The number of subprime-related lawsuits is outpacing those during the Savings and Loans crisis in the early 1990s, according to a press release from Navigant Consulting Inc.
Per the study, subprime mortgage cases filed in 2007 alone equaled half of the 559 Savings and Loan suits over a multi-year period handled by the Resolution Trust Corporation, who oversees the liquidation of insolvent thrifts.
“The S&L crisis has been a high water mark in terms of the litigation fallout of a major financial crisis. The subprime-related cases appear on their way to eclipsing that benchmark,” said Jeff Nielsen, managing director of Navigant Consulting.
The number of filed lawsuits linked to subprime nearly doubled during the second half of 2007, from 97 to 181, with a total of 278 cases for the year.
The cases were made up of borrower class actions (43 percent), securities cases (22 percent), and commercial contract disputes (22 percent), as well as bankruptcy, employment, and others.
Fortune 1000 companies were named in more than half of the cases, and mortgage bankers and correspondents were the most common defendants, involved in about a third of the suits.
“This appears to be just the beginning,” said Nielsen. “We are already observing a steady acceleration of continuing litigation activity into 2008. The course of regulatory investigations, the prospect of government intervention and marketplace variables may affect the volume of filings, but the explosion of cases in 2007 suggests a daunting forecast of what is still to come.”
The group found that roughly half of the suits were filed in courts in either New York or California, focusing on mortgage brokers, lenders, appraisers, title insurance companies, homebuilders, servicers, and more.
Nearly a century ago, Congress created the Federal Home Loan Bank system (FHLBs) to promote home ownership and provide liquidity to thrifts (savings and loans) and insurance companies that primarily provided mortgages at that time. Today’s financial system is radically different: Thrifts are synonymous with banks; mortgage lending originates from within and beyond the banking system; and securitization has become the driving force for liquidity in the housing finance marketplace. In light of these systemic changes, it is time to reassess the purpose and mission of the FHLBs. Their regulator, the Federal Housing Finance Agency (FHFA), has launched a comprehensive review.
The Brookings Institution’s Center on Regulation and Markets, Boston University’s Review of Banking & Financial Law, and Boston University School of Law co-hosted a forum to discuss and debate how the FHLB system is working, what its mission should be, and what reforms, if any, should be undertaken. We heard from a wide range of experts, including current FHFA Director Sandra Thompson, former FHLB regulators, affordable housing advocates, and leading academics and researchers. Here are four key take aways from the event, which can be watched in full here.
1. Are the Federal Home Loan Banks focused on their mission to promote housing?
The homeownership rates for white households was 75%, compared to 45% for Black households
Supporting housing finance is the original purpose of the FHLB system, but there is no requirement that members use FHLB advances to promote housing. Lisa Rice, president and CEO of the National Fair Housing Alliance, described the mortgage market system’s problematic institutionalized preference toward white Americans, noting that mortgages were not “made universally available to people… [these policies] systematize the association between race and risk in our financial markets that is still with us today.” She called on the FHLBs and the broader housing finance system to prioritize reducing the racial disparity in homeownership. In the second quarter of 2022, the homeownership rates for white households was 75%, compared to 45% for Black households, according to the Department of Treasury. At nearly 30 points, the racial homeownership gap is higher today than it was in 1960. She cited small mortgage loans (under $150,000) and special purpose credit programs as models to be promoted.
Ms. Rice urged “bold,” not “incremental,” change for the FHLBs while Kathryn Judge, Harvey J. Goldschmid Professor of Law and vice dean at Columbia Law School, called this an “exciting moment” for rethinking the role of the FHLBs.
Panelists brought up the case of Silvergate Bank, a bank that primarily supports cryptocurrency actors which borrowed heavily from the FHLB system, particularly in recent times of stress, as an example of how the FHLB system’s focus has strayed far from housing. The conversation highlighted that the FHLBs focus on the type and quality of collateral for their advances rather than the purpose for which the banks use those advances.
Those advances generate profits and the FHLBs have long been required to pay a share of their profits toward affordable housing through the Affordable Housing Program (AHP) they administer. Luis Cortes, founder and CEO of Esperanza and a former member of the FHLBank of Pittsburgh’s board of directors, asserted that FHLB provisions do not go far enough, stating that the current rate of 10% of profits for AHP amount to “getting gamed by the membership,” given the value the FHLBs provide to their members. He stressed that the role of government is not recognized and that a 50/50 partnership is in order. George Collins, former chief risk officer for the FHLBank of Boston, agreed, citing an annual government subsidy of $5-$6 billion for the FHLBs shifting the burden of progress onto member banks. “I really think that it’s in the best interest of the members to jump forward here … because the members get a lot of benefit from the home loan bank system.”
Julieann Thurlow, president & CEO of Reading Cooperative Bank in Massachusetts and chair-elect of the American Bankers Association, raised another key purpose of the FHLB system: to promote community banks and their ability to lend and serve locally. She discussed the value FHLBs provide to community banks, stating: “It is foundational as far as a liquidity source.” The mortgage market structurally has moved toward commoditization whereby mortgages are originated by national lenders (often non-banks), sold into securities, and then serviced by for-profit specialized servicing companies. Thurlow pointed out the value that community banks bring, as individuals can “walk through the front door of a community institution,” not resorting to a 1-800 number. One of the many lessons of ‘08 Financial Crisis and housing market disaster is that just originating a mortgage is insufficient, unless that mortgage is sustainable, which requires adequate resources should the borrower encounter financial difficulty.
2. Are the FHLBs properly regulated?
Congress created the FHFA to better regulate the FHLBs during the midst of the financial crisis in 2008. FHFA replaced the Federal Housing Finance Board, whose former chairman Bruce Morrison, made the point that a government-sponsored entity (GSE) “…should not exist unless they have a clear public purpose, and they perform that purpose … it’s not good enough that they’re safe and sound.”
Professor Judge built upon this point, connecting the recent Silvergate lending episode to questions about whether FHLB regulation even considers what purpose banks are using the GSE subsidy for: “[This] might actually not have been a failure of supervision, which begs a much bigger question about the mission drift … supporting a bank that could corrupt the perception of safety and soundness of banking system generally.” She posed the question of how access to FHLB liquidity may have influenced the risk appetite of Silvergate. This exposes the tension between the FHLB system and the Federal Deposit Insurance Corp (FDIC) as the ultimate guarantor of system advances.
“Total avoidance of bank failure is not necessarily a good thing”
The FHLB system is designed to provide liquidity for its members, but due to the FHLB’s super-lien priority over the FDIC, they can shift any lending losses to the FDIC’s deposit insurance fund when a member bank fails. Brookings’s Aaron Klein argued that total avoidance of bank failure is not necessarily a good thing, as some banks that make bad business model decisions deserve to fail. He cited a paper by fellow panelist Scott Frame, Vice President of theFederal Reserve Bank of Dallas, “The Federal Home Loan Bank System: The Lender of Next-to-Last Resort?” as evidence that the FHLB system acted as a lender-of-first-resort to some of the largest originators of subprime mortgages who eventually failed (or would have failed) during the housing and financial crisis of 2007-2009, IndyMac being the prime example. Frame commented that the regulatory problems remain, saying “The primary regulators don’t have any particular say, certainly about any specific advance or anything. This is a business arrangement between the members and their home loan bank.”
Former FHFA Director Mark Calabria, who helped write the law creating FHFA while a senior staffer for Senator Richard Shelby (R-AL), noted the structural limitations of the current regulatory structure: FHFA regulates the FHLBs, but FHLB members are regulated by federal and state banking regulators and state insurance regulators. This was not always the case. Until the 1980s, as the prior regulator of FHLBs, the FHFA also regulated thrifts who were then the major members of the FHLB system (along with insurance companies). This raises questions of inter-regulatory coordination, particularly between liquidity lenders such as the Federal Reserve and FHLB, supervisors, and the FDIC as receiver of failed banks.
3. What reforms should be made?
Michael Stegman, from the Urban Institute, observed that considering executive compensation at the other GSEs may prove fruitful. “The GSEs have a scorecard where performance is tied to … mission-critical activities … we ought to think about how that kind of incentive … can influence compensation.” Klein agreed with Stegman’s idea on executive compensation. He added three ideas: restricting banks to membership in a single FHLB; a restriction on how much one FHLB can lend to a single member; and greater FHLB participation in supporting lending for projects that fill the gap between five to 49 units and mixed-use development. Dennis Shea, executive director at the J. Ronald Terwilliger Center for Housing Policy, stressed that regulators should do more about housing supply. “This area of five to 49 multi-family [housing], which has been traditionally underfinanced, is a worthwhile idea.” Furthermore, on the issue of transparency, Shea asserted that a government assessment of the value of the taxpayer subsidy provided to the FHLBs and their members and the public benefit they provide would prove helpful.
“Regulators should do more about housing supply”
Megan Haberle, senior director of policy at the National Community Reinvestment Coalition, called for greater regulatory clarity on advances, stating: “Not only tracking the advances, [but] attaching stronger strings to them … we want to make sure the advances are attached to that core purpose.” She also called for expanding usage of Community Reinvestment Act (CRA) performance by the FHLBs as well as performance for first time homebuyer support, nothing that under current law many members of FHLBs such as insurance companies and mortgage businesses are not covered by CRA.
Mr. Stegman advocated that GSEs, should not be able to lobby, citing the $3 million spent in lobbying fees in 2021. He also proposed mandating member banks use the community investment program advances to support affordable housing initiatives. The myth of “zero public subsidy” of the FHLBs needs to be dispelled, he said, citing the six notches that the credit rating agencies ascribe to the implied taxpayer support of FHLB debt.
4. View from the top
In the keynote fireside chat, Boston University’s Cornelius Hurley interviewed Director Sandra Thompson regarding the FHFA’s review of the FHLBanks’ mission, as well as proposed recommendations for the future. Director Thompson agreed that member banks could do more to promote affordable housing. “They’re fulfilling their liquidity prong very well, but with regard to affordable housing and community investment … they could do better.”
Responding to Mr. Hurley’s question asking whether taxpayers are “stakeholders” in the FHLBanks, Director Thompson responded, “Absolutely,” citing the implied taxpayer guarantee of all FHLB debt and their exemption from paying taxes among the reasons. She also said, “The status quo is not acceptable.”
“The status quo is not acceptable.”
Mr. Hurley inquired about board composition and executive compensation, asking if FHFA can ‘pull any levers’ in the area. Director Thompson directed her answer about executive compensation to the forthcoming report and its recommendations, which will include both legislative and regulatory recommendations. Regarding compensation, she mentioned that she did not set executive compensation levels or ranges but that she has the authority to deny. She offered insight about what diversity in board composition looks like. “When we talk about diversity, not only is it just race, gender diversity, but it’s also diversity with some of the board members and their experiences,” citing an example about representation in districts that have significant tribal communities.
Next Steps: FHFA is continuing its listening sessions and roundtables and has invited comments to be submitted by March 17, 2023. The Review of Banking and Financial Law will be publishing further materials dedicated to proposals on FHLB reform. The call for papers can be found here.
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.
In today’s financial landscape, consumers want a more individualized experience that may be lacking in traditional banks. This is one key factor contributing to the rising popularity of credit unions as a viable alternative.
Primarily, credit unions offer customers the opportunity to actively participate in their running, as well as access to more competitive interest rates. There are many other benefits, too.
But before we get into all that, what exactly is a credit union, and how different are they compared to banks?
What is a credit union?
If you’re thinking of joining a credit union, it’s a good idea to know exactly what you’re getting. The major difference between banks and credit unions is that credit unions are owned by the members they serve.
Unlike banks, credit unions are not a business needing to make profit. Instead, they can be defined as member-owned nonprofit financial cooperatives.
Where a bank makes profits, a credit union instead recycles funds back into itself. The result is that credit union members have access to better rates on savings and loans.
Credit unions are also much more personal and community-focused compared to traditional banks. As a credit union member, your deposits in checking and savings accounts actually help other members of your community to buy their first homes and establish businesses.
Because credit unions function as cooperatives, all members get to vote on major governance issues such as electing board members and directors.
What are the benefits of joining a credit union?
Credit union membership comes with several benefits. Some are well-known and immediate, while others might take a bit more time to see. Let’s take a closer look at how a credit union account could improve your life.
Personalized Customer Service
A credit union will have a much smaller customer base compared to a traditional bank. That, along with the fact that they are member-owned financial institutions, means credit union service comes with much more of a personal touch.
Some credit unions also provide great educational resources to help improve the finances of their members. You’re also more likely to have the chance to build a relationship with employees at your credit union, since they will also be members of your local community.
Better Interest Rates
The bottom line for credit unions is not profit, but being self-sufficient and providing good service to its members. This means that instead of making money off of customers, excess profits are passed onto customers in the form of competitive rates:
Lower interest rates on loans. Credit unions often offer better loan rates than most banks. While loan products may be more basic, you can still get mortgages, auto loans, and personal loans at better rates.
Higher interest rates on savings. Credit unions are a great place to deposit savings, as the interest rates on savings accounts are much higher than normal.
Lower Fees
Credit unions tend to have significantly lower fees across the board. Monthly maintenance fees, opening or closing account fees, and overdraft fees, are often minimal or non-existent with credit unions.
In many cases, opening a checking account with a credit union will cost you nothing.
Better Mortgage Accessibility
Credit unions can sometimes help members overcome barriers that might prevent them from obtaining a home loan. For example, if your credit history is lacking, your credit union might be willing to provide a loan where a bank turns you away.
This is just one aspect of the many relationship-building benefits that come with credit union membership. A credit union will also be more interested in helping you to navigate any difficulties that you may experience when paying off your loan.
Also, it helps to know that when you take out a mortgage with your credit union, that loan stays with them. When you take out a home loan through a bank, your loan is likely to be sold off to a larger lender, with interest proceeds going there instead.
With a credit union, you know that your money is going back into your local community.
Community Oriented
Credit unions are naturally community oriented. Because every credit union is essentially a cooperative, you’re actually an active part of a financial institution. Furthermore, taking into account common membership requirements, credit union members often live in the same community.
This is another reason why credit unions are increasingly popular as alternatives to banks, which rarely bring that sense of community and belonging.
Voting & Governance
Credit union membership means you get to actually have a say regarding how the institution is run. All members can vote on important decisions, including the selection of board members. Credit union members are all equal co-owners.
This is obviously in stark contrast to all traditional banks, which are run exclusively by owners and non-elected board members.
Variety of Service
While credit unions are often thought of as having less products compared to a bank, there actually may be a greater variety of services available. In addition to financial education and counseling, credit unions offer checking accounts, savings accounts, branches with other credit unions, as well as various loans and credit cards.
Many credit unions are focused on providing as much support to their members as possible, and regularly seek feedback on how to improve their services.
Insured Deposits
Just like with FDIC insurance at a bank, a credit union will have regulated deposit insurance. A federally insured credit union will be protected by the National Credit Union Administration, via the National Credit Union Share Insurance Fund. Some state credit unions are also insured by the same body, if not privately.
The NCUSIF is backed by the U.S. government and covers individual member deposits up to $250,000 at all federally insured credit unions.
See also: Best Nationwide Credit Unions of 2023
What to Consider Before Joining a Credit Union
We’ve looked at the many benefits of joining a credit union. It’s only fair to consider that there are some potential downsides, too. Here’s what you should be aware of if you’re considering credit union membership:
Exclusive Membership
Most credit unions are only open for those living or working within a specific community or profession. Although there are exceptions to this, it’s important to know that there may only be a handful of credit unions you can realistically join.
Limited Location Availability
Many credit unions are small institutions, with just one or two brick-and-mortar branches. If you need to conduct in-person business at your credit union, you may have to make a trip out of town. This could also narrow the pool of feasible credit unions you can join even smaller, especially if you like to bank in person.
Fewer ATMs
Unlike large banks, credit unions don’t have extensive ATM networks available. Instead, most credit unions will only have dedicated ATMs attached to a branch.
While you will still be able to use non-network ATMs to conduct basic banking transactions, you’ll be subject to fees for the service.
Limited Technology
One major downside of credit unions is that some of them are lacking in technology. When it comes to websites, mobile apps and online banking options, credit unions may often fall behind compared to big banks.
If online banking is a priority for you, make sure to look for a credit union with well developed online services.
Less Credit Card Options
While some big credit unions will do their best to compete with large banks, smaller credit unions are unlikely to have the same variety of credit cards available.
If you’re set on landing a credit line that comes with big rewards programs and sign-up bonuses, you might be disappointed with a credit union’s offerings.
Benefits of a Credit Union – FAQ
Can anyone join a credit union?
Credit unions are not exactly exclusive clubs, but in many cases there are certain requirements needed to become a member. Generally speaking, large credit unions operating several branches will be easier to join than smaller, localized ones.
Credit unions are designed to serve their communities. As a result, some are strictly for employees of a certain organization, while some are geared to anyone living or working in a designated community.
You can usethis website to find credit unions that are local to you, and find out which options you’ve got.
Is it better to keep my money in a credit union or a bank?
The answer depends on your own unique financial needs and priorities. While credit unions often have better rates for savings and loan products, banks don’t have membership exclusivity.
A bank may also just be a more convenient option for you, especially if you’re looking for specialized financial products or slick online banking services.
Are credit unions safe?
Yes. Storing your money in a credit union is just as safe as using a bank, provided your credit union is insured by the National Credit Union Administration. Don’t take it for granted that any credit union you join is suitably secured.
Bottom Line
Better rates on savings, loans and a personal touch are some of the biggest benefits to credit unions. However, as we’ve seen, there are potential downsides that could disrupt your plans of joining a credit union.
Before making any changes, be sure to research the credit unions in your area. Keep in mind that services and rates can vary widely between credit unions.
Once you’ve found a credit union you can join, you’ll want to compare rates, fees and other details to maximize the benefits.
At first glance, Iâm wondering why he didnât list it for $10,999,999, but shoot, he probably has a reason. Legendary investor Warren Buffett has finally listed his vacation home located at 27 Emerald Bay in Laguna Beach, CA for $11 million. It seems heâs finally ready to take some profits after breaking even â oh… Read More »Warren Buffett Just Listed a Home for $11 Million That He Paid $150,000 For
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Savings and loan associations are financial institutions similar to banks that specialize in providing mortgage loans to home buyers, making loans from deposits usually gathered from the local community. Both borrowers and depositors are considered members rather than just customers ⦠Continue reading â
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