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THE MORTGAGE MACHINE
HOEPA (Home Ownership and Equity Protection Act) hearings in San Francisco. At
the hearing, consumers testified to being sold option ARM loans in their primary
non-English language, only to be pressured to sign English-only documents with sig-
nificantly worse terms. Some consumers testified to being unable to make even their
initial payments because they had been lied to so completely by their brokers.”
Mona Tawatao, a regional counsel with Legal Services of Northern California, de-
scribed the borrowers she was assisting as “people who got steered or defrauded into
entering option ARMs with teaser rates or pick-a-pay loans forcing them to pay
into—pay loans that they could never pay off. Prevalent among these clients are
seniors, people of color, people with disabilities, and limited English speakers and
seniors who are African American and Latino.”
Underwriting standards: “We’re going to have to hold our nose”
Another shift would have serious consequences. For decades, the down payment for
a prime mortgage had been (in other words, the loan-to-value ratio (LTV) had
been ). As prices continued to rise, finding the cash to put down became
harder, and from on, lenders began accepting smaller down payments.
There had always been a place for borrowers with down payments below .
Typically, lenders required such borrower to purchase private mortgage insurance for
a monthly fee. If a mortgage ended in foreclosure, the mortgage insurance company
would make the lender whole. Worried about defaults, the GSEs would not buy or
guarantee mortgages with down payments below unless the borrower bought
the insurance. Unluckily for many homeowners, for the housing industry, and for the
financial system, lenders devised a way to get rid of these monthly fees that had
added to the cost of homeownership: lower down payments that did not require
insurance.
Lenders had latitude in setting down payments. In , Congress ordered federal
regulators to prescribe standards for real estate lending that would apply to banks
and thrifts. The goal was to “curtail abusive real estate lending practices in order to
reduce risk to the deposit insurance funds and enhance the safety and soundness of
insured depository institutions.” Congress had debated including explicit LTV stan-
dards, but chose not to, leaving that to the regulators. In the end, regulators declined
to introduce standards for LTV ratios or for documentation for home mortgages.
The agencies explained: “A significant number of commenters expressed concern
that rigid application of a regulation implementing LTV ratios would constrict credit,
impose additional lending costs, reduce lending flexibility, impede economic growth,
and cause other undesirable consequences.”
In , regulators revisited the issue, as high LTV lending was increasing. They
tightened reporting requirements and limited a bank’s total holdings of loans with
LTVs above that lacked mortgage insurance or some other protection; they also
reminded the banks and thrifts that they should establish internal guidelines to man-
age the risk of these loans.
High LTV lending soon became even more common, thanks to the so-called
