By Thomas E. Hampton
Recently, New Century Mortgage Corporation, the second largest subprime mortgage companies in the nation, went into bankruptcy and DISB coordinated with other state regulators to find alternative funding for the 72 loan commitments that District residents had in the pipeline. As of March 28, the loan commitments of New Century have all been resolved either through transfers to other lending institutions or loan withdrawals by the consumers.
The surge of subprime mortgage lending caused by reductions in loan underwriting standards has caused problems including loan defaults and foreclosures in many markets around the country. Financial regulators, both state and federal, are taking a closer look at the overall regulation of mortgage lending. Subprime loans are those that have higher costs (such as higher interest rates) than prime mortgage loans primarily due to low income, poor credit histories, high loan-to-home value ratios or other underwriting factors that would disqualify them from being eligible for lower cost, prime rate mortgage loans.
Over the past few years, innovative mortgage loan products were developed, which decreased reliance on the credit history or income of the applicant, and focused more on qualifying additional consumers for mortgages. The increased number of qualified buyers as well as the low interest rates fueled a hot real estate market and attracted unprecedented amounts of securitized capital from Wall Street firms. It was obvious that innovations made to the subprime mortgage products far exceeded the pace of consumer education.
In the District of Columbia, about 5 percent of its mortgages are subprime, which are especially concentrated in Wards 5, 7 and 8, according to the Urban Institute, a research and policy analysis institute based in Washington, DC. The share for refinance loans was almost twice as high at 10 percent. This has become a major concern to DISB because of the number of lower-income residents qualifying for loans they may not be able to afford and defaulting on them. The prevalence of a rise in default on mortgage loans has potential risks in the area’s housing market. Initial foreclosures in a neighborhood can trigger a cascade of falling real estate values, making it harder for struggling families to escape high mortgage payments through refinancing or by selling their homes. The cycle becomes very difficult to escape.
What is DISB doing?
As the financial-service regulator for the District of Columbia, DISB is committed to protecting consumer interests without stifling any communities’ access to capital. Due to the broad preemptive power of federal regulators, state laws that address predatory lending and other aspects to protect consumers have limits to the mortgage lenders and brokers under our regulatory authority. We can, however, enhance our consumer education and outreach efforts so consumers have a better understanding of the true consequences of certain loans and that mortgage lenders are held accountable for failure to disclose fully the loan terms and their impact on individual consumers.
As the commissioner of the agency that regulates mortgage lenders among other financial industries, I have taken the opportunity to encourage residents with any subprime mortgage lending questions or concerns to contact DISB at (202) 727-8000. We want to make sure that our consumers are aware of their options, even when facing foreclosure, and understand they can always call DISB with any questions or issues related to mortgage lending or any financial services in general.
Further, DISB has taken a very proactive approach to the market fallout. We have been working with the Council of the District of Columbia’s Committee on Public Services and Consumer Affairs and chair, Ward 3 Councilmember Mary Cheh, to examine the adequacy of the District’s regulatory scheme to address subprime mortgage lending. I recently testified at the committee’s hearing on the Home Equity Protection Act of 2007, more specifically on subprime mortgage lending in Washington, DC. One of my main concerns is the bill should include all individuals who are compensated for foreclosure consultant services; and additional clarity is needed on some of the provisions to avoid consumer confusion. Regulation, by its nature, is reactive to concerns that happen in the marketplace. If regulations get too far ahead of the market, we risk curtailing any product innovation and hurt the very people we intend to protect. DISB has been working on drafting its own legislative language to present before Councilmember Cheh.
At the grassroots level, DISB has been taking its messages on mortgages and financial literacy to the community. We are scheduling mortgage-related seminars and workshops during the months of April and May. The agency is working with several nonprofit partners such as Housing Counseling Services, Manna Mortgage and the Capital Area Asset Builders, etc. to give various presentations that will help protect consumers from being victimized by predatory abuses that occur in the mortgage industry. We are also distributing consumer information on mortgages through the media, community meetings, consumer fairs and other venues.
It is our intention to continue providing District residents with the tools they need so they will protect their assets. Throughout this year and the next, we will continue addressing this issue to ensure greater awareness and protection of consumers from losing their assets and life savings.
I will encourage any resident with questions related to mortgage lending or the financial-service industry to visit our offices at 810 First Street, NE, Suite 701, call DISB at (202) 727-8000 or visit the agency online to file a complaint.
Commissioner Thomas E. Hampton heads the DC Department of Insurance, Securities and Banking.