Continued from part 1

The more power as a regulator of the Charter gives an institution the more likely it is that institutions want to be licensed under the regulatory authority. In the past, competition between regulators has been limited mainly between the national bank (ie, OCC) and the Charter of the state charter (ie, Federal Deposit Insurance Corporation, the Federal Reserve, regulators and the state). However, as thrifts were allowed to become much more like commercial banks and banks are increasingly involved in the mortgage markets, bank savings distinction became less meaningful. Thus, all the federal bank regulators, to some extent, competing to retain and attract banks and thrifts under their authority. In 1974, Arthur bums, chairman of the FRB, expressed concern that this situation would lead to a possible "competition in laxity" of regulators. Since then, concerns have been taken that the banks "forum shop" to find the more comfortable regulators. A version of this "race to the bottom" in May regulating banks competing to offer the most power they can pre-emption. Demonstrate the importance of preemption to the value of a charter, a prosecutor of the bank was quoted in the American Banker on the OCC pre-emption of shares of the request. "Why would you want a national charter, but the power of preemption?

The OTS moved first to avoid the state banking law pre-empting the key provisions of Georgia's predatory lending law in January 2003 so that federal thrifts were exempted from the law. A week later, the OTS preempted the State of New York's predatory lending law. State regulators immediately opposed the OTS moves. Community groups have seen action by the OTS between federal regulators have expressed some concerns of the higher predation on loans.
The COC was not about to let the savings charter obtain a clear regulatory advantage over the national bank charter.

In November 2002, he published a letter to the bank to assert its jurisdiction over all the regulators and banks were asked to indicate whether a state regulator said in May have authority over a national bank. In comments to the press after the decision of the OTS, the OCC stressed that it needed a request from a bank before they can follow the edge of the preemptive move. It was not long before a national bank, National City Bank of Cleveland, has requested that the OCC anticipate the Georgia law. Community groups, governors, attorneys general and state legislatures have argued that the OCC does not anticipate moving the state consumer protection laws. During the summer of 2003, anticipating the 0CC Georgia has prepared antipredatory right, even after the interests of the industry has managed to get the right significantly weakened. The agency added that it would pre-empt all similar laws, and has issued regulations for early 2004. The ABCs of spend, in some respects, was a bigger step in defending the banks to ignore the laws, because its authority under the statutes of the bank to anticipate the laws are much less clear. It was essentially based on historical regulatory practices and its own interpretation of these practices, rather than the more specific statutory authority OTS used.

As states such as Illinois, New York. monitoring and Georgia and North Carolina started to pass laws antipredatory loan in 2001 and 2002, lenders began pushing for lenders for the federal-friendly policies that would override the laws. Lenders have argued that the laws create a "patchwork" of regulations of the country, which would reduce the efficiency of the banking system by making it difficult for lenders on the secondary market and domestic enterprises to make the operations loan. Supporters of state law, including governors and legislators, argue that states have the right to protect their citizens, especially when it comes to something as important as defending the ability of people stay in their homes. In addition, real estate laws, including the foreclosure laws vary by state. Lending markets have welcomed such differences, without causing significant harm to the availability of loans.

Donors to challenge state predatory lending laws has pursued a mixed strategy of seeking a federal law to pre-empt state legislation, and at the same time, try to get federal bank regulatory laws to prevent .

The first approach is difficult as Democrats hold significant power in the Senate and Senator Paul Sarbanes, a proponent of increased regulation of predatory lending, to maintain the ranking Democratic committee headquarters. Thus, lenders, including banks, thrifts, and bank-owned lenders, have also adopted the second strategy. The two national banks and thrifts used their federal regulators (the Office of Thrift Supervision [OTS] and the Office of the Comptroller of the Currency [OCC], respectively) to anticipate the state predatory lending laws. Unfortunately for those on the side of state authority in this area, regulators have an interest in the laws pre-empt state consumer protection. The ability to anticipate the rule of law is perhaps the greatest source of value in the federal savings and national bank charters. As mentioned earlier, the banking regulators are funded by levying taxes on the regulatory institutions and they often pursue policies that encourage banks May-especially larger ones to move or stay under their control. Even the passage of a large bank may have an impact on the revenue body. When Chase Manhattan Bank (now JP Morgan Chase) was merged with Chemical Bank in 1995 and replaced by a national of a state charter, the 0CC lost 2 percent of its budget on costs.

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Drawing on the recent revolution in information technology and telecommunications, today's mortgage market means little resemblance to that which existed a few decades ago. While new approaches to marketing mortgage. subscription, and service have generated a strong increase in loans to low-income and minority neighborhoods, this growth is linked to the emergence of a dual system of mortgage characterized by a notable absence of conventional prime mortgages in these same areas. Instead, low-income borrowers and minority communities disproportionately arc by the government-backed, subprime, or manufactured home lending. and exposed to new threats associated with rising rates of mortgage delinquency and default and a significant increase in abusive lending practices.

As the dual market was developed through the capital to families who have historically been excluded from the mortgage market, it has prompted some community organizations "to rethink their role in the market. After a discussion on the changing structure of the mortgage industry this chapter examines how community organizations have a bit to respond to changes in the restructuring of existing operations and new programs and activities. In particular, some community organizations have changed their advocacy efforts to expand access to capital by the mortgage for low-income people and communities. Others have restructured their loan programs offered by community partnerships with mortgage companies in the private sector to create new automated loan or mortgage services operations, or by creating their own state of the art mortgage and loan servicing systems. Other approaches to time in the early stage of development, including efforts to fight against abusive lending practices, increase the effectiveness of the homeownership counseling, avoid eviction and develop the initiatives of many promises.
Unfortunately, many community groups are not adapted their activities to reflect changes in the mortgage banking industry. For example, while private lenders arc more and more to sell the right to service a handful of giant mortgage services only a relatively small number of CBOs now outsource their lending service. It is not only to avoid the small community to have access to the state of the art die-service technology, but also diverts resources and management capacity of non-OBC where the presence of the community gives it a comparative advantage over its private sector counterparts.

This database combines HMDA data on the characteristics of the borrower and the loan with the Federal Reserve data on the characteristics of the lender, as well as 1990 and 2000 census information on the neighborhoods where the loans were made. In addition to quantitative analysis, this chapter draws on qualitative information collected from 1 50 leaders of the community industry experts and mortgage in depth during phone and in person and groups of discussion held in Atlanta, Baltimore, Birmingham. Alabama, Boston, Chicago, Los Angeles: New York and San Francisco.

Continued from part 1

However, the LTV problem does not occur only when purchasing a home is refinanced. The so-called home equity extraction allows owners to increase their debt to the house where the home value increases. The idea is very simple. When the market value of the house increases by 20%, the volume of debt can also be increased by 20% and the ETV remains the same. However, the percentage increase when the market value of the house decreases. Since much of home equity extraction was used to finance consumption, such practices simply lead to high transmission of the house owners.

However, the requirement for an initial deposit prevents a large proportion of the population to buy their own home. The central idea of the mortgage market has been to provide financing tools for people who are otherwise unable to acquire a house. Although we do not doubt that these credit products play an important role in democratic societies, the risks associated with such lending techniques require strict underwriting. This is the second central lending rule: do not lend to a borrower, unless you can verify its ability to service the debt. Although this principle is quite clear, the financial sector has invented a way to circumvent the so-called "stated income loans (aka low-doc or no-doc loans, and sometimes called NINJA loans," no income, no job or assets). Here, the loan is given without a thorough review of the documentation of the income of the borrower. There is anecdotal evidence that licensees not only turned a blind eye to income exaggerated claims, but even encouraged borrowers to do to get the loan approved. Apparently the fraud was a major factor in the subprime crisis, but in fact the principles of subprime loans were an invitation to fraud.
But how to deal with underwriters at the expense of mortgage payments that exceed the economic capacity of the borrower? The lenders knew that was the case. Reduce the payments as far as possible using all available techniques and if it does not allow the borrower to defer payments. The reduction of debt servicing has been done by skipping the need for amortization payments (the so-called interest only mortgages or choose a payment "loans. Where the borrower can choose whether to make a payment, a payment of interest only or perhaps even lower payment) and setting of the coupon period to a shorter period (so-called loans adjustable rate mortgage (ARM)). The works, if the yield curve is upward, but it creates the risk of payment shock for borrowers at higher interest rates (note that the default rate of subprime began to soar the interest rates increased and loans were given at higher rates). A commonly used ARM loan was format 2 / 28. In this loan contract, the coupon payment is set at a level low enough to the first two years and is then delivered to a higher level for the remainder of 28 years, including an increase in credit spread. A large part of the delinquency of subprime mortgages that triggered the crisis are part of this 2 / 28 ARM category.
Even if this does not lead to a coupon payment that the borrower can afford, there were opportunities for the borrower to obtain a loan (and the possibility for the author to make his loan departure tax ): negative amortization loans. In a negative amortization loan, the borrower pays only a portion of the interest required to be a good operation. The unpaid amount is simply added to the unpaid balance of the loan. It must be repaid at maturity or at any other point in time. The idea behind it - 2 / 28 teaser loans, negative amortization, etc. speculation. When the price of the home increases dramatically, the house can be sold and the loan can be repaid (including coupon payments deferred) or the loan could be replaced by an initial loan because of the improved ratio LW . Another argument in favor of subprime loan is the prospect that the economic situation of the borrower to improve in the future, or simply hope that the success of a portfolio of subprime credit of the borrower (referred to "credit repair) could benefit from a first mortgage cheaper.

Loans come in different shapes and characteristics. They range from consumer loans, the mortgage loans in syndicated corporate lending business. Banks May offers a great variety - from a few hundreds - of loan products. to their customers. Unlike a bond, which is supposed to be a standard safety and emissions trading, private loans are negotiated between the borrower and a bank and are generally regarded as a purchase and maintenance of investments by banks. Nevertheless, the intention of negotiable loan exposure is very old, and is the main idea of securitization. Today, credit derivative contracts to facilitate the liquidation of the mid-and large-scale loan exposure. The availability of such credit derivative contracts and the willingness of investors to take the loan exposure of banks off balance sheets of banks loans motivated to change their processes. Instead home loans for their own books, they just used their balance sheet (or special purpose vehicles) to the warehouse and ready to distribute to investors by securitization. This, of course, affect the credit quality of the original loans, banks tend to release their catch practices to increase the number and volume. But the deterioration in the credit quality of the original loan is not only - by coincidence, by subscription inappropriate, but also intentionally. Banks on subprime loans, because there was a strong demand of the investor base for the corresponding period in subprime RM BS. Therefore, the growth of subprime lending market has been led in large part by investor demand for products rather than the spread of demand from borrowers.

Although there is no official definition of a subprime credit quality, the United States to borrowers with a FICO credit score (credit score developed by Fair Isaac & Co.) of less than 620 are generally considered subprime (on a scale that ranges from 300 to 850). May subprime borrowers have involved one of the following characteristics. Two or more loan payments 6o days past due in the last 12 months, or one or more loan payments for 90 days for the last 36 months, stop, foreclosure, recovery, or non-payment of a loan from the prior 48 months: Bankruptcy in last 7 years.
The loan business knows that a few rules to keep central credit risk for lenders manageable. The basic rule is that the economic interests of lender and the borrower must be aligned. Borrowers must have no interest in the absence of debt service. Regarding mortgages, it is traditionally made by a sufficiently large capital of the borrower. In general, mortgage lenders require a down payment the borrower at least 20% of property prices. In more technical terms, the loan-to-value (LTV) ratio should be less than 80%. Subprime mortgage lenders have broken with the central rule. It is not only the cases where borrowers were able to buy the house at 100% by debt, some lenders offered more than 200% to cover transaction costs, the furniture of the house or even a new car. These practices have no place in the United States and are a clear sign of a bubble. In the United States, more than 8o% LTV may lead to the need for the organization of the mortgage insurance. In order to prevent the subprime mortgage lenders to provide so-called piggy-back loans where the loan balance is divided into a 8o% mortgage and a smaller secondary loan. In such a mortgage, the proportion of the first loan is misleading because it underestimates the true place of exposure, use so-called combined loan-to-ratio (CLTV) for the evaluation of risk of default of a loan. In fact, the recent history of the subprime default there is a strong correlation between failure rate and high CLTV. From an economic basis, it is very clear. First, borrowers who have a high amount of debt burden are those who have problems. Second. if the CLTV is greater than one, the borrower in May have an incentive to default because it does not make much sense to pay 110% of debt for an asset with a value of 100%. This incentive is particularly high for the so-called non-recourse loans, ie loans which the lender in May not to have recourse to the borrower after foreclosure where the price achieved the sale of the mortgaged property is not sufficient to cover the outstanding debt. However, a moral hazard May be caused by the application of mitigation of losses, such as forbearance, act in lieu, partial claims, loan modifications, foreclosure or pre-sales. Although these techniques from May to mitigate the loss on an individual loan, they trigger in May increasing the failure rate as in May they make the economic consequences of a borrower defaulting less severe. However, one of the most serious consequences for the borrower defaulting on its debt is the damage to their credit. But for a subprime borrower, the results are most likely already been reached. Otherwise, it would not have been a subprime borrower.

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