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And Still More On The Subprime Fiasco

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As a subplot to the entire mortgage drama, two feuds recently emerged or more accurately re-emerged among some major mortgage players.

First, in testimony before the Senate Banking, Housing, and Urban Affairs Committee, North Carolina Commissioner of Banks, Joseph A. Smith, Jr. representing the Conference of State Bank Supervisors (CSBS) told the Committee that any federal move to regulate the mortgage industry must recognize that the states play a major role in regulating such lending.

Smith told the Committee that state officials have actually been hampered by federal regulatory preemptions of state consumer protection laws for national and federal financial institutions and their mortgage lending subsidiaries and affiliates. "Federal preemption", he said, "undermines attempts by state policymakers to protect their citizenry and sets an unlevel playing field among mortgage lenders."

However, a few days later, following a House hearing and in a press release The National Association of Mortgage Brokers urged Congress not to fund or support a proposed broker registration system because it is too narrowly focused to protect consumers from predatory lending. According to NAMB President Harry Dinham who testified at the hearing, the regulators' continued rhetoric is hollow and misleading to the public.

"At hearing after hearing", Dinham said, "these groups extol the benefits of this new registry. However, they do not let legislators know that thousands of loan originators at banks and other lending institutions will be exempted from the registry and left unaccountable to the consumers they serve. We urge Congress to refrain from offering any assistance until all mortgage originators are registered in the system."

"Consumers would get a false sense of security from this system as it stands today. Most consumers do not distinguish between origination channels and they would naturally assume that a loan originator at a bank would be held to the same high standards. This is far from the truth and bad actors at banks would still be able to freely travel from bank to bank even if convicted of fraud."

(As a clarification, states are, as Mr. Smith pointed out, preempted from regulating federally charted financial institutions so Dinham's demands are virtually impossible for CSBS to address.)

The second kafuffle erupted after the Center for Responsible Lending (CRL) issued a Paper on March 27 updating earlier reports with 4th Quarter 2006 data and claiming that "subprime originations during 1998 to 2006 have led or will lead to a net loss of homeownership for almost one million families." In fact, the Paper states, a new homeownership loss occurs in subprime loans made in every one of the past nine years.

Numbers provided by the Center claim that, in the 1998-2006 period, 1,435,472 subprime loans were used to purchase homes by first-time homebuyers and that 2,366901 have or will be foreclosed for a net homeownership loss of 931,439.

Since "providing homeownership opportunities" has been a slogan or maybe more like a flag that has been waved by subprime lenders for several years, CLA's claims provoked an immediate response from the Mortgage Bankers Association (MBA).

MBA claims that CRL has "invented a set of assumptions, developed a worse case scenario and presented the results of those questionable assumptions as facts."

According to MBA:

• The percentage of foreclosures is far below the rates cited by CRL and not all foreclosures result in the borrower losing the house;
• CRL assumes a worst case scenario of economic conditions, interest rates, and home prices to inflate its "facts."
• CRL mixes data on refinance loans with purchase loans
• Subprime loan performance is a result of local economic conditions, not the loan terms or products;
• 85-90 percent of subprime borrowers are ultimately successful on their loan.

Finally, The Nation has weighed in on another aspect of the subprime mess. In its April 9 edition it has run a "comment" entitled "The Loan Shark Lobby" in which it details some interesting financial connections between New Century Financial Corporation which just declared bankruptcy and members of Congress.

According to the article, nearly half of House Financial Services Committee members which have been holding hearings on the tanking of the subprime market have received money from New Century. Recipients named by The Nation include Chairman Barney Frank and members/heads of the financial subcommittee including Paul Kanjorski, Spencer Bachus, and Richard Baker. In all the company has given nearly $700,000 in campaign funds to legislators since 2004.

The article maintains that two bills that would have provided safeguards for consumers against some subprime lending abuses; the Prohibit Predatory Lending Act and the Predatory Mortgage Lending Practices Reduction Act both died after being referred to financial services subcommittees. New Century "took the lead" in pushing the Responsible Lending Act which The Nation maintains would have narrowed the definition of subprime mortgages and preempted some stricter state regulations. The bill's "patron saint" was former Congressman Bob Nye of Ohio who is currently in federal prison serving a 30-month sentence for corruption. Nye received $49,300 in campaign contributions from New Century.

If one wonders if the changing of the guard will mean increased regulation of subprime lenders the article doesn't hold out much hope. Mortgage bankers gave 40 percent of the $6.6 million they contributed to 2006 election campaigns to Democrats including Senator Hilary Clinton, Frank, and Senator Chris Dodd who heads the Senate committee concerned with banking.