Skip to main content

Search

Home Foreclosures: 1.2.7 Negotiating a Workout or Modification

In some cases, a workout or loan modification can achieve a result as good as litigation with the expenditure of far less time and money. In other cases, borrowers may not have strong enough claims to pursue a litigation strategy. In either case, advocates should determine whether a workout agreement or loan modification is possible.

Mortgage Lending: 1.3.6 Manufactured-Home Financing: Parallels to the Mortgage Loan Crisis

Although many states consider manufactured housing to be personal property, at least at the purchase stage, the reliance on manufactured housing as a primary residence increased significantly from 1991 to 1998.236 During that time, the manufactured housing industry experienced a boom and bust similar to the more recent events in the market for traditional mortgages. Indeed, the market share of manufactured homes in relation to new single-family homes peaked in 1995 at 33.8%.

Mortgage Lending: 1.4.1 Market Deregulation and the Crisis

The surge of abusive mortgage loans in the 2000s, particularly predatory loans, and the resulting foreclosure crisis proved the existence of major flaws in market practices. Competition and self-regulation did not prevent lenders from making predatory and unaffordable loans, nor did the weak enforcement of existing laws. Instead these practices appear to have helped promote the crisis.

Mortgage Lending: 1.4.2 The Structure of the Mortgage Market and Self-Policing

For much of the twentieth century, the mortgage market mainly consisted of banks and savings and loan associations that would originate, fund, own, and service mortgages. Banks competed by offering fixed-rate mortgages at rates as low as possible, considering the borrower’s risk. If the bank wrote mortgage loans to customers who could not afford to repay, the bank suffered losses. If the bank deceived the homeowner, the homeowner would complain to the bank and defend any foreclosure action based upon the bank’s deception.

Mortgage Lending: 1.4.3.1 Barriers to Consumer Decision-Making

One argument for unfettered lending is that consumers, as informed and rational decision makers, will insure that the mortgage market is operating properly. But the lesson of the last foreclosure crisis is that this is not true. For a borrower’s contractual “choice” to have any meaning, borrowers must be able to evaluate the risks and benefits of the credit offered. Borrowers must also have meaningful alternatives to the credit presented.

Mortgage Lending: 1.4.3.2 Mere Disclosure As a Cure for the Problem

Disclosure is not an adequate counterweight to creditor overreaching when consumers face a product as complex as a home mortgage.296 The disclosures required prior to the last foreclosure crisis utterly failed to explain the pricing of these products. For example, the federal Truth in Lending Act (TILA) disclosure requirements did not keep pace with the complex products that were sold in large numbers during the period 2000–2007.

Mortgage Lending: 1.4.3.3 Role of Prepayment Penalties in Refinancing Out of Bad Loans

Particularly in subprime loans, prepayment penalties often trap the homeowner in a loan even after the homeowner discovers that the loan terms are not what they were led to expect. One study found that about eighty percent of subprime loans contained prepayment penalties, compared with only two percent of loans in the prime market.306 These prepayment penalties created a significant barrier to refinancing a bad loan into a better one.

Mortgage Lending: 1.4.4.1 Introduction

An often heard criticism of regulation is that it reduces the availability of mortgage credit. High prices and onerous terms are excused as necessary to match the high risk of lending to certain borrowers. Critics argue that restrictions on price or terms will prevent the market from extending credit to the riskiest borrowers.

But the claim that risk accounts for rate was clearly not true in many mortgage loans during the run-up to the 2007 crisis. As explained further below:

Mortgage Lending: 1.4.4.2 Underwriting with Little Consideration of Risk

As described earlier regarding yield spread premiums, securitization, and the secondary market,313 pricing was often explicitly not based upon risk. Instead brokers and other originators focused on writing loans for as high a price as possible. They did so because their commission was based on how much the actual price exceeded the (purported) risk-based price set by the lender.314 The risk of default was not a factor in how brokers and other originators priced the mortgage.

Mortgage Lending: 1.4.4.4 Pricing Based on Race, Not Risk

Despite industry claims that loans were priced based on each borrower’s credit fundamentals, data shows that the applicant’s race or the racial composition of the applicant’s neighborhood was a leading predictor for the cost of mortgage credit. According to a 2006 study, data submitted under the Home Mortgage Disclosure Act (HMDA) revealed that for purchase-money loans, 54.7% of African Americans and 46.1% of Latino whites received “higher-priced”323 loans, in contrast to only 17.2% of non-Latino whites who received such loans.

Mortgage Lending: 1.5.2 Mortgage Lenders

Almost anyone can be a mortgage lender. Aside from government entities lenders are either depository institutions (federally or state-chartered banks and credit unions) or state-licensed non-depository institutions—more commonly called nonbank lenders. State law usually sets a threshold for the number of loans that trigger the duty for a nonbank lender to obtain a license.

Mortgage Lending: 1.5.3 Mortgage Brokers and Table Funding

Traditionally, mortgage brokers acted as intermediaries between borrowers and lenders. They did not originate loans. Instead, mortgage brokers were merely middlemen bringing home purchasers or homeowners and lenders together. Homeowners often seek out brokers because they believe a broker will find the best loan available.366 Confusingly, mortgage brokers are sometimes considered “mortgage loan originators” under state or federal law.367

Mortgage Lending: 1.5.4 Loan Officers

Loan officers are employees of financial institutions and assist home buyers or homeowners in selecting a mortgage loan product offered by their institutions. They are essentially in-house salespeople for banks or mortgage companies.

Mortgage Lending: 1.5.5 Mortgage Loan Originators

The seemingly generic term “loan originator” has become a term of art defined by numerous state375 and federal laws.376 A mortgage loan originator (or sometimes “mortgage originator” or “loan originator”377) can be a natural person or an artificial entity.378 Complicating matters, a loan originator may also be a lender, a manufactured home sales person, a loan officer, a mortgage broker, or a brokerag

Mortgage Lending: 1.5.6 Mortgage Electronic Registration System (MERS)

The Mortgage Electronic Registration System (MERS) is a privately owned electronic registry and clearinghouse established to track mortgage ownership and servicing rights. For many home loans MERS, as “nominee” for the lender, is the mortgage holder of record or the beneficiary on a deed of trust. MERS typically has no legal or beneficial interest in the promissory note. Nevertheless, as mortgage holder, MERS sometimes initiates foreclosure proceedings.

Mortgage Lending: 1.5.7 Real Estate Agents

Real estate is often sold through real estate agents, real estate brokers (not to be confused with mortgage brokers), or “realtors.”386 They list the property in newspapers, circulars, and computer databases. The agent usually represents the seller of the property. In some circumstances, however, a real estate agent may be the buyer’s agent or may even represent both the seller and buyer. Real estate agents are typically paid a percentage of the sales price. States commonly require agents to be licensed.

Mortgage Lending: 1.5.9 Closing and Settlement Agents or Attorneys

The mortgage loan closing or settlement (the terms are synonymous) is the final meeting at which all the transaction documents are signed. The loan contract is normally consummated at this time. The closing is usually conducted by an agent for the lender.392 The process varies widely by jurisdiction, especially when the transaction includes selling a home.

Mortgage Lending: 1.5.10 Escrow Agents

An escrow agent is an independent third party responsible for holding documents or funds during a transaction. In some states escrow is handled by the closing agent or title agent. If all of the proceeds from a loan transaction are not distributed at the loan closing, the escrow agent is usually responsible for holding the remainder until certain events occur. The lender or escrow agent may have drafted an escrow agreement that governs to whom and when the remaining funds will be paid.

Mortgage Lending: 1.5.11 Private Mortgage Insurance Companies

When a loan’s loan-to-value ratio exceeds eighty percent, lenders usually require that borrowers purchase private mortgage insurance.396 The cost of this insurance is added to the borrower’s monthly payment and held in escrow by the servicer. If the borrower defaults, the mortgage insurer will pay the loan holder some of the monies not recouped in the foreclosure process.