American Banker’s Editor in Chief Neil Weinberg joined the magazine in May 2011 after 18 years at Forbes Media, where he was a reporter, Japan bureau chief, senior editor, and executive editor in charge of Money & Investing coverage for Forbes magazine and Forbes.com. He was awarded the Overseas Press Club’s 2006 award for the best business story in a magazine and is co-author of Stolen Without A Gun: Confessions from inside history’s biggest accounting fraud—the collapse of MCI Worldcom. He is based in New York.
The Score caught up with him after he moderated a panel titled “Warning Signs: Where Is the Credit Risk in Today’s Market?” at the Mortgage Bankers Association Risk Management and Quality Assurance Forum 2013. Panelists for the session were Fred Bader, senior vice president and chief risk officer of Legacy Services, JPMorgan Chase; Anand K. Bhattacharya, professor of finance practice at W.P. Carey School of Business at Arizona State University; and Sarah F. Davies, senior vice president, product management, analytics & research at VantageScore Solutions.
1. In your opinion, what were the most interesting changes in consumer behaviors brought up by the panelists?
Two came up. The first involves the fact that, after getting burned badly over the past decade taking on debt, consumers are more cautious about borrowing in general. They’re not signing up for credit cards like they did before the recession and are closing accounts they don’t use. They don’t want the same levels of debt in general hanging over their heads because they’ve learned first-hand what can happen.
Second is the view that when consumers dig themselves into financial holes, they’ve gone from counting on themselves to dig out to expecting outside assistance. One panelist said a few decades ago if someone got behind on the mortgage, he or she would drain savings, sell investments or appeal to family and friends for help. Then came the financial crisis, when the government made mortgage assistance widely available. That has helped create the expectation among consumers that either government or their lender will cut them a deal if they fall behind.
2. Are new regulations affecting consumer behaviors?
Actually, regulations are having a bigger effect on the behavior of the industry than on consumers. Namely, they’re having a big impact on the financial products and services that can be offered and how they’re disclosed. Regulations have already led to cutbacks in areas that previously drove big slices of revenue. Everything from overdraft fees to payment protection and variable-rate mortgages. And the Consumer Financial Protection Bureau is just getting warmed up.
3. What was the panel’s general sense of the tightness of credit in the current environment?
Credit is plentiful. For consumers with stellar credit scores, that is. For others, it’s tight. Panelists expressed concern that in mortgages, for example, we have a barbell-shaped credit market. If you have great credit, lenders are falling over one another to provide their services. If you’re near the bottom of the market, you might qualify for a Federal Housing Administration (FHA) mortgage. If you’re in between, you get starved. The danger is that ever-tighter regulations are eliminating the latitude lenders once had to charge more to the higher risk borrowers in the middle. Instead, lenders now fear legal or regulatory blowback. The result is that credit in the big middle market is tight.
4. Did the panel comment on how legacy loans originated before the recession are performing?
Those of the last few bubble years have done terribly.
5. After the conference, you wrote a column titled, “Who’s pushing subprime loans? Uncle Sam.” Can you summarize the regulatory pressures lenders are under with respect to providing credit to disadvantaged borrowers?
Regulators are showering the mortgage industry with two inconsistent messages, and that is exacerbating the barbell loan market I mentioned earlier. For people with good credit, lenders are being told to toe the line. Shun exotic mortgages. Comply with Fannie Mae’s 200 underwriting standards or risk being forced to buy back mortgages. Follow the letter of the qualified mortgage and qualified residential mortgage rules, even before they’re finalized.
At the same time, regulators are telling them to disregard all these safeguards and shovel the loans out the door to fulfill Community Reinvestment Act and other public policy goals. Perhaps the epitome of this triumph of politics over common sense is the FHA’s recent reduction, from three years to one year, of how long a borrower must wait after losing a home to foreclosure or a short sale before qualifying for a new mortgage. Maybe it’s just me, but it seems like someone who stiffed a lender for a house just 13 months ago would be doing everyone involved a favor if he or she rented.