Monday, February 28, 2011

LMI Mortgage Lending: Road Less Traveled

The Federal Deposit Insurance Corporation's (FDIC's) Advisory Committee on Economic Inclusion (given the catchy name "ComE-IN") will meet on Wednesday, March 2, 2011 to discuss principles for low and moderate income (LMI) mortgage lending (as well as supporting financial education).
Committee members will discuss "responsible ways to restore LMI mortgage lending and sustainable homeownership in the wake of the mortgage and housing crisis." Observing the obvious, the FDIC's announcement states that "borrowers' opportunities for homeownership have diminished as the availability of mortgage credit has contracted" and "market disruptions have been particularly difficult for lower-income borrowers, who have been disproportionately affected."
LMI has not quite been in the forefront of community lending for awhile. The subsidies associated with LMI are responsive to the Community Reinvestment Act (CRA) requirements designed to promote home ownership. Chase, for instance, currently provides an LMI program for 1 - 4 Units, Condo, PUDs or New York Co-ops, loan amounts up to $400,000, primary/purchases only, and a maximum subsidy that is the lesser of $1,500 or .75% of the loan amount. Chase also offers a Correspondent LMI Subsidy Eligibility tool.
Of course, geographic locations matter in CRA loans, so banks determine eligibility using the property location as an eligibility factor.

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LMI and CRA – Controversy
The CRA was designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory ("redlining") credit practices against low-income neighborhoods. In recent years, CRA lending has been accused of contributing to the mortgage meltdown in 2008, the assertion being that such loans were inherently unsafe.
In point of fact, the FRB has examined the statistical evidence and concluded that their empirical research did not validate any relationship between the CRA and the 2008 financial crisis.
In 2008 the FDIC's Chair Sheila Bair - who is also addressing the forthcoming meeting - noted that the majority of subprime loans originated from lenders were not regulated by the CRA. She asserted that CRA was a "scapegoat," and stated: "I want to give you my verdict on CRA: NOT guilty."
Whatever your thoughts - whether you think CRA encouraged a loosening of lending standards or dispute that CRA was a significant cause of the subprime crisis - LMI did not go away, and the FDIC now clearly wants to explore its strengths and weaknesses in an effort to "restore LMI mortgage lending and sustainable homeownership."

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  • FDIC: Advisory Committee on Economic Inclusion (ComE-IN) 
  • Conference: "Principles for LMI Mortgage Lending, Teaching Financial Education, and Policy and Projects Updates"
  • Date: March 2, 2011
  • Location: FDIC Headquarters, 550 17th Street N.W., Washington, DC
  • Webcast: Presentation

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FDIC: Advisory Committee to Discuss Principles for Low- and Moderate-Income Mortgage Lending and Supporting Financial Education
Press Release
February 24, 2011