As mortgage woes return, lessons from last crisis come to light

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As part of the multibillion-dollar settlements that the Obama-era Justice Department reached with big banks over pre-2008 mortgage fraud, the lenders were often required to give a helping hand to affected consumers.

In the years since, critics have questioned how much consumer relief these settlements actually delivered, and whether the purported relief was appropriately targeted to Americans who were hurt by misconduct from the subprime mortgage era.

This week saw the publication of the most comprehensive effort to date to measure the real-world impact of any of those settlement deals. The report, which was written by a lawyer who monitored Deutsche Bank’s compliance with its January 2017 settlement, reflects a rigorous effort to determine how much benefit accrued to consumers.

The Justice Department has touted the Deutsche settlement as offering $4.1 billion in consumer relief.

The new report finds that Deutsche helped many people in need between 2017 and 2019 by financing their home purchases. But the report does not reach a conclusion on whether those homebuyers would have gotten mortgages without the German bank’s involvement.

Nor does it render judgment on the structure of the settlement, which did not require Deutsche to focus on homeowners who were harmed by its own misconduct, or even the larger group of Americans who landed in trouble after the Great Recession.

The report also notes that many of the benefits that went to lower-income Americans could prove illusory at a time when millions of homeowners are again struggling to make their mortgage payments.

Michael Bresnick, a partner at the law firm Venable who wrote the report, declined to comment on his findings. A Deutsche spokesman also declined to comment on the report.

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The Deutsche Bank settlement was announced just three days before President Trump took office. Subsequently, the Trump-era Justice Department inked settlements with numerous big banks over their pre-crisis mortgage conduct that did not contain any consumer relief provisions at all.

But compared with other settlements reached during the Obama administration, the Deutsche Bank agreement allowed for greater flexibility with respect to consumer relief obligations.

Unlike the DOJ’s earlier settlements with Bank of America and JPMorgan Chase, the Deutsche agreement did not require the bank to offer loan modifications.

Instead, such workouts were one option on a menu of choices available to the bank. After initially pledging to provide modifications, Deutsche backed out of that plan, saying that it would instead fulfill its obligations exclusively by financing new mortgages.

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In order for a new Deutsche-financed mortgage to qualify for credit under the settlement, the homebuyer merely needed to be deemed creditworthy and reside in one of 18 U.S. states that were designated as hard hit, including California, Florida, New Jersey and Illinois, or the District of Columbia. Combined, these states accounted for more than half of the entire U.S. population.

Deutsche Bank does not have a substantial U.S. mortgage lending operation. So in order to meet its obligations under the DOJ settlement, the bank reached agreements with eight nonbank mortgage lenders, each of which got a line of credit from Deutsche to fund new loans. The lenders received incentive payments from Deutsche for each loan that met the settlement’s eligibility criteria.

All told, Deutsche financed more than 379,000 mortgages between 2017 and 2019. The 252,000 loans that the bank financed in 2018 accounted for more than 4% of the total U.S. mortgage market that year, according to the report released this week.

All of the Deutsche-backed loans went to borrowers who met the credit underwriting standards of Fannie Mae, Freddie Mac, the Federal Housing Administration, the U.S. Department of Veterans Affairs or the U.S. Department of Agriculture.

The report released this week features a statistical analysis that compares characteristics of the mortgages financed by Deutsche Bank against publicly available data about all mortgages backed by Fannie, Freddie and federal agencies in 2018.

The report finds that the Deutsche-backed loans were somewhat more likely than the larger pool of loans to go to needy borrowers. Some 14.62% of the loans financed by Deutsche Bank were in census tracts where unemployment was at least 1.5 times the national average, compared with 12.3% for all lenders that were part of the study.

In addition, the average income of borrowers who got Deutsche-backed loans was nearly 15% lower than those of borrowers for all loans that were part of the study.

But within the 18 states plus D.C. where Deutsche got credit for financing mortgages to any creditworthy borrower, the Frankfurt, Germany-based lender did not lend more frequently into distressed areas.

In fact, only 19.47% of the Deutsche-backed loans within those states were in census tracts where the average income is at or below 80% of the low- and moderate-income level, compared with 20.45% of all loans that were part of the study. Loans in the 18 states and D.C. accounted for approximately 83% of all the loans that Deutsche financed.

The report also found that the Deutsche-financed borrowers paid slightly higher interest rates — an average of 4.896% versus 4.779% for all loans that were analyzed.

The report includes an epilogue about the economic damage being wrought by the coronavirus crisis, particularly on less wealthy, first-time homebuyers. “These developments may be having a cruel and unexpected effect on some or even many of Deutsche Bank’s borrowers,” Bresnick wrote.

“None of this, of course, is Deutsche Bank’s fault. It is a reminder, however, that homeownership is not entirely risk-free and despite best efforts to help borrowers and homeowners, economic conditions can change in an instant.”

“In light of this, any future settlement agreements permitting new mortgage loan originations might address this possibility and, to the extent possible, contain provisions to help these new loans remain sustainable.”

Given its timing, the Deutsche report offers a reminder of unresolved matters from the past and a warning of challenges to come, argued Kevin Stein, deputy director of the California Reinvestment Coalition. Stein has been critical of Deutsche for failing to provide loan modifications that could help distressed borrowers stay in their homes

“This settlement reflects the mistakes of the last crisis, where there were no meaningful penalties or consequences for egregious corporate misconduct, where relief designed to keep families in their homes never reached the hardest hit communities,” Stein said in an email Thursday. “Are we going to make the same mistakes again during this crisis?”

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