SECONDARY MARKETING IS OF FAR greater importance in the United States than anywhere else in the world. The drivers of secondary marketing, as well as the industry structure, have several structural components that have created problems that do not exist elsewhere. Most notably, the industry has come under increased scrutiny for predatory lending and lending bias-both forms of discrimination. Though appearing as separate issues, they are in many ways connected.
In this issue of Mortgage Banking, numerous current secondary marketing topics are addressed. An underlying theme in several of these topics is the line between fair access and discrimination. Predatory lending, affordable housing and risk-based pricing (RBP) all share this fundamental struggle.
On the one hand, the industry wants to expand its customer base, make mortgage money more widely available and remove the restrictions on how homeowners use and access their equity. However, they also need to make good credit and lending decisions, maintain the ability to sell loans to investors and balance a customer's risk with their return requirement.
Some might argue that the very nature of lending--credit decisions, pricing and even terms--is inherently discriminatory. The truth is, it is discriminatory, and it must be. A bank must meet its community (societal) objectives while observing its fiduciary responsibilities to the community and to its stakeholders. This is no different than the college admissions process or the national tax code.
How then does the industry balance these often opposing fundamentals? Well, for starters, the industry must police itself. Freddie Mac and Fannie Mae have made inroads into the alternative-A paper arena, reducing the barriers of access for hundreds of thousands of "credit-challenged" and low-income families. They have also published and are enforcing policies and prohibitions against predatory lending. Simultaneously, they are moving ahead with RBP to better segment the risks of their various customers and to meet the fiduciary responsibilities they have to their stockholders and other stakeholders.
Most lenders have taken similar steps within their domain. New products are allowing more customers to purchase homes and extract equity (such as reverse mortgages), and allowing lenders to share the risk of these products with investors better equipped to manage it. However, it is clear that the industry needs to be carefully monitored for full...