Subprime Loans = Primetime for Vampire Lenders

By Jim Hightower, Hightower Lowdown. Posted August 22, 2007.

One of the most dramatic stories from the New Testament is of the time that Jesus encountered money changers in the temple. Enraged by their usury and sacrilege, he went on a tear -- overturning their tables, physically driving them out and chastising them for converting the temple into a "den of robbers." The Bible doesn't say where these bloodsucking lenders went, but now we know: They have re-emerged in recent years to set up their tables right here in America, working a dark alley of homeowner financing called the "subprime mortgage market." The what? Don't be deterred by the finance industry's jargon (which is intended to numb your brain and keep regular folks from even trying to figure out what's going on). At its core, this is a classically simple story of banker greed and outright sleaze. And the astonishing part is that nearly all of the rank injustice perpetrated by today's money changers is considered legal and is practiced by supposedly reputable financial firms.

That's when avaricious mortgage hucksters and high-finance manipulators looked upon this broad pool of needy, vulnerable castoffs and suddenly shouted, "Eureka, GOLD!" With interest rates remarkably low, housing prices seemingly on a nonstop rise, and (this is the Big One) practically no regulation of this low-income market, the money changers promptly began to devise clever, Enronian schemes to entice such "subprime" borrowers into high-interest, high-fee loans. Never mind that these families really could not afford (and mostly did not understand) the level of debt being piled on their backs. That was a matter for manana. Today was for raking in profits from the poor.

The subprime schemes are run through an intricate, intertwined system of loan brokers, mortgage lenders, Wall Street trusts, hedge funds, offshore tax havens and other predators. To entrap borrowers, the industry created an arsenal of arcane financial devices and maneuvers known by such exotic names as "exploding ARMs," YSPs, teaser rates, low-doc mortgages, loan flipping and equity stripping. Ultimately, these schemes are scams, extracting high payments from the families, sucking out any equity they might build up and stealing their homes.

This is one of those economic stories, like the savings-and-loan scam of the 1980s, that are usually buried back in the business section of newspapers. But, just as with the S&L collapse, this debacle is growing too big to contain, and all of us need to be paying attention. The built-in traps of the subprime mortgage market have already taken the homes of more than a million people in just the past year, and the dangers are quickly rising for millions more. This collapse in homeownership for the working poor has begun seeping into the rest of the economy, causing thousands of job losses, shaking the soundness and reputations of some major Wall Street firms, and slowly -- ever so sloooowly -- forcing lackadaisical bank regulators and clueless politicians out of their laissez-faire stupor.

How it works

You might have seen some of the come-ons: "Bad Credit? No Problem!" "Zero Percent Down Payment!" "Creative Financing!" "No Documentation Needed!" "Quick and Easy Money!"

The key to building the subprime market is hustle and flimflam -- trying to rush anxious, uninformed people into signing on the dotted line for what they're assured is the deal of a lifetime. Of course, the mortgage industry casts its work in a noble light, asserting that its primary purpose is to help extend the joys of homeownership to the masses. But an examination of key players reveals little altruism.

BROKERS. These are independent, local operators who troll for borrowers in your town and mine, using flyers, doorbells, phone calls, personal contacts, websites, late-night TV ads, data banks and every means imaginable to get low-wage renters to sit still for a home-loan sales pitch or to find vulnerable homeowners who can be talked into taking out a refinancing loan. Brokers don't actually make the loans, service them or have any stake in whether the deals work out. Rather, they are simply "finders" who are paid an upfront fee by the mortgage lenders for every borrower they deliver. And 71 percent of all subprime mortgages come through them.

The pretense is that the broker is the borrower's trusted advisor in the shark-infested waters of banking. Au contraire, Bubba. In most states, agents have no legal responsibility to represent a buyer's best interest. And, in fact, they don't, for the system gives brokers lucrative incentives to deceive borrowers.

Through a common practice called "steering," unsuspecting families are guided into the most expensive, riskiest subprime loans. For doing this dirty job, brokers are paid cash bonuses called "yield spread premiums" (YSPs) -- though you would call them by their more common name: kickbacks. The Center for Responsible Lending reports that these YSP payoffs, averaging $1,850 per loan, are added to about 90 percent of all subprime loans. That's right, struggling families are silently assessed an extra fee for being secretly steered into a loan with higher interest rates and worse terms than they're entitled to get. They're literally being robbed by their bankers.

See more stories tagged with: populism, wall street, hedge funds, mortgage, finance, subprime mortgage, homeownership, home loans, housing prices

From "The Hightower Lowdown," edited by Jim Hightower and Phillip Frazer, Aug. 2007. Jim Hightower is a national radio commentator, writer, public speaker and author of Thieves In High Places: They've Stolen Our Country And It's Time to Take It Back.

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