Mel Watt spoke Monday at the Mortgage Bankers Association's annual convention and laid out the priorities for the FHFA for the next year. It was heartening to hear about the FHFA’s renewed focus on affordable housing and the attention it is paying to the large numbers of renters — some of whom may never get to participate in homeownership.
But the biggest (welcome) surprise to me was the possible action the FHFA might take regarding borrower communication in Spanish. At the moment there is no federal mandate for these critical communications to be produced in anything other than English — a real problem as our country’s population grows more and more diverse.
It’s daunting to even think of how to do that operationally, but as far as funding the effort, there is an income source that would fit the bill perfectly: the Consumer Financial Protection Bureau's civil penalty fund.
Let me explain.
In the first part of September, the CFPB collected $100 million from Wells Fargo after it was revealed that the bank’s employees had opened 2 million fake accounts that customers didn’t know about. So far this month, it collected another $28.5 million.
By law, the CFPB has only two ways to spend that money: compensating victims harmed by financial institutions and educating consumers.
Compensating victims makes sense — these are people who have suffered real harm by abusive financial practices, and they should receive that money back.
But consumer education? While that sounds like a perfectly legitimate goal, in reality it could be a huge waste of time.
Yes, you read that right: the third rail of the housing economy may be a complete and utter waste of the industry and government’s time, effort and money.
I’m not saying consumers don’t need any financial education, but for the majority of consumers in the United States, the most important information they need revolves around managing their debt and obtaining a mortgage.
For all the talk of complex financial instruments, most mortgages are pretty straightforward: Borrowers need to understand the total cost of the mortgage, the interest rate they are being offered, what fees they are being charged, and whether they can truly afford the regular payments.
Mortgage borrowers don’t need to understand the details of the financial instruments used to fuel the financial crisis — collateralized debt obligations or the convoluted asset-backed securities that financial institutions used those mortgages for — consumers had nothing to do with that.
And providing most of this information has already been accomplished by regulation (thank you TRID) and available in a general sense from the CFPB and numerous mortgage lenders who offer this consumer education.
Why invest hundreds of millions of dollars into a goal that can’t be quantified? How do we know if all consumers have been educated? Do we test them all?
If you have hundreds of millions of dollars that can only be spent on consumer education, it’s easy to imagine how that goal could take on a life of its own, spawning a bloated consumer education complex overnight. Videos, brochures, interactive games, 10-week courses, etc, etc., that in the end only serve to enrich the very earnest purveyors of such material.
Let’s be honest, here — anything beyond the general information that is already available is going to be about as useful as the 102-page terms-of-use agreement you accepted but never actually read on whatever device you’re viewing this on.
Or as a quote from Jason Fried of Basecamp, hanging in our HousingWire office, puts it: It’s simple, until you make it complicated.
Instead, that money could be put to much better use helping consumers in tangible, real-life ways, including the aforementioned borrower communications.
Here are just three ways to spend money helping financial consumers — I would love to hear some others!
1. Translate servicing communications into Spanish and other languages.
Servicers are required to send a series of communications to borrowers who fall behind on their loan payments, outlining every step in the default process and ways they can get loans modified. These communications were designed as real consumer protection, but they are utterly useless if they aren’t in the borrower’s language. And yet there is no federal mandate to translate or communicate any of these critical steps in anything other than English.
2. Replace plywood boarding with clear boarding when homes are abandoned.
What happens to the property values of a residence next to a house that has been boarded with plywood? It tanks. One plywood-boarded house drags down the home values of the whole street, leading to more defaults and trapping homeowners who not only can’t sell, but have to live near the crime magnet of an obviously vacant house.
The great thing is, we already have the solution to this problem! Clear boarding secures properties much better than plywood, and does it without advertising that a house is abandoned. However, it is more expensive than plywood. Why not use the money the CFPB has for consumers to cover the difference between the traditional plywood boards and clear boarding?
This one action could make a huge difference for communities blighted in the financial crisis and keep other neighborhoods from falling victim to the same fate.
3. Help defray the lenders’ cost of originating loans on mortgages less than $50,000.
A lot of people in rural or decaying urban communities are stuck being renters forever because no one will lend under $50,000. And why would they? With the average cost to originate a mortgage north of $7,000, small mortgages would represent a serious loss to most lenders.
The government doesn’t have to reinvent the wheel here, just help cover some of the cost involved in underwriting (resulting from its own increased regulation) or establish a different, less costly underwriting structure for small mortgage amounts.
This one solution could change the wealth trajectory for some consumers living in poverty. Owning a $50,000 house could lead to a step-up house, or at least a paid-off mortgage for the next generation. It marries well with the FHFA’s desire to boost affordable housing and would also benefit the mortgage industry long-term if more people could move up the housing ladder.
Would these steps be expensive? Yes, very. But it seems to me a better use of the civil penalty fund than the endless, never-a-goal-line-in-sight nature of consumer education.