We have a second posting from Jason Vondrak, this follows our first exchange at Mortgages: Who’s To Blame For The Lending Crisis?

Allow me to respond to some of the points raised in Jason’s second posting.

Jason says: “Peter,I agree with you partially, you are an intelligent person. However, consumers do have access to more information than they need. Of course loan officers and banks have more information than consumers. The sky is blue. I am in total agreement with you on banks having the obligation to inform their consumers about their products before selling them. Consumer’s are not “entirely” dependent on banks for info. It is also important to note that option arms, while risky, are not necessarily bad for everyone. If used properly they can be an extremely effective cash flow tool. You are right though, many of these arms were pushed onto consumers who were misinformed by their brokers whom were given higher compensation in return.”

Peter says: When a borrower is dependent on a lender for rates and terms, when the loan is made in the lender’s usual form, then, yes, as a practical matter the buyer is entirely dependent on the lender. Who in this picture represents the borrower? It certainly isn’t a federally-regulated lender.

“Some have proposed,” says Harry Dinham, president of the National Association of Mortgage Brokers, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.”

“A lender underwrites, approves and funds the loan,” according to John Robbins, Chairman of the Mortgage Bankers Association. “The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”

Jason says: “By the way, that is really great for your “little community bank” and I mean this from a profit standpoint not an ethical one. Let us remember that banks are in business for one reason and one reason only, to make money. Some banks are going to use high risk bank products and some are going to use low risk products, but in the end they are both aiming for the highest profit possible.”

Peter says: Not quite. We don’t believe in unbridled capitalism in the U.S. A dentist, for instance, could have a higher profit if he did not sterilize his drills. In the world of banking, we have the Community Reinvestment Act which raises bank costs and lowers bank profits by requiring banks to have branches in “historically underserved areas” — a term which means places where lenders failed to serve given neighborhoods and communities in the past, typically as a by-product of discrimination.

Jason says, “the federal government most definitely says overcharging borrowers is a crime, its called section 32, check it out for your records. In response to the “It is socialism when the fed reduces the discount rate to bail out huge banks and lenders.” Now we are getting into economics and this is a separate issue. Lets first address your inadequacies in real estate finance, business ethics, and business law. These are inflationary measures used to offset a recession so that we can compete in the global economy.”

Peter says, respectfully, Section 32 of Regulation Z is simply HOEPA — the Home Ownership and Equity Protection Act. It does not make overcharging a crime. It says that if a lender charges a certain amount above the prevailing rate of interest for Treasury debt of a like maturity, or if points and fees exceed 8 percent of the principal amount of a first lien, then the borrower must sign a disclosure statement.

First, HOEPA does NOT say that high costs loan are illegal or cannot be made. It merely says they must be disclosed.

Second, as the FTC points out, HOEPA “rules do not cover loans to buy or build your home, reverse mortgages or home equity lines of credit.” This is much of the mortgage universe.

Third, under HOEPA’s Section 129(I), the Federal Reserve has expansive powers to deal with unfair and deceptive acts or practices (UDAP) regarding ALL loans. As Michael Calhoun, President of the Center for Responsible Lending, says, “the Board has not used this authority.” In other words, the Fed could have effectively stopped the mortgage mess we see today had it acted earlier.

Jason says: “The question of the day is “why didn’t federal regulators put an end to this before it got out of hand? I suppose you will side with me on this one. I guess the reason is that when everyone is making money there are no problems and everyone is happy. You can point the finger at Greenspan now because hindsight is 20/20 but I don’t think this will make matters better. I guess had Allen been psychic, he could have foreseen this mess. I strongly believe that had the fed known that such a mess was lurking around the corner, they would have acted accordingly. In order to move the economy forward, we must not dwell on the mistakes of the past but rather learn from them and fix them. Step one is quit pointing fingers and start educating borrowers.”

Jason, can I say it? Gimme a break! The problems with the mortgage market were neither unknown nor unexpected. As one example, I have been warning borrowers and lenders about this stuff for years. No 20/20 hindsight involved. See, as one example, a review of past observations:

Mortgage Surprise? What Surprise?, Realty Times, March 13, 2007.

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