Massachusetts Mortgages To Become Safer, Fairer

Massachusetts Attorney General Martha Coakley last week unveiled aggressive regulations designed to curb the orgy of irresponsible lending that led to the subprime meltdown. The measures, among the strictest in the nation, enjoin lenders from profiteering or ignoring a prospective borrower’s financial situation.

Under the new regulations:

  • Lenders will be required to treat all borrowers fairly and equally;
  • Lenders must have a “reasonable belief” that the borrower can repay the proposed mortgage;
  • Lenders would be required to offer the cheapest loan for which the borrower qualifies;

The state legislature may soon augment the Attorney General’s regulations with additional requirements.

The Massachusetts Senate in June adopted many of Governor Deval L. Patrick’s proposals for increased regulation. The version before the House today is similar. Mortgage brokers and lenders must be licensed, pay an annual fee and be subject to greater regulation and oversight by the Massachusetts Division of Banks. The money would be used to finance housing counselors who would assist first-time homebuyers planning to use adjustable-rate loans.

The legislation would also give borrowers a 90-day grace period in which to catch up on loan payments if they fall behind. And it limits the fees lenders can charge if borrowers convert from adjustable-rate loans to fixed-rate loans, which are generally easier to repay.

Massachusetts’ regulations only protect Massachusetts residents, but on Wednesday, Representative Barney Frank (D-MA), Chairman of the House Financial Services Committee, will introduce his own proposals that could extend similar protections to everyone.

State toughens rules on mortgages [Boston Globe]
(AP Photo/Reed Saxon)

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  1. howie_in_az says:

    * “Lenders must have a “reasonable belief” that the borrower can repay the proposed mortgage;”

    So in other words, lenders must have common sense.

    Why they gave money to people that clearly couldn’t afford to repay it still boggles my mind.

  2. forever_knight says:

    @howie_in_az: if you can sell the risky loans to another sucker, why not? risk free and they make a ton? the housing bubble has been like a 5 year wet dream for bankers.

  3. AD8BC says:

    Agreed, Howie. But the buyer should employ some common sense as well.

    Common sense dictates that you should be able to afford a house to purchase a house. It’s a big purchase and the purchaser should know exactly what he/she is getting into.

    The sellers should display this same common sense (isn’t this what the approval process is all about?

    But can you legislate a “reasonable belief” that someone could repay the loan? Seems kind of vague to me.

  4. ArtDonovansLoveChild. says:

    OK. Im going to address this yet again;

    Requiring extra training and licensing is perfectly ok, and should be encouraged (Disclaimer: That would also bring me training business) but extra rules regulating brokers must be approached carefully. States and localities that have regulated brokers more harshly have actually seen rates go up, and options go down since there are fewer lenders willing to serve those areas. Do a little research on the difficulty of getting a B-C credit loan in DC or West Virginia.

    Lets look at this list

    Lenders will be required to treat all borrowers fairly and equally;
    Borrowers are different, as are loan properties. Bad credit customers pay more in fees because there are more problems with their loans. The same thing applies to cheaper properties or ones in “bad” neighborhoods.

    Lenders must have a “reasonable belief” that the borrower can repay the proposed mortgage;
    This is just part of the myth that lenders WANT people to lose their homes. This is wrong. Lenders want people to pay the mortgage every month. This is how they make money. A reasonable belief should only be that they meet the actual requirements for the loan. I am not excusing the cut and paste shops that forge docs who should be prosecuted, but there is no reason a lender would want a customer to default.

    Lenders would be required to offer the cheapest loan for which the borrower qualifies;
    What is this, communism? Brokers and lenders have the RIGHT to sell each mortgage for what the borrower is willing to pay. Im not saying you should be able to abuse borrowers, but name one other industry where people are guarenteed the lowest price. If someone is willing to buy a car for 20k while the average customer will only pay 19k is that the dealers fault? It is up to the customer to shop around to find the best deal.

    And it limits the fees lenders can charge if borrowers convert from adjustable-rate loans to fixed-rate loans
    What? A lender makes a loan with a certain expectation of profit. If a borrower wants to convert an ARM to a fixed rate product the rate will go up. Mr. Frank wants to allow borrowers to lock in the arm rate for minimal fees (read the bill). This is contrary to the concept of ARM loans, and defeats the purpose of an ARM having a low intro rate to allow customers to transition into a new home with lower payments. If this bill passed the fixed rate loan becomes redundant, since people can just take a lower rate ARM then lock it at a lower rate.

  5. Trai_Dep says:

    @ArtDonovansLoveChild.: “This is just part of the myth that lenders WANT people to lose their homes. This is wrong. Lenders want people to pay the mortgage every month.”

    This is precisely where everything broke. In fact, since brokers could peddle their laughably unwise mortgages off – and the risk – to others, the industry was rewarded by making ANY loan. The fact that they’re risking driving the global economy into a tailspin several years later having NO bearing on their business practices.

    So, yeah: good provisions. Shame that the gov’t has to step in and demand that lenders use basic common sense.

  6. Trai_Dep says:

    (must be nice to live in an ideal world that you describe, though. where everyone’s a classic economics rational thinker, and even self-interested actors balance their needs with those of the larger whole. Let us know when your ficticious world is accepting new tenants, so we can join you).

  7. CarlR says:

    I’ve become convinced that a the change needed to fix a lot of the (future) sub-prime loan problem would be to simply ban pre-payment penalties. This would make these types of loans a lot less profitable, and much harder to sell to investors, which should reduce their availability. Why would someone be willing to buy (invest in) a mortgage that jumps from a teaser rate to a much higher rate if the borrower could just refinance without a pre-payment penalty?

  8. krom says:

    Nothing says “good place to live” to me like a government that cares about its people not getting screwed.

  9. badlydrawnjeff says:

    @krom: This is the type of thing that drove me OUT of Massachusetts. Let’s be clear, the love child is absolutely right about this, and this will make a Massachusetts housing market that already sucks even worse, as fewer lenders will be in place, etc.

    Massachusetts hasn’t cared about anyone getting screwed in years.

  10. ArtDonovansLoveChild. says:

    @CarlR: I dont think you understand of pre-payment penalties. They are in place to allow companies to offer lower rates and still ensure a profit from each loan. Eliminating them will only raise rates, since the prospect of someone jumping each year to a new teaser arm will destroy the market for those products, which are valuable to a decent chunk of society.

    First, some localities already forbid prepayment penalties, and loan rates are HIGHER in those areas, since companies need to insure a faster return from those loans.

    Second, 85% of all prepay penalties can be bought out by paying a slightly higher rate or a specified up-front fee, again to ensure that the company makes a profit.

    Additionally, it is incredibly rare that a 2 year arm has a prepay longer then 2 years nowadays (And the max prepay almost across the board is 3 years, legally). I once worked for a lender, AEGIS, that was putting 3 year prepays on 2/28 arms. They were smacked hard by a lawsuit and stopped the practice. Ameriquest was the big offender in regards to this, and they have gone the way of the Dinosaurs.

  11. bostonmike says:

    So instead of enforcing the existing laws that these crooked mortgage brokers violated, AG Martha Coakley is adding some new duplicate regulations. She’s paying back her biggest campaign contributors by making it look like the fraudulent loans they sold over the past 5 years weren’t already illegal.

  12. CarlR says:

    @ArtDonovansLoveChild.: I understand that rates will have to rise (or teaser rates will disappear) – that’s actually my point. It will no longer be profitable to make loans to people who can barely afford the loan at the teaser rate, much less the normal rate. People who fall into this category don’t need access to these products – they shouldn’t be buying houses because they simply cannot afford them. And it will become much less profitable to “stick” someone with crappy loan terms, because they will be able to escape.

  13. ArtDonovansLoveChild. says:

    @CarlR: See, that is an ignorant statement. The percentage of buyers who default on these loans are still relatively low, and there are a lot of decent, hard working people who need these products to buy a house. The “Mortgage crisis” has a lot of causes, and this is far from the biggest one. My humble opinion:

    5% unethical lenders (who should be prosecuted)
    10% Greedy lenders who pushed for exceptions for approvals
    30% Property value stagnation (people who planned to refinance at better rates cant since they havent built the equity they expects)
    15% Borrowers who ran up other debt/ took loans they never intended to repay
    15% Uneducated borrowers who took loans they didnt understand, and didnt prepare for changes.
    25% Investors who tried to buy as many houses as possible and didnt care about long-term results. (If you read any study of the forclosure market a BIG chunk are investment properties).

    These products were originally sold in a lot of cases as band-aid loans. You take the 2/28 loan at 6% instead of that 8% fixed rate loan for 2 years, make your payments, and then refinance into the fixed rate loan down at the lower rate because, all things being equal, your credit jumps 100 points. I can run a list of 50+ people who I have put into UGLY loans in the past and then refinanced (or gave to someone else to refinance nowadays).

  14. MyCokesBiggerThanYours says:

    Once more we take the responsibility from the individual and put in the hands of the government. This only promotes government interference in our personal affairs.

  15. mac-phisto says:

    @ArtDonovansLoveChild.: “This is just part of the myth that lenders WANT people to lose their homes. This is wrong. Lenders want people to pay the mortgage every month. This is how they make money.”

    it’s not so much that lenders want people to default, it’s that many times the people directly involved in closing the loan don’t care. in many brokerage houses, loan officers could be equated to the sales clerk at a retail store. does the sales clerk care if you can afford to pay the credit card bill when you open a charge account & buy a $7000 sofa set? no. he cares about his sales commission & meeting his numbers to keep his job.

    i DO think that lenders took for granted the idea that mortgages are 110% secure. with housing values rising at double-digit percentages every year in many markets, lenders were secure in the idea that IF they had to take the house, they would have no problem selling it for 100% LV + $30,000 in foreclosure & lawyer fees.

  16. RandomHookup says:

    There was an orgy? And I missed it? Damn.

  17. CumaeanSibyl says:

    @mac-phisto: I think you nailed it. Not only did the individual broker not care if a mortgage held by his/her company went into default, he/she also knew that the mortgages all probably got sold to other companies anyway, so it didn’t matter. And even if there were problems — hey! Housing never loses value, right?

  18. rich815 says:

    The Governor, the atty general, all for politcal grand-standing. What idiots. Lenders will be avoiding MA like the plague soon. This will screw up MA real estate big time. This guy’s got it about right:

    [tinyurl.com]