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Musings on Mortgages

By E. Dennis Kelly Jr.

It seems that whenever I pickup a newspaper, there is a story about the mortgage crisis. Unfortunately, words such as subprime lending, foreclosure, default, mortgage meltdown and credit crunch have become part of a media diatribe.
One thing is for certain: We have a number of questions which have to be answered. First, how can financial markets and our society figure out this problem? Second, will the decline in home values affect the mortgage portfolios at banks? Finally, what can we do to prevent this from happening again in the future?
Recently, I was driving through Fall River when I noticed a billboard on the side of the road. It was an advertisement from one of our member banks, Citizens Union. The message was short and to the point: Mortgages … Done Right! Well said. This message summarizes our banking industry’s focus on mortgage lending over the years. Given the current crisis caused primarily by mortgage brokers and unscrupulous mortgage companies, we can take pride in how we conduct our business.
This past June, the Massachusetts Bankers Association made its annual Washington, D.C., visit. It afforded the attendees the opportunity to meet with representatives from the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Treasury and the Federal Reserve Bank. (Just a little aside: If you have never been on this trip, you should make an effort to attend; you’ll get a lot out of it.) In each of these discussions, we emphasized that our lending practices did not create the current crisis, but rather, it was another part of the mortgage industry. Each of them said they knew that.
However, having said that, we still must play a role in the long-term solution. I know that in most of our banks, residential lending still is a very important part of our business plans. Home ownership is one of life’s most important accomplishments. As community builders, those of us who run banks want to help people make this a reality. Nevertheless, as an industry, we have seen our originations as a percentage of the total market drop off consistently over the years.
This year, at least at my bank, I’ve seen a change in our market. Despite the overall downturn in mortgage activity, both the number and dollar amount of our originations are higher this year than last. Why? Well, maybe there is a recognition that we do mortgages right and that borrowers feel more comfortable with our stability and permanency.
Does the current environment create an opportunity for our industry to expand our mortgage lending efforts? I think back to the early ’90s, when my bank made a strategic decision to become a commercial lender. It was the worst of times and the best of times for that decision. The market needed lenders who were willing to make business loans. It allowed us to fill a void.
Even better, there were a number of commercial lenders and credit people available. Our bank gained some great employees who have helped us grow over the past 15 years. Overall, the market was longing for stability and we were able to provide that.
I see some similarities in the current environment. It may require our industry to make changes in how we approach the business, but it could help propel us into the future. Today, borrowers want lenders who are committed and approach the business in the right way. Let’s tell our story. It’s a good one. I think as bankers we have a tendency to focus on numbers, particularly on balance sheets and income statements. Ironically, our people, who are our most important assets, are not even listed. The current situation offers an opportunity to selectively expand staff and add experienced people (as long as they are not among the group formerly from questionable mortgage companies). Good people are one of the things the mortgage market needs right now.
What are the long-term solutions? It seems that if the same regulatory standards that are applied to banks were applied to all mortgage lenders, we would have a good start on improving the future. It is clear, when you consider where we are at today, that the mortgage market has not policed itself. On the other hand, some regulations and disclosures may be so cumbersome that no one needs them. Recently, the MBA offered a number of recommendations to regulators to strengthen the mortgage industry. The suggestions include:
•    Initiate a mortgage company/broker licensing moratorium.
•    Establish a foreclosure tracking system and mandatory foreclosure notices: Each month, the Division of Banks would then publish a list containing the names of lenders, investors, etc. ranked in order of the number of foreclosures filed in that month.
•    Track mortgage loan originations: All mortgage brokers and lenders should be required to list their broker/lender license number prominently on the residential mortgage document prior to recording. This will assist the division in tracking problem loans, as well as analyzing lending and foreclosure trends for loans which were originated and funded by particular brokers and lenders.
•    Scrutinize advertising: The Division of Banks, working with the attorney general and the Office of Consumer Affairs, should identify ways to increase scrutiny of lender advertising, particularly advertising that is deceptive and/or misleading, such as advertisements offering easy or low-cost credit.
•    Increase mortgage company/broker licensing fees and reexamine licensing requirements.
•    Consider multi-state licensing system for mortgage brokers and companies.
•    Criminalize mortgage fraud: Mortgage fraud should be made a felony under Massachusetts law. Criminal penalties should apply to any borrower, lender, loan originator, real estate broker, appraiser, closing attorney or seller who knowingly participates in a fraudulent mortgage transaction. Prosecution of these criminal activities should be a high priority for the attorney general and local district attorneys.
•    Require a Realtor disclosure notice: Promulgate regulations that require Realtors, with or without captive mortgage companies, to provide a disclosure to homebuyers that the purchase of a home is not contingent on arranging financing through the captive mortgage company or any specific lender or broker referred by the Realtor.
•    Establish a permanent rescue fund: Those lenders/funding sources of loans in foreclosure should be required to contribute to a rescue fund. This pool of funding can be used to refinance affected homeowners; provide additional resources for foreclosure prevention counseling; and fund portions of the public awareness campaign.
Another important part of the long-term answer is education. As a country, we fall short on financial literacy and the impact is probably the greatest in low- and moderate-income areas. Our citizens should learn about budgeting, saving and the importance of good credit. A good starting point would be in our school systems. Why not develop a Life Skills curriculum which would include these items? Finances have a major impact on everyone’s life.
The MBA has begun a public awareness campaign about the mortgage crisis, including the fact that there are plenty of mortgage funds available to qualified borrowers at local banks. I urge you to share your ideas with the staff at the MBA or with any of our board members. Your input and support are important in our effort to influence public perceptions. This is not a problem we caused, but it is one we can help solve.

E. Dennis Kelly Jr. is president and CEO of Taunton-based Bristol County Savings Bank. 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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