It's Time to Nail Down Subprime Loans Crisis
11/7/2007
Source: Maureen Downey, The Atlanta-Journal Constitution

Describing the wreckage of the subprime mortgage collapse as part of the normal business cycle is akin to characterizing the devastation of New Orleans as the aftermath of a seasonal downpour.

In both disasters, human blunders and government inattention played pivotal roles. And the market can no more be counted on to fix the subprime mess than Mother Nature could be trusted to fix up the mess after Hurricane Katrina.

Government must intervene quickly and firmly in the subprime fiasco, in helping desperate borrowers keep their homes if possible and, more important, in ending abusive lending practices that contributed to the national leap in mortgage defaults and foreclosures.

New federal and state laws must couple strong prohibitions against abusive lending with equally strong enforcement and consequences. The pain must be felt by the duplicitous mortgage brokers who talked the homeowners on Elm Street into loans with hidden brokerage fees and unnecessarily high interest rates all the way up to the investors on Wall Street who profited from the bundling and selling of these subprime loans.

Here in metro Atlanta, about one in four home buyers in recent years has turned to a "subprime" loan, which carries a markedly higher interest rate than "prime" loans offered to borrowers with better credit histories and money for a down payment.

Besides hidden fees, subprime mortgages often contain prepayment penalties that bind borrowers to the loans for several years, making it difficult if not impossible for borrowers to get out from under them.

Increasingly, research shows that race has also played a role in who gets sold a subprime loan. Forty-one percent of black home buyers in metro Atlanta earning more than $100,000 a year got a subprime mortgage, compared with 7 percent of whites with the same income.

Subprime loans are about 10 times more likely to fail than prime loans.

"This is a crisis," says William Brennan, director of Atlanta Legal Aid's Home Defense Program for the last 19 years and one of the first consumer advocates to warn Congress of the coming meltdown.

"More than two million subprime mortgages have already failed or will end in foreclosure," says Brennan. "In metro Atlanta, every month thousands of families are losing their homes to foreclosure. On the courthouse steps today, more than 6,000 homeowners were facing foreclosure."

Entire communities are being destabilized by widespread foreclosures; studies show that every foreclosure cuts the value of neighboring properties by 1.2 percent. As House Financial Services Committee Chairman Barney Frank (D-Mass.) said at a hearing on Capitol Hill, "... if you own a home, and you are paying your mortgage, and the house across the street is foreclosed upon, and three houses down another, you've got a deterioration in the neighborhood. You get vacant housing which becomes a source of difficulty. You get a deterioration of property values."

Frank has introduced the Mortgage Reform and Antipredatory Lending Act, which would prohibit mortgage lenders and brokers from taking kickbacks to entice borrowers into overly expensive loans; require lenders to verify that the borrower has a reasonable ability to repay; hold banks that package mortgages for investments liable for lending-law violations; mandate the licensing of mortgage brokers; and impose limits on penalty charges to borrowers who make their payments early.

Those provisions essentially come down to requiring honest, ethical business practices. But the bill lacks any real remedies to the current crisis, a failing that worsened Tuesday when Frank brought forth an amendment that would hand Wall Street investors — Public Enemy No. 1 in the subprime meltdown — a free pass.

"It creates a simple standard for Wall Street to meet to avoid all liability," says Ira Rheingold, executive director of the National Association of Consumer Advocates. "And it pre-empts states from taking any action or legislation against Wall Street even though investors are the ones who need the least protection."

To keep Wall Street honest, borrowers need to be able to legally pursue underwriters who put the mortage-backed securities together in pools, the investors who buy the pools, the trustee banks who own the mortgages in the pool and the mortgage servicers who collect the loan payments

The surge in subprime lending has been a direct result of Wall Street's vaulting enthusiasm for bundled subprime loans. About 75 percent of all subprime loans made in 2004 and 2005 were sold in the secondary market. Yes, some of the loans went bad, but profits from the others more than covered the losses for a while.

"However, as housing prices and interest rates were rising, less loans should have been made," says Rheingold, who was in Atlanta recently to testify on subprime loans. "But Wall Street had developed too great a fondness for these bundles. So the exotic loan products with low teaser rates were created to keep up demands for loans."

Among the homeowners who spoke at the Georgia hearing was Nessia Jones, 54, who lives with her mentally retarded daughter on a small pension and disability income in the DeKalb County home she's owned for 26 years. Combined, she and her daughter make $1,266 a month. Yet a mortgage broker doctored refinancing documents to reflect that Jones drew nearly $4,000 in Social Security disability income each month.

"If I made that much money, I wouldn't have needed to refinance to repair my house," says Jones. Instead of a single mortgage, Jones discovered later that the refinancing had saddled her with two mortgage loans and monthly payments of $1,500.

Before the refinancing, Jones had a credit score of 700; now it's down to 400.

"I can't get credit from anyone now," she said.

When Congress and the Georgia Legislature consider the fallout from the subprime implosion, they ought to remember that Jones and others like her are its real victims, not Wall Street.