Estabilidad intercultural de perfiles motivacionales en estudiantes de EF

It is important to consider what types of borrowers existed in the lead up to the housing boom in the late 1990s and early in the 2000s and their interaction with the lenders. This analysis will assist in determining whether the conduct of business actions taken after the crisis are likely to be effective.US homeownership rates were around 44% in 1935 (the end of the Great Depression). They then rose steadily until reaching a plateau in 1970 at 10 64% before sharply rising again from 1997 to 69% just before the financial crisis. The 11 increase in homeownership was largest among “Hispanic, Black and Asian groups (16-17%) compared with an 8.6% increase for non-Hispanic Whites.” The stock of 12

Carlos Garriga, William T. Gavin, and Don Schlagenhauf, ‘Recent trends in homeownership’, (September/

10

October 2006) Federal Reserve Bank of St. Louis Review, 88(5), 397-411, 398 Ibid, 398

11

Ibid, 400

mortgages “lent by US banks to US households went from 15% of GDP in the 1970s to 96% in the 2000s. In the 1970s, one in ten Dollars lent out by US banks was towards a mortgage; but in the 2000s, this was one in three.” 13

Problems became evident in 2006. In 2005 only just over 1% of mortgages were classified as in default within their first two years of inception. This figure doubled in the period 2006-2008. For sub-prime loans the default figures increased from 10% in 2006 to 40% 14 in 2010. The Triennial Survey of Consumer Finances found homeownership “rose from 15 63.9% in 1992 to 69% in 2004 and the share of households with a mortgage rose from 38.4% to 45%”. In 1998 almost 100% of mortgages were written as 30 year fixed rate 16 loans. This percentage had fallen to 35% by 2004 and did not rise much above 40% by 17 2007. By the end of 2009 40% of the subprime adjustable rate mortgages (ARM) policies 18 were seriously delinquent. This percentage rose to 53% for ARMs sold between 2005 19 and 2007 compared with 48% for fixed rate mortgages sold during the same period. The 20 delinquency rate for prime ARMs rose from “0.6% in 2005 to 18% by the end of 2009.” 21 ARMs “by the end of 2007 represent 22% of outstanding mortgages but 62%

of...foreclosures.” By “mid-June 2010 4.6% (about 2.2m properties) were in foreclosure 22 and another 4.8% (about 2.3m) were 90 days past due.” Further, is evidence that the 23

Dirk Bezemer,’Schumpeter might be right again: the functional differentiation of credit’, (November 2014),

13

Journal of Evolutionary Economics, Vol. 24, Issue 5, 935-950 CFPB,12 CFR Parts 1024 and 1026, RIN 3170-AA19, 12-13

14

Ibid, 13, There are a variety of definition of “sub-prime” all of which attempt to capture the increased

15

riskiness of the borrower. The measures include credit scores, high LTV and high interest rate loans, see Oren Bar-Gill, ‘The law, economics and psychology of sub-prime mortgage contracts’, (2009) 94 Cornell Law Review 1073-1151, 1087-1088

Daniel Bergstresser and John Beshears, ‘Who selected adjustable-rate mortgages? Evidence from the

16

1989-2007 Surveys of Consumer Finances’,(2010), Harvard Business School, Working Paper 10 083, 2 Rajdeep Sengupta, ‘Alt-A: the forgotten segment of the mortgage market’, (January/February 2010)

17

Federal Reserve Bank of St. Louis Review, 92(1), 55-71, 58 Ibid, Table 1, 58

18

The issue of adjustable rate mortgages is considered in more detail later in this chapter.

19

, Chapt 2, n18, (Bubb and Krishnamurthy, ‘Regulating against bubbles’), 1606

20

Supra note 17,(Sengupta) Table 1, 58

21

Supra,note 16,(Bergstresser and Beshears), 6

22

John Campbell and others, ‘Consumer finance policy:Implementing two-tier mortgage regulation’,

23

increase in problem mortgages was skewed towards those with ”cognitive limitations” and that “poor numerical ability correlates with missed payments and defaults.” 24

This data paints a picture of a rapid rise in homeownership starting in the late 1990s and accelerating in the final years leading up to the collapse in 2006/7. This rise was largest in the first time buyer, minority and single parent demographic groups.

It is worth noting that ARMs are not inherently problematic. They are a standard type of mortgage sold in the UK, Australia, Canada etc. The issue appears to be that ARMs 25 were sold with low initial premium periods, which low-income borrowers were able to afford with a significant increase in the monthly repayment some years later. The position is further clouded by the development of the “Alternative-A” (“Alt-A”) mortgage market. Traditionally those whose credit was impaired due to, for example, past unpaid debts borrowed in the sub-prime mortgage market.Alt-A mortgage products were normally used by those with good credit scores who were unwilling or unable to provide supporting documentation for their income declaration as part of the mortgage underwriting process. These individuals were normally self-employed and were often paid periodically in cash. Between 2001 and 2003 subprime mortgage origination grew by 95%. The “comparable 26 growth rates between 2003 and 2006 for the subprime and Alt-A segments were 94% and 340%, respectively.” Both sub-prime and Alt-A mortgages experienced very high default 27 rates usually within the first twenty-four months after origination with significantly worse outcomes for those written after 2003. Nevertheless, significant losses still came from 28 the traditional fixed rate market. 29

Supra note 16,(Bergstresser and Beshears), quoting research by Gerardi, Goette and Meier in 2009 on

24

New England subprime mortgages, 5-6 (Kristopher Gerardi, Lorenz Goette, and Stephan Meier, ‘Financial literacy and subprime mortgage delinquency: evidence from a survey matched to administrative data’, (2010) Federal Reserve Bank of Atlanta, Working Paper 2010-10)

Emanuel Moench, James Vickery, and Diego Aragon, ‘Why is the market share of adjustable-rate

25

mortgages so low?’, (2010),Current Issues in Economics and Finance, Vol. 16, No. 8 Supra, note 17, (Sengupta), 56

26

Supra, note 17, (Sengupta), 56

27

Supra note 17, (Sengupta), 65

28

Michael Lea and Anthony Sanders, ‘Government policy and the fixed-rate mortgage’, (2011), Annual

29

Review of Financial Economics, 3, 223–234, 230, ”The 30-year fixed-rate mortgage remains the fool’s gold standard for mortgages throughout the United States, offering superior stability for some homeowners and potential catastrophe for U.S. and global financial systems”

It is clear that the quality of lender underwriting declined in the early 2000s and more sharply after 2003 in all sectors. However, prospective borrowers’ initial contacts were with intermediaries and not the lenders and many of the issues relate to this interaction.30 By 2005 some 60% of sub-prime loans were originated by mortgage brokers. Mortgage 31 brokers have been described as being the “engines of the sub-prime market.” They were 32 remunerated by lenders and were regulated, if at all, at the State level. For example, New Century Financial Corporation (New Century) had “more than 7,100 employees and 222 sales offices nationwide, and was one of the largest subprime mortgage originators in the United States”. “In 1996, the company originated over $350 million in loans. In 1997, 33 New Century went public and was listed on NASDAQ. In 2001, the company’s subprime loan origination volume exceeded $6 billion. Volume continued to grow rapidly, and volume increased tenfold to over $60 billion in 2006.” In April 2007 the company filed for Chapter 34 11 protection. Between 1997 and 2005 some 30-40% of all its loan applications were made with no documents to support the mortgage applicants’ income declaration (with a figure of 42% in 2004: the high point of this practice). For example, of the loans 35

originated by New Century in 2005, 7% were in default within 15 months. It is difficult to 36

It is also worth noting that many of the mortgage “originators” were both mortgage brokers and lenders

30

and often had parent companies that held mortgage securitisations. These groups in effect were “eating their own cooking”, (Bubb and Krishnamurthy), chapt 2, n18. For example, the largest mortgage originators besides New Century were Ameriquest (a savings and loan association) part owned from 1999 by

Washington Mutual and closed in 2007, First Franklin bought by Merrill Lynch in December 2006 and wound- down in 2008; WMC bought by GE Money in 2004 and closed in 2007; Fremont Investment and Loans (a savings and loan association) closed when its parent company filed for bankruptcy in 2008; BNC bought by Lehman Brothers in 2003 and closed in 2007; Countrywide Financial which demerged its savings and loan operation: IndyMac Bank in 1997, was sold in 2008 to Bank of America; Aegis owned by Cerebus Capital, a private equity firm filed for bankruptcy in 2007, and Option One, owned by H&R Block, a tax planning business, closed in 2009. In addition a number of major banks had their own mortgage originators trading under their parents’ names, for example, HSBC (formerly HFC), CitiMortgages, Wells Fargo and GMAC Residential Funding. All these businesses were either closed or filed for bankruptcy between 2007 and 2009, (Bubb and Krishnamurthy), and The Centre For Public Integrity website, http://www.publicintegrity.org

(accessed 24th February 2017)

Mortgage brokers accounted for 59.3% of subprime originations in 2005. ‘Brokers flex their muscle in

31

2005, powering record subprime year, inside B&C lending’, (March 2006) reported in Ellen Schloemer and others, ‘Losing ground: foreclosures in the subprime market and their cost to homeowners’, (December 2006), Center for Responsible Lending

Mark Fox and David Lane, ‘Lessons from the US subprime mortgage crisis’, (2008) Journal of

32

International Banking Law and Regulation, 449

Antje Berndt, Burton Hollifield and Patrik Sandas, ‘The role of mortgage brokers in the subprime crisis’,

33

(2009), NBER Working Paper 16175, 5 Ibid, 6 34 Ibid, 33 35 Ibid, 39 36

be precise about who was most at fault in writing such poor quality business. There was a congruence of interests: many borrowers, who would not normally have been able to do so, were able to buy and keep their homes, others were able to borrow against the equity in their properties to fund other expenses or to speculate in the housing market, brokers were remunerated by lenders dependent on the volume and profitability of the mortgages they originated and lenders used cheap funds to produce high returns.

The role of mortgage brokers has largely been overlooked. It is clear that brokers are “salesmen”. Many of the problems could have been prevented if adequate conduct of 37 business regulations, backed by sound supervision, had been in place. This chapter will return to this aspect of the broad theme and how intermediaries should be regulated and supervised. After the crisis, as mentioned above, many borrowers, but not all, were evicted and the business of both lenders and brokers collapsed. The issues, as mentioned earlier, appear to be have been exacerbated by property speculation and the picture is not

complete until this aspect is also considered.