Mortgage lenders ought to provide service to underserved communities and potential homebuyers, although this is a duty that not many lenders have at heart.
Some federal programs have already involved lenders in “duty” service: this is the case with the Community Reinvestment Act, the Affordable Housing Program of the Federal Home Loan Banks and the affordable housing goals of Fannie Mae and Freddie Mac.
Institutions that provide financial service have a shareholder responsibility as well as a social responsibility. The lender’s duty is to serve, whether depositories and non-depositories, and some believe that this should be a “rule” for all mortgage providers. Such a claim is made by Levitin and Ratcliffe in their new book Homeownership Built to Last, and it has already sparkled controversies.
According to the two authors, the federal government dominates the mortgage sector; therefore the social duty to serve social policies is a consequence of this state of facts. Lenders now benefit from a number of government-led incentives and guaranteed securities such as the mortgage interest tax deduction, government-sponsored enterprises’ subsidies of mortgage rates, Federal Housing Administration insurance and so on. Levitin and Ratcliffe further argue that if lenders enjoy these advantages, it’s only fair that they also play by the government’s rules.
Non-depositories would be expected to serve just like depositories given the fact that they too enjoy government support. Fannie Mae and Freddie Mac keep the majority of mortgage banks heavily involved, whereas private mortgage insurers depend on the GSEs. If down-payments are less than 20%, private mortgage insurance (PMI) is a must. Furthermore, depositories support non-depositories through warehouse lending.
The argument can move one step further from the primary to the secondary market where many banks have developed by providing loans through subsidiaries and affiliates that do not fall under the Community Reinvestment Act (CRA).
A full system needs to be created to support this social duty approach to mortgage lending. In order for lenders to perform their “social duties”, there is need of metrics, tools and incentives. Moreover, all goals should be enforced by a credible mechanism such as an independent commission, possibly under the authority of the Consumer Financial Protection Bureau.
Lenders commonly complain of how CRA lending has contributed to the housing collapse and that the GSEs’ housing goals have caused risky loans. Market studies actually debunk this negative perception by showing that 78% of CRA loans were break even or profitable. The majority of toxic loans that directly impacted the financial crisis were not subject to CRA or GSEs’ housing goals.
An objective assessment clearly shows that both lenders and regulators have their part of failure. The main problem lies in the fact that regulators have not enforced the CRA requirements as diligently as they should have. The United States cannot have two unequal housing credit systems: one for the wealthy, white communities and another for low to moderate income and minorities. While the former get traditional, non-predatory products from prime lenders and depositories the latter don’t get any service or they are served non-traditional, high-cost products by non-banks.
The future of the mortgage business depends on the measures taken by the federal government to open the market in an accessible and non-discriminatory manner.