THE STASH AUGUST 6, 2009
I don't have a ton of analytical insight to add to this discussion, but Simon Johnson, James Kwak, Felix Salmon, and Mike Konczal have all been making very solid points lately about why a consumer financial products agency would benefit community banks, especially insofar as they compete with megabanks. Which is why their early opposition to the idea seems counterintuitive (though there are ways to explain it). Kwak sums up the situation nicely:
Community banks must have some source of competitive advantage over Bank of America and Citigroup. There are two obvious possibilities. One is that customers prefer dealing with local banks, and based on my personal experiences, the level of customer service is far superior than what you get with a megabank. The other is that community banks, as Salmon said, are better at underwriting, because they actually know the characteristics of the neighborhoods they are underwriting in and, possibly, the borrowers they are underwriting. The reason I went with Greenfield Savings was that they offered me a lower rate than any national bank, and presumably they were able to do this because they knew something about the local market that the national banks didn’t.
Now, both of these are advantages that should be protected by the CFPA. That is, if your goal is to provide better customer service, you are probably not in the business of screwing your customers. And if your competitive advantage is in underwriting, then you have no need to confuse customers with unnecessarily complex products. You should be happy that Elizabeth Warren is keeping predatory lenders out of your backyard, because even if you refuse to match their mortgages, they are driving up housing prices and making it harder for you to find qualified borrowers.
So the CFPA would basically preserve the things community banks excel at and outlaw the things the megabanks excel at. Not a bad deal. So why are the community banks opposed? Tough to say exactly, but Salmon speculates that they fear the new regulator will get captured by the big banks--not unreasonably.
For what it's worth, my own reporting on this stuff jibes with Kwak's point. Take, for example, a guy I wrote about it in a piece about short-sellers a few years ago:
The landscaper told us his family moved into the house last fall, at which point the landlord suggested they buy it. In December he closed on a mortgage. He told me he thought the payments would be around $1,000 a month, but by February they were nearly double that amount. He lost his job around the same time. With no income and an entire brood to feed — he and his girlfriend have five children, including 4-month-old twins — he said he hadn’t paid more than $100 in any month since. The foreclosure documents arrived in mid-May, about a week and a half before we did. ...
After the encounter with the landscaper, I stopped by the office to meet with Izzolo and Bill Mirro, a childhood friend of Izzolo’s who joined the firm almost three years ago. They immediately concluded that the landscaper’s mortgage was dubious. For one thing, the property had been appraised for $215,000. But given the size of the house and its location — on the northern edge of the poorest part of town — the price seemed outrageously high. All the more so given that the sale took place in December 2006, a year after the market had turned. Appraisers must justify their estimates with recent sales data for comparable houses in the neighborhood. Mirro speculated that the appraiser had simply gone two blocks north — across Central Avenue, the boundary between the historically white and black sections of St. Petersburg — where an identical house sells for $20,000 to $30,000 more. ‘‘If the bank’s based in California, they don’t know,’’ he said.
The landscaper appeared to have what is known as a ‘‘phantom second’’ mortgage. Because he lacked money for a down payment and had no hope of qualifying for 100 percent financing on $193,500, which is what the owner appears to have been asking, the inflated appraisal of $215,000 made it look as if he were borrowing only 90 percent of the asking price. It was unlikely that the landscaper even knew about the arrangement.
Suffice it to say, I don't think a local bank would have fallen for this. It would have known the appraisal was bogus because it would have been familiar with the local geography. On the other hand, the national bank that financed the purchase didn't particularly care to know. It basically just cared about selling the guy an outrageously expensive mortgage, which it did by way of an incredibly deceptive teaser rate. The hope is that the consumer financial products regulator would get rid of the second thing. But that shouldn't matter in the least to the local bank, which wouldn't have touched the loan in the first place.