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Gambling on Mortgages

By David Floreen

Casinos, foreclosures, slot machines and mortgage reform all have one thing in common: extra risk and top billing on Beacon Hill. Everyone has a strong opinion on the pros and cons of expanding gambling and how to address the ongoing fallout over the mortgage lending mess. Gov. Deval Patrick’s plan to allow up to three resort-style casinos across Massachusetts and devote the anticipated $500 million in annual revenues to infrastructure and local government has stimulated intensive discussion as to whether expanded gambling is the best way to stimulate economic development and raise revenues.
In a bit of irony, the same day that the governor announced his casino plan, the special commission on transportation finance announced its long-awaited recommendations for a 50 percent increase (11.5 cents) in the gasoline tax, a user fee and several reforms in MBTA pensions, police details and a hike in tolls to meet the $20 billion needed for infrastructure improvements. Making these serious, tough and expensive decisions will generate angina for many political leaders, and provide columnists and advocacy groups with plenty of fodder for their pet programs.
The fallout over the sudden bridge collapse in Minnesota simply enhances the recognition that something substantial must be done soon to fix the decaying infrastructure, both in Massachusetts and nationally, and that bold responses are a given. No one wants to see another calamity occur on their watch.
Historically, the 10-week period between mid-September and Thanksgiving is one of the more productive times for the Legislature. The key issues have begun to crystallize, the interpersonal dynamics have been established and the often unstated political agendas make their presence known.
So what can we look forward to as the days get shorter and cooler while the debate gets longer and hotter? Will it be “slots for tots” as a way to raise more money for education or local governments? Will the Legislature approve some, or all, of the casino package introduced with great fanfare recently by Patrick? Can the government really help those impacted by the rising foreclosure rate? Will the governor and legislative leaders embrace higher gas taxes, tolls or some other revenue source to pay for the nearly $20 billion in infrastructure improvements? What about corporate tax reforms? How can the state stimulate economic activity? Are legislative leaders growing weary of dealing with highly emotional social issues and is there renewed interest in business and consumer matters? Down in Washington, will Congress be able to move beyond Iraq and act on other key issues such as mortgage lending reforms and approve major annual appropriations?

Beacon Hill Update
Despite the range of questions, gambling and housing matters are likely to dominate Beacon Hill this fall and beyond. In a perverse way, both issues have much in common. Part of the reason we got into this mortgage turmoil was the reckless way that some participants in the mortgage industry looked at housing: buy and flip property with no money down (and make a quick buck!); no-doc or stated income loans (no problem!); and steering borrowers into products they did not understand or qualify for (who cares, I got my commission; in a few months you can refinance into a better deal!).
These schemes worked only as long as housing prices continued to rise. Sort of like Russian roulette or musical chairs: When the music stopped, the gun went off and some people were badly hurt. Once prices stopped rising and started falling, all bets were off, and this time, builders, borrowers and sellers felt the shock.
Now everyone – and I do mean everyone: legislators, regulators, the media, borrowers, activists and others – is clamoring for an investigation into why the mortgage markets are in turmoil, asking who do we blame, who should (or can) pay to fix the mess and who can make restitution to those who deserve some assistance. Pointing fingers is easy; crafting a rational resolution that does not irrationally disturb the normal economic ebbs and flows of the market and stimulate crises is the hard part. Crafting programs to help those who are true victims without providing benefits to those who were trying to game the system will be very challenging.
Many are actively involved in the mortgage issue: the Legislature through major revisions to several state laws; Gov. Patrick’s administration acting through the Division of Banks and other agencies by expanding regulatory oversight of mortgage lenders and brokers; jawboning lenders that initiated or invested in subprime loans; and Attorney General Martha Coakley by initiating the first overhaul of regulations (940 CMR 8) since 1993. No doubt at some point the courts are likely to be dragged into resolving some disputes as well.
Last July, the state Senate unanimously passed S. 2299, a bill seeking to provide comprehensive mortgage foreclosure reforms using a bill aimed at stimulating the production of employer-provided housing as the vehicle. While this bill contains a number of helpful initiatives, such as clamping down on several mortgage broker and lending practices, expanding CRA to many mortgage lenders and brokers and licensing mortgage originators, unfortunately it also includes several features that would be very detrimental to the lending industry and would actually be counterproductive to resolving the mortgage/foreclosure problems.
By mid-October, the House is expected to take up its version of a comprehensive mortgage lending package and we are hopeful that the more onerous and problematic provisions of S. 2299 will be amended or deleted.
During the third week of September, Attorney General Coakley’s office held four public hearings across the commonwealth to solicit comments on her proposed amendments to expand the scope and enforcement of these regulations (940 CMR 8) to cover all lenders and set out a number of practices that per se would be considered an unfair and deceptive practice under Massachusetts law. Many alleged victims of mortgage lending abuses and aggressive foreclosure practices urged the attorney general to impose stiff penalties on those who initiated these loans on unwitting borrowers. Her office is expected to finalize revisions to the regulations by mid-October.
All summer and into fall, senior officials from the Patrick administration were aggressively trying to craft a comprehensive package designed to assist borrowers who have become victims of the wave of foreclosures. Senior MBA officers and member banks met with top Patrick administration officials on several occasions to relay ideas and concerns regarding their initiative.
Unfortunately, there is no silver bullet – in fact, there is no magic elixir at all. Nationally, the fallout continues to grow in terms of a drop in housing construction and prices, loss of jobs in the mortgage lender community and a decline in overall consumer confidence. Here in Massachusetts, many banks have initiated aggressive advertising and other campaigns to assure borrowers, real estate brokers and the business community that banks have plenty of money available to lend on favorable terms to qualified borrowers. The MBA has also been delivering this message to the media, legislators and public officials to assure them that banks are alive and strong, noting that as they craft public policy, they must be very careful not to overreact and create a series of unintended consequences that could inhibit the steady stream of credit to qualified borrowers.
While it seems like “all mortgages all the time,” there are other bank-related issues surfacing this fall. The Committee on Financial Services began holding half a dozen public hearings, taking place between late September and mid-November. Two hearings focus on banking matters: The Sept. 26 session heard several association-sponsored bills on bank powers, structure and governance issues, while a Nov. 7 hearing will hear consumer matters such as overdraft protection programs, EFT and other fees, and numerous other deposit issues.
Meanwhile, auto and homeowners insurance reform is likely to consume much of the financial services committee’s attention in the coming months as a number of legislators, mainly senators from urban areas, seek to curb or modify recent regulations issued by Commissioner of Insurance Nonnie Burnes to allow for managed competition in the setting of automobile insurance rates in Massachusetts beginning in April 2008. Intertwined in this struggle is a debate over whether auto insurers can continue to offer discounts to members of special groups, such as AAA, alumni organizations, professional societies and “premier” banking customers.
We remain hopeful that the Legislature will approve this year a redraft of H. 4146, a bill sponsored by the MBA that would significantly restrict the use of so-called credit triggers in mortgage lending. At least four other states have already enacted similar laws, and the House Financial Services Committee in Washington is expected to consider legislation amending the Fair Credit Reporting Act to ban such practices. Other than credit triggers, don’t expect too much action on banking bills on Beacon Hill this fall – that’s for 2008.
In addition to the spirited debate over gas taxes and tolls, the special commission on tax fairness continues to meet and is expected to develop a series of policy recommendations by Dec. 31. Some items are controversial, but rumors persist that some efforts may be under way to develop a reduction in the corporate tax rate as part of a package to eliminate “check the box” options and mandate combined reporting. Look for this to be a dominant issue in early 2008.

The Washington Scene
While Iraq continues to dominate discussion and potential legislative action on Capitol Hill, figuring out what to do about the mortgage lending and foreclosure mess has moved onto the “A” list. Several congressional committees have held hearings, an expected precursor to legislative action later this fall. Although members from both parties want to reform the mortgage system, punish the bad actors and provide assistance to legitimate victims, no one wants to support measures that could have a series of unintended consequences that might create more turmoil, further restrict credit or bail out investors who are responsible for many of the loans now in foreclosure. Look for congressional action toward late October or early November, if at all.
It’s still unclear if the Senate will act on H.R. 698 or the companion bill S. 1356 to prohibit commercial firms from acquiring or chartering industrial loan companies (ILCs). Enactment of ILC legislation is a high priority for the banking industry, as the current FDIC moratorium on ILC applications expires in January 2008, and applications by Home Depot and other large corporations remain alive and potentially troublesome for banks.
Last summer, the banking industry successfully beat back legislation that would have substantially expanded the role of the Farm Credit System (FCS) in offering commercial and home mortgage loans. While this matter did not generate much attention here in Massachusetts, it was a major issue in much of the country, as it would have set a dangerous precedent for government expansion into private sector activities. Notably, House Financial Services Committee Chairman Barney Frank was a leader in supporting the banking industry and opposing the FCS’s power grab.
Consumer issues have also become a higher priority in the Democratic-controlled Congress, with several key senators and congressmen continuing to press for action to curtail a number of “abusive” practices by credit card companies, especially over-limit and late-payment fees, double-cycle billing and the practice of increasing interest rates due to a late payment to another creditor. Some credit card companies already have modified their practices in an attempt to forestall legislation; we’ll see if voluntary action will be enough.
Locally, there has been a spirited race between Niki Tsongas, D-Lowell, and James Ogonowski, R-Dracut, to fill the vacancy in the Fifth Congressional district when former Congressman Marty Meehan resigned to become president of the University of Massachusetts at Lowell.
Mortgage lending issues have also taken center stage among the bank regulators, with a number of proposals related to subprime loans, loan servicing and underwriting practices finalized this year. The Department of Defense, working with the banking regulatory agencies, also released a final rule to implement the Talent Amendment, which places a 36 percent interest rate cap on loans to members of the armed services and their families. The bank regulators also finalized the new Basel II rules, while abandoning plans for a Basel IA system for small and mid-size institutions. We expect several proposals that are currently in the pipeline, including revisions to the regulations governing high-cost mortgage loans and unfair and deceptive practices, to surface late this year or in early 2008.
In many ways, the legislative process on Beacon or Capitol hills is a lot like Red Sox/Yankee games: full of suspense, intrigue and unforeseen turns of events. Stay tuned; we may see extra innings.

David Floreen is senior vice president at the MBA. He can be reached at

Posted on Sunday, December 02, 2007 (Archive on Sunday, December 02, 2007)
Posted by Scott  Contributed by Scott


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