Bubble-icious Chicago? Not!
ShoreBank's Ellen Seidman said in an email that the Fed is not proposing, with respect to higher-priced mortgages, to "require lenders to lend based on the borrower's ability to repay at a fully indexed, fully-amortizing rate." Rather, the proposed regulation would establish a rebuttable presumption that failure to underwrite in that manner constitutes a prohibited "pattern or practice" of extending credit "based on the value of consumers' collateral without regard to consumers' repayment ability." Whether the distinction is meaningful in practice will undoubtedly be the subject of comments.
We agree, Ellen. Here's my column quoting Ellen Seidman as it ran Dec. 30.
blockquote>What a year! But Chicago rolls with the punches
December 30, 2007
BY SALLY DUROS Sun-Times Real Estate Editor
Surprise -- it's the eve of 2008, and what a year 2007 was!
In early 2007, we and the Sun-Times business section reported on a series of events unfolding related to HB 4050, the Illinois Predatory Lending Database Pilot Program.
The purpose of that law was to stem a tide of subprime lending in certain neighborhoods in Chicago. In the events of the day, that bill was pulled back, revised, and will be rolled out again in 2008.
The purpose of that law was to stem a tide of subprime lending in certain neighborhoods in Chicago. In the events of the day, that bill was pulled back, revised, and will be rolled out again in 2008.
That story was a harbinger of more dramatic events to come that ultimately called to order Federal Reserve Chairman Ben Bernahke, sent Wall Street lenders gasping for cash streams, grabbed President Bush's attention, and contributed to a financial credit crunch worldwide.
As we reported then, the original HB 4050 was revamped in the unresolved clash between home buyer advocates and lenders. Home buyer advocates wanted to flush out the predators and prevent suffering caused by inappropriate subprime loans, while lenders wanted to preserve the robust cash streams from the legitimate sub-prime market.
So here we are! The bubble has burst --finally! -- and it's ugly out there.
Except in Chicago where we have developed a few warts but can still look at ourselves in the mirror with pride. Although our home prices might be backsliding a bit, we on the third coast are holding our own much better than the bubble-iscious coasts of California, Florida and New York.
To prove a point, the latest data from Standard & Poor's/Case-Shiller home price index shows home prices falling nationally in October for the 10th consecutive month, posting their largest monthly drop since early 1991. But here in Chicago, home prices dropped only 3.2 percent in October 2007 from October of 2006. This was less than half the record national rate at 6.7.
"If you go back a year ago and look at the stories, and look at what the lending community was doing, [the problems do] tend to unfold more slowly in places like Chicago that are more stable," said Ellen Seidman, executive vice president at ShoreBank Corp. and the director of the Financial Services and Education Project at the New America Foundation. Seidman was director of the Office of Thrift Supervision between 1997 and 2001.
"I think we will see a slow rollout in Chicago in 2008 of problems," she said, "[but] fortunately we have a healthy economy."
While President Bush's plan to freeze rates on certain subprime mortgages continues its public vetting, the Federal Reserve announced stronger lending standards with the goal of being a "comprehensive set of protections to consumers."
Seidman says the goal of these proposed revisions to regulations under the Truth in Lending Act is to realign relationships in the mortgage business so a good mortgage is the outcome.
The proposed rules, Seidman said, would apply to all mortgage lenders and others (such as brokers, independent mortgage bankers and appraisers), not just to banks, thrifts, and credit unions.
The proposed regulations would "require lenders to lend based on the borrower's ability to pay at a fully indexed, fully amortizing rate, verified by independent third-party documentation. Escrows for taxes and insurance would be required (for at least the first 12 months the loan is outstanding), and prepayment penalties would have to expire at least 60 days before the first payment change," Seidman wrote in an OpEd piece in the American Banker.
The proposed regulations also address abuses in brokerage, appraisals and servicing, as well as advertising abuses, such as calling a loan fixed when it's not. Lenders would also be required to provide borrowers with information about payments, finance charges, and interest rates early in the shopping process, and before charging any application fee.
"The proposed law is pretty far-reaching," Seidman said. "There are several pieces of it that would cover all loans."
"I know how hard it is to hold on to the pro-consumer stuff that you've done when the comments start coming."
Seidman says that some areas are left untouched by the regulations. These include nationwide licensing, testing and registration of mortgage brokers; liability -- beyond the initial creditor -- for violations of standards; requirements for pre-foreclosure counseling and modification attempts; and bankruptcy law changes to permit judges to modify home mortgage loans that are "underwater."
"The Fed will try hard to hold tight," she said. "To some extent the comments by the Democrats on the Hill are a combination of wishing the Fed would go further and wishing the Fed will not go backwards."
She said, however, that "The Fed rules will not make a major change to the fact that property values are out of line. "
"2007 was not by any means the end of it," she said.
