Attack of the Mortgage Vultures

George Bush likes to boast about the high rates of homeownership. But today in America, millions of homeowners are at risk of seeing their prized possession taken right out from under them.

Over the last decade, we have been witnessing some of the most brazen acts of mortgage entrapment ever to hit the American housing market.

Subprime lenders have coaxed eager consumers to buy or refinance their homes often with no money down, and at seemingly low interest rates. But now millions of homeowners are paying way more than they can afford.

Their dream of homeownership has quickly turned into a nightmare of foreclosure.

And this nightmare is beginning to rattle the economy as a whole.

All the while, the government has stood idly by.

Buying or refinancing a home is not what it used to be. Traditionally, you’d get your mortgage through a savings and loan. The banker there would inspect your income and credit history to see if you could pay back the loan, and you needed to come up with 20 percent of the loan as a down payment. The loan would have a fixed interest rate over fifteen or thirty years. The homeowner would have to set aside money for property taxes and homeowners’ insurance. And the mortgage would stay in the originating bank.

Things are different now, thanks to the so-called subprime mortgage market, which accounts for almost one out of every four home loans currently being written. Today, mortgage brokers barrage consumers with offers of no-money-down loans, and last year, “more than 37 percent of subprime loans were made without verification of borrowers’ incomes,” The New York Times notes. Nor do such lenders typically require borrowers to escrow money for property taxes and homeowners’ insurance.

The terms of the loans are also much different. Adjustable rate mortgages have proliferated, with consumers getting seduced by offers of low interest rates the first two years of the loan only to be slapped with steeply escalating rates in subsequent years.

And the original lending institution now often sells the mortgage on the financial markets rather than hold onto it. When times get tough, faraway investors are even less open to renegotiating terms than local savings and loans were.

The boom in this industry has been extraordinary. “From 1994 to 2005, the subprime loan market grew from $35 billion to $665 billion,” the Center for Responsible Lending notes in a report entitled “Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners.”

But so has the bust. “We estimate that one-third of families who received a subprime loan in 2005 and 2006 will ultimately lose their homes,” the report predicts.

While opening up the possibility of homeownership to people with lesser means or spottier credit is something that progressives have advocated for a long time, the way the private sector has done this has been criminal. “Because the subprime market is designed to serve borrowers who have credit problems, one might expect the industry to offer subprime loan products that do not magnify the risk of loan failure,” the report says. “In fact, the opposite is true.”

First of all, adjustable rate mortgages are inherently duplicitous. They play upon the attractiveness of low interest rates up front, and they exploit ignorance of higher rates later on.

Second, many who get subprime loans could easily have received safer, less expensive mortgages in the prime market but were steered into the subprime loan by a mortgage broker.

Third, these brokers sometimes get a cash bonus from the lender for getting the consumer to agree to a higher interest rate than the lender was expecting. And the broker’s incentive is not to ascertain creditworthiness but to clinch the deal. The broker bears no financial cost if the consumer ends up foreclosing.