The Bad Guys of Subprime Lending Are Raking in Bailout Billions

By John Dunbar and David Donald, The Center for Public Integrity. Posted May 20, 2009.

AIG settled claims of abusive lending practices in 2007. AIG subsidiary Wilmington Finance Inc. agreed to pay approximately $128 million in restitution after the Office of Thrift Supervision found the lender had failed to consider the creditworthiness of borrowers and charged large broker and lender fees. AIG also agreed to donate $15 million to "financial literacy and credit counseling."

The company did not respond to a Center request for comment.

The British bank HSBC got into the subprime business in the United States with the purchase of Household Finance in 2003. Prior to the purchase, Household paid a $484 million settlement encompassing customers in all 50 states for unfair and deceptive lending practices.

Ameriquest was the subject of at least four settlements involving predatory lending since 1996, including charges of excessive fees and misleading poor and minority borrowers. In 2006, Ameriquest and its holding company, ACC Capital Holdings Corp., agreed to a $325 million settlement with the District of Columbia and 49 states over allegations that the company misled borrowers, falsified documents, and pressured appraisers to inflate home values.

Countrywide, No. 1 on the Center's list, signed off in 2008 on the mother of all predatory lending settlements. After being sued by 11 states, the company agreed to provide more than $8.6 billion of home loan and foreclosure relief.

The Center contacted an attorney for former Countrywide CEO Angelo Mozilo, but did not receive a response.

Deeper and Deeper in Debt

There's no question it has become easier over the last few decades to buy a home. Keeping it, however, is a different matter. One of the key measures of whether borrowers can afford a home or not is to compare their income to their loan amount. In its analysis of the lending industry, the Center tracked the loan-to-income ratio of borrowers between 1994 and 2007. The Center did a computer analysis of more than 350 million mortgage applications reported to the federal government during this time.

In 1994, the median loan after adjusting for inflation was $120,000 -- meaning half of loans approved were greater than that amount and half were less. The median income of borrowers was $73,000. That's a loan-to-income ratio of 1.65. So borrowers were taking out loans that amounted to 165 percent of their salary.

The ratio remained relatively steady through the rest of the 1990s, but by 2000, it began to shoot upward. By 2005, the peak of the subprime lending boom, the median loan grew to $183,000 while borrowers' median income remained roughly the same. That amounts to a loan-to-income ratio of 2.46. That meant the typical loan amounted to 246 percent of annual income.

Borrowers, in other words, were spending a much higher percentage of their income on housing during the subprime lending boom. Many of the lenders coaxed them along by lowering lending standards, failing to require documentation of income on loans, and providing adjustable rate loans with low two-year teaser rates that reset to much higher levels. Ultimately, that fed a wave of foreclosures, leading to trouble for borrowers, lenders, and eventually taxpayers -- lots of it. And digging out will be no easy task.

These top 25 lenders were responsible for nearly $1 trillion of subprime loans, according to a Center for Public Integrity analysis of 7.2 million “high interest” loans made from 2005 through 2007. Together, the companies account for about 72 percent of high-priced loans reported to the government at the peak of the subprime market. Securities created from subprime loans have been blamed for the economic collapse from which the world’s economies have yet to recover.

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