“This paper is short on data, as its authors admit, and community lenders view it as long on conjecture.”
The paper contains a basic error so glaring it casts doubt on the paper’s overall academic rigor; namely, it states more than once that VA mortgage lending, and thus non-bank lenders’ presence in this field, constitutes its own marked risk factor. However, VA loan defaults have been the lowest among mortgage channels, including conventional mortgages, for many years, and VA loan performance during the Great Recession did not deteriorate as did other mortgage channels. The authors’ lack of rigor here does a distinct disservice to veterans and active duty personnel. *(Read as pdf)
While true that Congress designed the FHA program to reach audiences beyond suburban ones, with the concomitant lower average FICO scores, carefully and truthfully underwritten FHA loans facilitate economic opportunity and growth without excessive risk. Community lenders have served this marketplace successfully for many years, even as large banks departed it. For our neighborhoods where large bank branches are not to be found, community lenders with FHA product provide a risk-controlled way for American families to escape ever-escalating rents and achieve a degree of economic security.
The paper avoids any mention of the Dodd-Frank qualified mortgage rule and any analysis how it has changed the marketplace. This is a distinctly perplexing oversight.
Further, the Federal Reserve’s record of mortgage market clairvoyance hardly merits approbation. A former chair proclaimed famously to Congress in 2007 that the subprime crisis was “contained,” and a different FRB chair earlier brushed aside timely warnings from the late Gov. Gramlich concerning the need to stop overt and reckless subprime lending activity.
And while non-bank community lenders do have to raise money without direct taxpayer subsidies–they do not have deposit insurance, cannot belong to the FHLB bank system, did not receive TARP money, and do not have access to extremely cheap (and thus potentially market-distortive) Fed window money, the authors do not examine the (market-discipline) benefits of this greater reliance on private sources of liquidity. Nor do the authors examine how community lenders’ fine and mortgage put-back restitution models — where any such funds come directly from the owners’ own pockets — provide an ongoing higher degree of quality control relative to that of large publicly-traded financial organizations, where any such payments come from indemnification/charge-off accounts, and executives committing errors/fraud therein need never surrender one Jeffersonian nickel from their own pockets.
The paper needs far more analysis and work, unless its chief goal is political in nature.
This statement rendered on behalf of the Board of CMLA, a trade association dedicated solely to advocating for independent, community-based residential mortgage lenders, both mortgage companies and community banks. Founded in 2009, the CMLA is committed to the preservation of a thriving independent mortgage-lending sector, which increases competition in the industry and thus provides borrowers with greater choice and lower costs.
Mr. Zimmer is a US Army veteran who purchased his first home with a VA mortgage.
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*the problem of VA IRRRL refi “churning” has been identified appropriately and Congress and two agencies are working to correct this.