The Center for Community Change, a group representing low and moderate income neighborhood interests, has recommended that regulation of the mortgage banking industry be moved from the Department of Housing and Urban Development to an independent agency, the Federal Home Loan Bank Board.
In a newly issued report called "Opportunities for Abuse: Private Profits, Public Losses and the Mortgage Banking Industry," the group says stiffer regulation of the industry is needed to reduce what it says are questionable lending practices in inner cities. These practices have led to high foreclosure rates and "facilitiated the destruction of neighborhoods scarred by abandoned homes," said researchers for the center, which is based here.
Mortgage companies, which now originate three out of every four FHA and VA-backed mortgages, go virtually unregulated by the states, the study pointed out. Regulation at the federal level is carried out ineffectively by the Department of Housing and Urban development, a fact HUD Secretary Patricia Harris acknowledge last summer when a Nader organization report focused on the problem, the center said.
The researchers said there is a fundamental conflict of interest within HUD when it comes to regulating mortgage bankers. The agency is committed to maximizing loan volume to encourage housing production and lower interest rates but is also charged with ensuring high underwriting standards.
That, says the housing group, is like depending on General Motors to set its own safety and environmental standards. Some mortgage companies are only too willing to make unsound loans to low-income persons who are poor candidates because the lenders lose nothing if the government-backed loans go into default, the researchers said.
At present the only HUD qualification for establishing a mortgage company to deal in FHA/VA loans is that the firm have $100,000 in capital funds. If the regulatory burden were shifted to the Federal Home Loan Bank Board, which oversees savings and loan associations, other criteria for setting up a firm would need to be established, the center said.
There should be automatic review of each license every four years, as well as the imposition of sanctions or punitive measures if companies did not comply with certain standards, the housing group said.
Standards should call for avoidance of foreclosure wherever possible, maintenance of adequate loan servicing staffs and refusal to cooperate with realtors involved in racial steering or blockbusting.
The center said that because it realizes Congressional action on such a proposal would be a long time coming, it supports strengthening HUD's mortgage review board as an interim measure. Such a board should open its proceedings to the public, the group said.
Among other recommendations are mandatory counseling for all prospective buyers seeking government-insured loans, default and delinquency counseling and compulsory disclosure by mortgage companies of lending activity by Census tract.
Also recommended was elimination of the point system whereby lenders charged sellers an up-front cash percentage of mortgages on FHA and VA homes. Points, the study says, deter people from selling FHA/VA if they live in neighborhoods where conventional financing is available.