WORD ON THE STREET: We can all agree that many factors contributed to the housing crisis. First, the loose underwriting standards employed by aggressive mortgage brokers and originators made it possible for too many people to buy overvalued houses on terms they couldn't afford to repay. Many of these brokers were under-regulated, and they often had compensation structures that ignored risk.
In addition, securitizers and rating agencies failed to recognize the significant, and systemic, risks underlying mortgage-backed instruments. And when the housing bubble burst, the mortgage industry did not have the operational capacity to implement viable loan modifications on a large scale or properly manage foreclosures. Modifications were further complicated by the variety of players and competing interests in the mortgage lending, servicing and securitization chain.
These are but a few of the challenges we have encountered and are working to address in order to support continued housing market recovery. Our collective wisdom and insights will be necessary as we work to help restore the mortgage and housing markets. Actions the Office of the Comptroller of the Currency (OCC) is taking right now include support for the issuance of Dodd-Frank regulations that ensure additional consumer protections and that mitigate the potential for future systemic risk events in financial markets.
The federal banking and housing agencies are working on a final risk-retention rule for securitizations, including mortgage-backed securities, that would give securitization sponsors a greater financial stake in the quality of the mortgages that they package into securities. These rules aim to re-establish the link between the credit availability to consumers that is facilitated by the secondary mortgage market on the one hand, and sound underwriting of those mortgages on the other. We are also consulting with the Consumer Financial Protection Bureau on forthcoming mortgage servicing standards.
Secondly, the OCC continues to address violations and unfair treatment of mortgage borrowers and other financial service consumers through a number of active enforcement cases. As you know, the OCC and other regulators issued consent orders against major mortgage servicers for unsafe and unsound foreclosure practices last year. This past summer, we also took enforcement actions against large banks for compliance deficiencies under the Servicemembers Civil Relief Act, including those associated with harmful and illegal foreclosure actions against members of our armed forces, and for the practice of steering minority borrowers into higher-priced subprime loans.
Finally, the centerpiece of OCC supervision is the management of risk, from credit underwriting to market risk to operational risk. Excellence in financial institution risk management is key to avoiding episodes of costly operational risk that harm all of us, including vulnerable mortgage borrowers.
We are seeing much more prudent underwriting today and, as a result, we are also seeing improved borrower performance and reduced mortgage credit risk exposure. The OCC's Mortgage Metrics report for the second quarter of 2012 showed improved performance over the same period in 2011. In particular, seriously delinquent mortgages fell to their lowest level in three years. Home retention loan modifications were a contributing factor to the improvement. Home retention actions increased 18% from the prior quarter, and retention actions outnumbered foreclosures.
Homeownership has been a key element of the American dream, and it can be an important asset-building tool, particularly for minority and lower-income families. Indeed, one of the greatest tragedies of the financial crisis has been the disproportionate harm inflicted on borrowers from historically under-represented populations, especially those who were misled about the mortgage obligations they were taking on.
The challenge we face today is how to preserve the sustainable homeownership opportunities that have been achieved while moving to adopt policies and implement programs that will responsibly build new homeownership opportunities. Because of the economic challenges facing minorities and lower=income families, it is critical that we understand precisely what the barriers are to accessing mortgage credit, so that we can address them with appropriate strategies. Fortunately, data is available that can help us better understand the hurdles to homeownership and perhaps point us to the most appropriate solutions.
When we look at the reasons for denials of conventional loans as well as Federal Housing Administration (FHA) or Veterans Affairs loans, two categories stand out: collateral-related issues and debt-to-income considerations. Potential home buyers need to understand how critical good credit is to achieving homeownership, because stricter underwriting guidelines now require higher quality credit. The median credit score for home buyers has increased by 40 points since 2006 with credit scores now averaging around 700 for FHA mortgages and government-sponsored enterprise mortgages rising to over 760.
Lack of a down payment is another potential barrier to homeownership. Last year almost half of owner-occupant home borrowers used FHA financing, which offers low down payment options. Declining home values, while potentially placing more housing stock in reach of buyers, also provide challenges to existing and potential homeowners. Appraisals are a critical component of determining value. Reduced property values can keep current homeowners from refinancing to take advantage of historically low interest rates.
Prospective new buyers and sellers may encounter difficulty when the purchase price doesn't match up with the appraised value. That is why OCC guidance emphasizes that lenders must obtain reliable appraisals to determine the market value of collateral and that they must choose appraisers based on their competence, experience and knowledge of the market.
Despite the difficulties facing current and prospective homeowners, there is some evidence that the housing environment overall is improving. There is a growing consensus that housing prices have bottomed out in many areas of the country and that home prices are increasingly affordable for buyers. Mortgage interest rates are at historic lows. While those trends are encouraging, it's clear that we have a long ways to go to ensure that aspiring homeowners, particularly in minority and underserved communities, have access to financing.
It is more critical than ever that we all work together to ensure that these families have access to mortgage credit that is available on fair terms, and that lenders realistically evaluate borrowers' ability to meet those terms.
Thomas J. Curry is the Comptroller of the Currency. This article is adapted and edited from a recent speech delivered before the Massachusetts Affordable Housing Alliance. The original text is available online.
