spread premium.
Enfinger said there’s nothing wrong with the payments. “You are selling money, basically is what you are doing. It’s like a car or anything else. You obviously want to sell it for the most you can. That’s kind of the dynamics of the American way.”
Perkins worries that she could eventually lose her home because of the new mortgage. “I like my home,” she said. “I’m comfortable here.”
Unintended result feared
Those who oppose the legislation say it is not necessary for the state to get involved in mortgage lending.
They say lawmakers and regulators in Washington are stepping in with a host of changes that will apply to Georgia lenders.
J.D. Crowe, president of the Georgia Association of Mortgage Brokers, acknowledged that lending standards became “ridiculous” during the subprime boom. “The entire industry knew things were out of control,” Crowe said.
But he opposes the Georgia proposals.
He said the market has halted abusive loans and the bill would have the unintended consequence of banning loans that make sense.
“It would be harmful to consumers, that’s the bottom line,” he said.
Dan Immergluck, a Georgia Tech professor who is a national expert on mortgage lending, disagreed. He said, “The notion that the market has solved the problem and we don’t have to worry about it anymore is shortsighted.”
Regulations are important in part, he said, because a wave of foreclosures hurts not just those who lose their homes, but nearby homeowners who lose equity when foreclosures push prices down.
“We’ve all been affected,” he said.
Georgia Watch, a statewide consumer organization, estimates that Georgia homeowners will lose more than $1 billion in home equity by 2012 because of the foreclosure crisis.
The Federal Reserve and federal banking regulators have adopted new rules to address some practices that led to the mortgage meltdown. The U.S. House has passed a mortgage lending bill and a plan to reorganize financial regulation with the creation of the Consumer Financial Protection Agency. The Senate has not acted.
About a dozen states have passed the sort of post-meltdown mortgage legislation Georgia is considering, said the Center for Responsible Lending.
Many states are also working on legislation to help reduce the number of foreclosures, some with measures intended to make the Obama administration’s foreclosure prevention program more effective.
In New York, for example, lenders must give 90-day notice of intent to foreclose. New York now requires a settlement conference between lender and homeowner to try to work out a mortgage modification to avoid foreclosure. Foreclosures are handled by courts in New York and can routinely take a year.
In Georgia, no court or government official is involved in the foreclosure process.
Current law requires lenders to give homeowners 30 days notice of a foreclosure sale. A bill introduced by Rep. Billy Mitchell (D-Stone Mountain) would require 90 days’ notice.
Some Georgia lawmakers say the time is right for the General Assembly to reform lending, and new leadership in the Georgia House may give the bill a better shot at passing.
“The high rate of foreclosures in Georgia dictates that we must take some action this year,” said state Rep. Mike Jacobs (R-Atlanta), who expects to take up Hamrick’s bill in a House subcommittee. Since the bill passed the Senate last year, it needs approval only from the House during this session.
While the market has shut down many of the riskiest loans that were hallmarks of the meltdown, too much about the system is still the same, said Uriah King, senior policy analyst at the Center for Responsible Lending.
“All the same perverse and contradictory incentives that existed in the marketplace to cause this problem still exist now,” he said.
Mortgage lending bills
In Georgia: Senate Bill 57
The Georgia General Assembly is considering a bill that would:
● Require lenders of subprime mortgages to determine that a borrower can afford the mortgage payment, including taxes and insurance.
● Ban fees and penalties for early payoff of a subprime loan.
● Ban refinancing of subprime loans unless the new loan has a “reasonable, tangible” net benefit to the borrower.
● Require mortgage brokers to perform as agents of borrowers and act in a borrower’s best interest.
● Ban brokers from earning “yield spread premiums” — compensation for placing a borrower in a loan with a higher interest rate than the best rate for which the borrower qualifies.
In Washington: The U.S. House in May approved a bill that included a slate of new rules for mortgage lenders. The elements of that bill were wrapped into the Wall Street Reform and Consumer Protection Act, which the House passed in December. The Senate has not yet taken action. The House bill overlaps, in some areas, the Georgia proposal.
The mortgage-related provisions would:
● Require lenders to make sure a borrower can afford to pay the mortgage.
● Limit prepayment penalties and yield spread premiums.
● Require lenders to retain an economic interest in loans they make.
● Expand existing federal rules that cover “high-cost loans” and expand federal standards on which loans are covered.
● Require additional disclosures about the terms of a mortgage.
● Create the Consumer Financial Protection Agency devoted to policing financial products.
Among the other mortgage-related changes implemented or under consideration in Washington:
● The Federal Reserve in 2008 adopted rules effective last year designed to stop deceptive mortgage lending practices. The rules, which apply only to higher-interest loans for consumers with poor credit, require lenders to consider a borrower’s ability to repay when making a loan and to verify income. The rules also limit prepayment penalties and require lenders to establish escrow accounts for property taxes and insurance.
● Federal bank regulators have restricted risky mortgages, such as interest-only loans, option ARMs and hybrid ARMs, as well as increased requirements for verifying income.
● New licensing requirements for mortgage brokers and loan officers nationally are being implemented as part of the SAFE Act of 2008.
● Borrowers beginning this year will receive clearer and more detailed disclosures about mortgages they are considering.
● The Federal Reserve in July proposed new rules that would improve disclosure requirements on mortgages and change the way brokers and loan officers can be compensated.
How we got the story
With the Georgia General Assembly set to debate mortgage lending reform, The Atlanta Journal-Constitution studied proposals to rein in brokers and set new requirements for lenders.
The newspaper studied foreclosure statistics and changes in place or under consideration in Washington.
The AJC also interviewed brokers, lenders, consumer advocates and national experts on mortgage lending.
Meet the reporter
Carrie Teegardin is a veteran investigative reporter for The Atlanta Journal-Constitution, focusing on articles that expose abusive business practices.
In her 20 years at the AJC, Teegardin has written articles on a wide range of topics and has been the recipient of numerous state and national awards. She worked on the newspaper’s “Borrower Beware” series, winner of the prestigious Gerald Loeb Award in 2006. The series exposed the dangers of predatory lending practices well before the mortgage meltdown began.
A graduate of Duke University, Teegardin last year was named the Atlanta Press Club’s Journalist of the Year.
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