Do mortgage lenders have a duty to serve underserved communities and potential homebuyers? A new book on sustainable homeownership has a provocative chapter on DTS that many lenders won't like much.
Many lenders already have several "duties to serve," through the Community Reinvestment Act, the affordable housing goals of Freddie Mac and Fannie Mae (still on the books, though targeted for extinction by some) and to a smaller degree, the Affordable Housing Program of the Federal Home Loan Banks, point out authors Adam Levitin and Janneke Ratcliffe.
"Financial service providers have a social responsibility as well as a shareholder responsibility," Levitin and Ratcliffe maintain in a chapter called "Rethinking Duties to Serve in Housing Finance," in the new book, Homeownership Built to Last.
This duty to serve should be leveled on all lenders, depositories and non-depositories alike, they add in the book, ajoint publication of the Brookings Institution Press and the Harvard Joint Center for Housing Studies.
It's a controversial assertion. How can institutions in a free market economy have such duties to serve social policy? According to the authors, the duty emanates from the federal government's dominance in mortgage lending.
If lenders want to benefit from deposit insurance, the government-sponsored enterprises' subsidies of mortgage rates, the mortgage interest tax deduction, Federal Housing Administration insurance, Ginnie Mae guaranteed securities and other government-led incentives, then it's only fair to expect them to abide by rafts of government rules, argue Levitin and Ratcliffe.
But what about non-depositories? The authors write that they, too, depend on the government sugar and should have the same duties to serve as depositories.
Mortgage banks are heavily involved in Fannie and Freddie, while private mortgage insurers are also dependent on the GSEs, which require PMI if down payments are below 20%. And other non-depositories are reliant on depositories through warehouse lending.
Levitin and Ratcliffe take their argument a step further, maintaining that this level playing field for the primary market should also extend to the secondary market. This not only means Fannie and Freddie, but also big banks that have grown out of their CRA britches by lending through "affiliates and subsidiaries that do not fall under the CRA."
Levitin, professor of law at Georgetown University Law Center and Ratcliffe, executive director of the University of North Carolina's Center for Community Capital, advocate that there should be tools, metrics and incentives behind the duty to serve mission, as well as a credible enforcement mechanism behind these goals. That could mean an independent commission, ombudsman, or inspector general, perhaps under the auspices of the Consumer Financial Protection Bureau.
The authors take care to debunk commonly heard perceptions that the GSEs' housing goals caused risky lending, and that CRA lending helped cause the housing collapse.
"In fact, the majority of toxic loans that triggered the recent financial crisis were subject to neither the CRA nor the [GSEs'] housing goals: non-depository lenders and private label securitizations." In response to allegations that CRA lending has hurt lender profitability, they cite a study that claims 78% of CRA lending was profitable or at least break even.
Not everything in this article will be anathema to lenders. The writers acknowledge DTS needs to be consistent with good business sense. And they do assess failures not just to lenders but also to regulators, though partly in being less than diligent in enforcing CRA requirements.
Some lenders would sign on to their assertion that they do not advocate lenders offering identical loans to all borrowers. "There cannot, however, exist a two-tracked, separate and unequal housing credit system in the United States, with wealthier (and whiter) communities offered traditional, nonpredatory products from depositories and prime lenders while low to moderate income and minority communities go unserved or served only by non-banks offering higher-cost and nontraditional products."
This is an excellent book, thoughtful and provocative. Access to credit will be a key to the overall health of the mortgage business in the immediate future, and not just for low-mod mortgages. I'm guessing the idea of DTS extending to non-depositories through their indirect association with depositories may be hard to sell. More bureaucracy will be a tough sale, too.
But I believe the authors have this concept well in hand as we head for the uncertain but hopefully radiant future when they write, "consumers' access to a government-constituted market must be offered in a nondiscriminatory and accessible manner to all."
Mark Fogarty, Editor at Large at National Mortgage News, brings more than 30 years of sector experience to his analyses of the mortgage market.