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House Committee on Government Operations agreed that "HUD's monitoring of mortgage servicing practices has been largely ineffective." 784t attributed HUD's lack . of success to inadequate staff, training, and guidance and to infrequent audits.

HUD's ineffectiveness is no small matter. It has cost the federal government more than $1.7 billion in losses on foreclosure sales and $300 million in interest on money borrowed from the Treasury to pay off mortgages.

A recent report by Ralph Nader's Housing Research Group provides the best analysis of the operations and failures of the HUD regulatory system. It analyzes in detail each of the divisions of HUD which relates to mortgage regulation and their performance, summarizing its conclusions as follows: "HUD's system for catching mortgagee misconduct thus appears to have more holes than net.

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The new Administration has introduced a number of changes in the MRB, including a revision of Board membership. The Assistant Secretary for Neighborhoods, Voluntary Associations and Consumer Protection and the Assistant Secretary for Administration were added to the Board. The Inspector General was designated as a nonvoting advisor to the Board. It has been decided that the Board will meet at least once a month and will review all audits conducted by the Inspector General's office of FHA-approved lenders. In addition, Secretary Harris has promised that the Department "will allocate needed resources to increase monitoring and improve efficiency." 80/

But these changes do not begin to get at the more basic issues of the conflict between production and regulation, and the lack of tough standards for licensure and debarment. They present a welcome beginning to reform, but far less than is necessary to protect HUD and the neighborhoods against continuing problems.

CHAPTER V

CONCLUSIONS AND RECOMMENDATIONS

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The mortgage banking industry is an economic giant, financing one-fifth of all America's mortgages, serving as a central instrument of federal housing policy. Yet it is unknown to most people and only sporadically regulated by government. It occupies a unique and favored position.

That position has been abused by many firms,

with devastating results. Detroit, Philadelphia, Chicago, Los Angeles, and Seattle are the best-known examples of cities which have suffered from careless underwriting and "fast foreclosures" and abandonments. Flint, Harrisburg, Compton, Inkster, and many other lesserknown cities are also riddled with abandoned units and vacant lots because of the same problems and, often, the same firms.

Many of the abuses continue unabated. Los Angeles is now witnessing a major scandal involving a commercial bank in transactions like those witnessed frequently among mortgage bankers; Pittsburgh is experiencing severe problems because of apparently improper loan servicing by the nation's largest firm; the firms which participated in the destruction of Chicago's Austin and West Englewood neighborhoods are now at work in Marquette Park.

Mortgage banking is indeed an industry "fraught with opportunities for abuse." FHA and VA offer the industry near 100 percent insurance against risk, issue licenses to virtually any firm which applies, structure their programs to encourage firms to originate as many mortgages as possible, give firms little incentive to forebear if the borrowers default, and exercise practically no supervision over their performance.

FHA and VA both have dual, directly conflicting purposes. They encourage a maximum volume of loans in order to make easy financing available as broadly as possible, but they also are responsible for enforcing

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standards on lending which may have the effect of reducing lending in order to protect federal and consumer interests. Even in the best of circumstances, it would be difficult for an agency to be responsible for such conflicting tasks. But the current system of regulation does not even begin to provide the best of circumstances.

The regulation of mortgagees is clearly of secondary concern at HUD. It is left to a fragmented series of offices, a little known Board with no staff, and a circuitous, often ad hoc process of reviewing complaints.

Consumers are given no role in decision-making on the issuance of licenses or the review of performance. Their only access is through the courts or massive political pressure. And they have little or no help at the local level as they pursue efforts to save a single home or spur broadscale reform.

In short, the situation is ripe for thoroughgoing reassessment and reform. If nothing is done, or if there are only piecemeal changes, the situation will continue to fester, leaving the industry still tempted by the enormous opportunities to profit from policies which injure neighborhoods, home-buyers, and FHA itself.

In this report, the Neighborhood Revitalization Project has looked at how the industry operates and earns a profit: what particular incentives, disincentives, and economic factors provide the background for the abuses; and how HUD has tried to guard against the abuses. The remainder of this chapter discusses a number of recommendations which would lead to a substantial change in the way the industry operates. The recommendations go well beyond simply cracking down on abuses. They are also directed towards:

increasing public and federal agency under-
standing of the industry and how it operates;

increasing the role of consumers in decision-
making on mortgagee questions; and

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reforming certain FHA policies which are
currently destructive to neighborhoods and
consumer interests.

PUBLIC EDUCATION

As a first step, the Project recommends that both the Congress and the Department of Housing and Urban Development conduct immediate surveys of the mortgage banking industry and its current and future relationship to federal housing policy.

It is of vital importance that there be greatly increased public understanding of the causes as well as the symptoms of the problems discussed in this report. The overall functioning of the industry must be understood so that a process of serious consideration of alternative public policies can begin quickly.

The Senate and/or House Committees should conduct extensive hearings on the role of the industry within the U.S. financial structure, concentrating especially on the issues raised in this paper. The hearings should focus on: the role of mortgage bankers in directing a flow of capital into housing and urban areas; how the current system of incentives, disincentives, and regulation is working; and what alternative forms of strengthened regulation might be advisable. They should be conducted for their broad educative effect on Congressional leaders and the public, as well as for consideration of specific immediate legislation.

The National Commission on Neighborhoods should also explore the questions raised in this report. It should move quickly to develop recommendations concerning changes in federal policy which would ensure that mortgage lending practices enhance neighborhood reinvestment and revitalization.

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The Project recommends that the Federal Home Loan

Bank Board take the lead in working with other federal

agencies to create a coordinated data collection system on

mortgage banking.

Effective regulation of mortgage banking and analysis of future policy toward the industry are currently hampered by the fragmentation of data collection among federal agencies. HUD, VA, the Federal Home Loan Bank Board, FNMA, GNMA, the Federal Reserve Board, the Controller of the Currency, and the Securities and Exchange Commission all have some relationship to the industry and thus some familiarity with it, but they do not share information on any regular coordinated basis.

It is essential that there be closer collaboration. This will depend upon one agency taking the lead role. Because of its close working knowledge of local mortgage markets and the secondary market, and its independence from the mortgage banking industry, the Bank Board seems to be especially well placed to have primary responsibility for ongoing data collection and review of the entire industry. Its efforts should be coordinated with HUD and VA through a joint task force, following the precedent of such interagency cooperation set by the Urban Reinvestment Task Force.

The Congress or the Department should also commission a study which looks into the relationship between mortgage bankers, real estate firms in metropolitan areas, and the effects of these relationships on competition and capital

allocation.

It should explore the ties between the industry and Real Estate Investment Trusts (REITS), commercial banks, and insurance companies, with special attention to concentration trends. Since the last comprehensive survey