New and Better Mortgage Lending Standards Maybe

rs-2New Orleans               The press is making a big deal of Mel Watt’s comments as the chief housing regulator at the Federal Housing Finance Agency to the Mortgage Bankers Association’s convention in Vegas.  He claims he has a new plan to loosen up the rules so that banks finally lend some money to first-time buyers and lower-and-middle income borrowers.  There’s a problem though.  The bankers are applauding, but there are no real details to the plan available, so what’s the story here?  Frankly, I don’t trust this.

Too much of this seems like a suck-up to the bankers and the equivalent of a “get out of jail” quickly ticket for them to blame their fast and loose behavior on the borrowers, which has been part of their narrative since the meltdown of the Great Recession.  Under the so-called “plan,” the housing finance agency would ease up on the rules that require the banks to buyback mortgages “that show evidence of fraud or other flaws in the underwriting process.”  Supposedly the buyback now would be based on the ability of the feds and the prosecutors to prove a “pattern of misrepresentations and inaccuracies.”  Furthermore the bank rip-offs would have to be “significant” enough to have disqualified the borrower from a Fannie Mae or Freddie Mac guarantee on the loan.

There’s a rumor of approving loans with as little as 3% down payments, and maybe that’s a good thing, but who really knows without the details.

To me this looks like a bank stickup with the bankers holding the gun against the government’s head and refusing to make loans until they get enough promises that they are not going to have to pay billions in fines and buybacks if they rip-off their borrowers yet again.  My argument would once again focus on one of the least corrected causes of the meltdown:  brokers.

As long as lenders refuse to supervise their broker networks even while all of the incentives are left in place for brokers to act independently and to be paid at the point of production regardless of affordability of the loan to the borrower, the conditions remain in place for fraud and predatory behavior.  Allowing this much finger pointing away from themselves, lets the bankers juice up the market without any accountability.  Even better, but only for them, they’ll get to still blame the victims, rather than take responsibility for their own thievery.

We need a subprime market.  We need for low-and-moderate income families to have the choice of buying a home, if it makes sense for them financially.  But, do we really want to make it easier for bankers to look the other way and claim their hands are clean when they are financing the fraudsters?

Many of the advocates are applauding this so-called plan.  I’m hoping they know a lot more of the down-low than has been made public, because at this point it looks like a deal made on our knees with the bankers where we’re once again begging for money for our people and they, once again, are dictating the terms and setting the table for more mischief and mayhem.

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Crisis of Accountability for Microfinance in India

New Orleans

Vikram Akula of SKS Microfinance

Vikram Akula of SKS Microfinance

Microfinance has many positives, but should never be confused or misnamed as a “poverty reduction” strategy.   There is simply no way to reduce poverty through debt.  Microfinance or microcredit or micro-lending or whatever the name has a value for the poor as a way to access minimal credit to create or improve livelihoods, but such livelihoods, usually in the informal sector are marginal and fraught with the same risks common to all informal work and small business for that matter.  ACORN International’s experience around the world is also very clear that there should never be any confusion about whether or not many of these loans are charitable because in fact they are often simply predatory.

I say all of this to put in some context a confusing article in today’s Times entitled “Microcredit is Imperiled in India by Defaults” by Lydia Polgreen and Vikas Bajaj.  The handwringing in the article painted the problem as a “subprime” crises because 80% of the money being lent in India comes from the state banks and in Andhra Pradesh the article says, “…almost all borrowers have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor.”

Indian politicians have deservedly earned a lot of skepticism and abuse for their probity and fairness, but in this case there’s a lot more to the story, and the politicians are right about this, as even some of the industry officials partially concede.

Here’s the real story in India in a nutshell.   The microfinance industry is no longer your older brother’s microfinance industry of even a decade ago with small non-profits and NGO’s and do-gooders.

Fueled by private bank money, many private finance operations have swooped into this lucrative market for lending to poor families and poor workers.  Microfinance is a major player in South Asia in India and Bangladesh particularly.   Andhra Pradesh is leading the accountability parade because the penetration of microfinance in the lending market in that state now accounts for about 12.5% of the loans outstanding.  Karnataka, where Bangalore is located is next with over 9%, Tamil Nadu, where Chennai (Madras) is the largest city has almost 5%, as does West Bengal, home of Kolkata (Calcutta).

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