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Following up on my review of Hillary Clinton’s one-sided mortgage reform policy ideas; today we’re talking about what Barack Obama has proposed as part of his mortgage reform package. This article will be decidedly shorter; as Mr. Obama’s policy changes seem (to me at least) to be rather nebulous in nature. At least with Hillary we could clearly see that she puts the blame on brokers Mr. Obama seems keen on studies, curbing insider lobbying and defining fraud; which seem to have fewer teeth than the Clinton plan.
I was going to title the post Mr. Obama gets it half right because I think a couple of his ideas have some merit, as we’ll see below. Let’s start with what Mr. Obama has to say about the subprime mortgage crisis.
Barack Obama on Subprime Lending
From Barack Obama’s web site his policy on subprime lending reads as follows:
The implosion of the subprime lending industry threatens to bring foreclosure to over two million households, including many families with children. Barack Obama has been closely monitoring this situation for years, and introduced comprehensive legislation over a year ago to fight mortgage fraud and protect consumers against abusive lending practices. Obama’s STOP FRAUD Act provides the first federal definition of mortgage fraud, increases funding for federal and state law enforcement programs, creates new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity. This bill also provides counseling to homeowners and tenants to avoid foreclosures. Finally, Obama’s bill requires the Government Accountability Office to evaluate and report to Congress on various state lending practices so that state regulations that undermine consumer’s rights can be identified and hopefully eliminated.
While it’s grouped under the heading of Subprime lending this initative is obviously pointed at the entire mortgage industry, which is fine, but unless we’re considering all of America subprime (which isn’t too far off) it’s a bit of a misnomer. Let’s take a look at some of the ideas in this plan.
Obama’s STOP FRAUD Mortgage Fraud Act
Obama’s STOP FRAUD Act provides the first federal definition of mortgage fraud, increases funding for federal and state law enforcement programs, creates new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity.
I’m a little confused by the STOP FRAUD act because it seems to me that we all have a pretty decent understanding of mortgage fraud and what it means. On every loan application (known as the 1003) signed is a little statement at the end that says:
Each of the undersigned specifically represents to Lender and to Lender’s actual or potential agents, brokers, processors, attorneys, insurers, servicers, successors and assigns and agrees and acknowledges that: (1) the information provided in this application is true and correct as of the date set forth opposite my signature and that any intentional or negligent misrepresentation of this information contained in this application may result in civil liability, including monetary damages, to any person who may suffer any loss due to reliance upon any misrepresentation that I have made on this application, and/or in criminal penalties including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, Sec. 1001, et seq.;
An entire chapter of the U.S. Code is devoted to fraud, and covers rather implicitly mortgage fraud throughout chapter 47 and in particular section 1014 which reads:
Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of the Farm Credit Administration, Federal Crop Insurance Corporation or a company the Corporation reinsures, the Secretary of Agriculture acting through the Farmers Home Administration or successor agency, the Rural Development Administration or successor agency, any Farm Credit Bank, production credit association, agricultural credit association, bank for cooperatives, or any division, officer, or employee thereof, or of any regional agricultural credit corporation established pursuant to law, or a Federal land bank, a Federal land bank association, a Federal Reserve bank, a small business investment company, as defined in section 103 of the Small Business Investment Act of 1958 (15 U.S.C. 662), or the Small Business Administration in connection with any provision of that Act, a Federal credit union, an insured State-chartered credit union, any institution the accounts of which are insured by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, any Federal home loan bank, the Federal Housing Finance Board, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Farm Credit System Insurance Corporation, or the National Credit Union Administration Board, a branch or agency of a foreign bank (as such terms are defined in paragraphs (1) and (3) of section 1(b) of the International Banking Act of 1978), or an organization operating under section 25 or section 25(a) of the Federal Reserve Act, upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan, or any change or extension of any of the same, by renewal, deferment of action or otherwise, or the acceptance, release, or substitution of security therefor, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
The bolding is mine to help sort through the legal gobblety gook. Now if we need to separate out mortgage fraud specifically from fraud as defined in Chapter 47 well let’s do it; but I don’t believe it’s a major policy issue to stand on. So no points to Mr. Obama for his STOP FRAUD act.
Increasing Funding for Federal and State Enforcement Agencies
Here Mr. Obama is right on track. Instead of blaming a particular group of people as the primary culprits in this debacle and inventing a whole bunch of new legislation that gains a lot of public support but does little to change the firmament lets give the existing laws some teeth by ENFORCING them. This can only be done with dollars. As Jillayne Schlicke of the Ethical Lending Foundation in Washington says (paraphrasing) there will never be enough dollars or regulators to ensure every loan application is handled in a proper manner. I agree with this; but there needs to be some level of oversight that is in step with the size of the industry. Look at California, a staff of 33 in the enforcement office for more than 500,000 licensed real estate people. This can only change with funding.
Mr. Obama’s plan to increase enforcement funding will improve the environment that exists in the mortgage lending arena using existing laws. A much better approach than Mrs. Clinton’s of singling out the mortgage brokers.
New Criminal Penalties
Not much to say here. Fine, lets bump them up. They should be at least on par with securities fraud penalties since we’re dealing with assets that are usually far in excess of typical securities transactions.
Obama Gets Bank Culpability
One refreshing difference between Clinton and Mr. Obama is his understanding of bank culpability in the mess. He does not pin the problems on the mortgage broker community alone. In this article he wrote for the Financial Times Mr. Obama clearly points to the roles played by lending institutions in this mortgage mess.
This all started as a good idea - helping people buy homes who previously could not afford to. But over time, lenders began pushing low-income buyers into homes they could not possibly afford, abusing the system by lowering their lending standards, making loans that required no money down and offering low, teaser interest rates that explode after the initial grace period. Some borrowers were also lying to get mortgages or engaging in irresponsible speculation.
There is a reason why this has happened. Over the past several years, while predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185m (£92m) lobbying Washington to let them get away with it. So if we really want to make sure this never happens again, we need to end the lobbyist-driven politics that made it possible.
Today, as we weigh our options on how best to resolve this crisis, many argue that bailing out the borrowers and investors will just encourage them to engage in more of the same irresponsible practices.
But I think we also have to recognise what will happen if we reward the mortgage industry’s lobbying: they will keep using the same kinds of deceptive practices to make a quick buck, no matter what the consequences to home buyers and their communities. Rather than correct what they are doing wrong, these companies will know that if things go badly, they can always lobby Washington to let them off the hook.
This is refreshing because the line out of Washington has typically been that the mortgage brokers (those gunslingers of the wild west who were unregulated by the states) are at the heart of the problem - not the federally chartered and regulated banking giants. The implication is that there was more security and less lawlessness in the big banks - which is clearly inaccurate.
Big banks who give the bucks should not be held out from scrutiny and regulation. They should not be protected while the brokers get thrown to the slaughter house. I applaud Mr. Obama on this initiative; and it truly shows his “outsider” mentality at work - and puts him in stark contrast to Mrs. Clinton.
The Ill-Advised Bail Out
While I applaud Mr. Obama for looking at all levels of the industry for improvement I have to strongly disagree with his stance on providing homeowner bail-out assistance. In particular I take issue with his position on providing federal assistance for those that bought homes that were too expensive for them to afford.
Obama will create a fund to help people refinance their mortgages and provide comprehensive supports to innocent homeowners. The fund will also assist individuals who purchased homes that are simply too expensive for their income levels by helping to sell their homes. The fund will help offset costs of selling a home, including helping low-income borrowers get additional time and support to pay back any losses from the sale of their home and waiving certain federal, state and local income taxes that result from an individual selling their home to avoid foreclosure.
This seems insane to me. Someone buys a home that is too expensive for them and therefore qualifies for financial assistance from the federal government? Let me ask. How did they get in to that overly expensive home? Was it inaccurate stated income? Was it falsified income? Did they sign an inaccurate 1003 that did not truly represent their earnings? If so, we’re bailing out people committing fraud? This doesn’t add up to me. Why do consumers who commit fraud to get loans they can’t afford get federal assistance while the loan officer who submits the application face prison time? This truly makes no sense.
Homeowners who bought more home than they can afford must lose their homes and there must not be a dollar of federal money spent on those people. What’s next? Are people who stretched on that new Lexus going to be entitled to a subsidy to unload their luxury car because they realized they couldn’t afford it? There needs to be some accountability here period.
Obama tries to minimize this by saying the fund will be financed by penalties collected from industry enforcement efforts; but then where will the industry enforcement efforts be funded from?
Better than Clinton but Not Quite There
I believe Mr. Obama’s mortgage reform policy to be a more sound one than that of Mrs. Clinton but still leaves some to be desired. His bail-out fund is terribly conceived and flawed; but his ability to look past the brokers as the scapegoats certainly has some merit.
It will be interesting to see if he refines his policy on mortgage reform throughout the course of his campaign to provide a clearer picture of his plans.