When it comes to the mortgage lending crisis, the latest statistics show that the U.S. is “not out of the woods yet,” State Attorney General Rob McKenna told a crowd of nearly 200 gathered for an Edmonds Chamber of Commerce-sponsored presentation at the Edmonds Center for the Arts Thursday. US. home values have declined by $1.7 trillion in the last 12 months, McKenna noted, 63 percent more than those values dropped in 2009.
“We are receiving hundreds of complaints from people whose homes are in foreclosure or people who are trying to obtain modified mortgages so they can stay in their homes and avoid default,” McKenna said. “Or people who are being scammed by folks allegedly selling loan modifications.”
Representatives from the Washington Homeownership Resource Center, which provides foreclosure counselors and staffs a hotline for people in crisis with their mortgages, told McKenna during the meeting that their organization is still receiving “close to 2,000 calls a month from people in Washington state.”
As a member of the Financial Practices Committee of the National Association of Attorneys General, McKenna said he has been working for several years to investigate the mortgage lending practices that fueled the housing bubble and obtain both loan restructuring options and restitution for affected consumers.
He took those in attendance through a brief history of the factors that led up to the current mortgage crisis, which he blamed on the deregulation of the financial industry — thanks to former Federal Reserve Chairman Alan Greenspan — and the subsequent rise of the subprime mortgage market.
He compared those lending practices to the traditional mortgage — with 10 percent down and a 10 percent interest rate — that he and his wife received on their first home in the late 1980s. “The bank was building a relationship with us so they had a very strong interest in whether we could repay the loan, because they were making their money on the difference between the interest rate we paid them, and what it cost them to obtain the funds to loan to us,” McKenna said. That traditional lending relationship changed with the rise of subprime lenders such as Ameriquest and Countrywide, he noted. “They didn’t make their money on the spread, they made their money on the loan fees. Because of course what they were doing was making these loans and immediately selling them upstream to Wall Street, which had developed a voracious appetite for these types of investments.”
Government-sponsored entities Fannie Mae and Freddie Mac contributed to the crisis as Congress — in an effort to increase home ownership — ordered the two agencies to increase the number of loans they were making to low- and moderate-income (LMI) borrowers, McKenna said. While home ownership did rise from 65 percent of all Americans to 69 percent, “that 4 percent increase turned out to be very, very expensive because the way that Freddie and Fannie drove more lending out to LMI borrowers was to lower lending standards” – and that meant more non-traditional mortgages.
By end of 2008, FannieMae and FreddieMac”together guaranteed or held about $1.7 or 1.8 trillion dollars in subprime loans out of a total of about $5 trillion,” McKenna noted.
The result? “Home values in this country temporarily doubled. There was truly a bubble,” he said. “So some people found that they couldn’t afford a loan that wasn’t nontraditional. If you refinance or you take out that loan and you assume that home prices are going to go up every year by 10 or 20 percent and you’re just going to be able to refinance, and then prices start to go down, you’re in a world of hurt and that’s exactly where we find ourselves. A lot of folks got in over the heads — many through no fault of their own. They were talked into risky loans or they simply took too much money out, thinking that the home would continue to go up in value forever.”
Then there were the people “who decided to use these exotic morgages to speculate in real estate,” McKenna said. “We all should have realized we were headed for a fall when three of the top-rated shows on cable television were some variation of “Flip That House.”
In October 2008, the National Association of State Attorneys General announced what McKenna called “the largest consumer protection settlement in national history,” negotiated with Bank of America, which had purchased Countrywide and was responsible for its predatory lending practices.
McKenna said the group took a different approach than the one used with earlier investigations involving Ameriquest and Household Finance. “In those cases, we focused on restitution,” he said. “We returned over $300 million to borrowers in the Ameriquest case.”
With the Bank of America/Countrywide case, the focus was to go beyond restitution and negotiate a pool of money for loan modifications. “We realized by the summer of ’08 that things were bad and getting worse, and if we could find a way to slow down the rate of foreclosure then we could help stabilize the housing market,” McKenna recalled. “Because foreclosures, of course, drive down real estate values and they cause more foreclosures.”
The result was a fund of more than $8 billion to provide those who received subprime Countrywide loans with modified loans with “a more favorable interest rate, a longer repayment period, any combination of improvements that would lower their monthly payment — so that no more than 35 percent of their income was going to pay their mortgage becauase they would have a fighting chance of keeping their home,” McKenna said. A chunk of the settlement money was also set aside for reductions in loan principal.
As of September 2010, Washington state borrowers received 3,294 modifications with an expected savings of over $82 million, McKenna said, with many more “in the pipeline.”
The U.S. attorneys general group is now investigating loan servicers, based on evidence of “incredibly sloppy loan servicing practices, up to and including violations of federal and state law,” he said. While he couldn’t share details of the ongoing investigation, he did say that “this is going to settle for a very large amount of money,” which will be available for some principal reduction and loan modifications.
McKenna said that statistics from the loan modification program offer hope that more people are being able to stay in their homes. “Not everybody with a modified loan ends up keeping their home, but a good 50 percent of them do and although that’s not as good as 90 percent it’s a lot better than zero,” he said.
During the question-and-answer session at the end of the presentation, he also offered a piece of advice for consumers who have not been able to receive a loan modification from a lender despite repeated requests. “Contact my office, file a complaint and we’ll try to help,” he said.