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, youÃ¢â‚¬â„¢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 homeownersÃ¢â‚¬â„¢ 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, Ã¢â‚¬Å“more than 37 percent of subprime loans were made without verification of borrowersÃ¢â‚¬â„¢ incomes,Ã¢â‚¬Â The New York Times notes. Nor do such lenders typically require borrowers to escrow money for property taxes and homeownersÃ¢â‚¬â„¢ 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. Ã¢â‚¬Å“From 1994 to 2005, the subprime loan market grew from $35 billion to $665 billion,Ã¢â‚¬Â the Center for Responsible Lending notes in a report entitled Ã¢â‚¬Å“Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners.Ã¢â‚¬Â
But so has the bust. Ã¢â‚¬Å“We estimate that one-third of families who received a subprime loan in 2005 and 2006 will ultimately lose their homes,Ã¢â‚¬Â 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. Ã¢â‚¬Å“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,Ã¢â‚¬Â the report says. Ã¢â‚¬Å“In fact, the opposite is true.Ã¢â‚¬Â
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 brokerÃ¢â‚¬â„¢s incentive is not to ascertain creditworthiness but to clinch the deal. The broker bears no financial cost if the consumer ends up foreclosing.
Fourth, subprime mortgages often limit repayment of the loanÃ¢â‚¬â„¢s principal, so that for many years the homeowner is just paying back interest and not accumulating equity.
Fifth, some subprime mortgages actually penalize the homeowner for paying off the loan ahead of time. This is especially pernicious, since if the consumer canÃ¢â‚¬â„¢t make the payments and has to sell the home prematurely, the lender imposes a huge extra fee at closing, draining whatever equity the homeowner may have acquired.
African Americans and Latinos take subprime loans at astonishing rates. More than 50 percent of the home loans to African Americans are subprime. For Latinos, itÃ¢â‚¬â„¢s 40 percent, the report says. Ã¢â‚¬Å“If current trends continue, it is quite possible that subprime mortgages could cause the largest loss of African American wealth in American history,Ã¢â‚¬Â testified Martin Eakes, CEO of the Center for Responsible Lending on February 7 to the Senate banking committee.
Some mortgage executives are absolutely unapologetic. Ã¢â‚¬Å“People are adults and made choices in their lives because they wanted to own a home of their own,Ã¢â‚¬Â Countrywide Financial CEO Angelo Mozilo told Bloomberg news service on March 22. Ã¢â‚¬Å“AmericaÃ¢â‚¬â„¢s great because people can make those decisions for themselves.Ã¢â‚¬Â Countrywide Financial is the nationÃ¢â‚¬â„¢s biggest mortgage lender.
Given the reprehensible tactics in the industry, and given the softness in the housing market, foreclosures are going through the roof. They were 43 percent higher in the third quarter of 2006 than the third quarter of 2005.
Ã¢â‚¬Å“Foreclosure rates will increase significantly in many markets as housing appreciation slows or reverses,Ã¢â‚¬Â the Center for Responsible Lending says. Ã¢â‚¬Å“As a result, we project that 2.2 million borrowers will lose their homes and up to $164 billion of wealth in the process.Ã¢â‚¬Â
Such a loss constitutes a threat to the overall economy. Several leftwing economists, most notably Dean Baker, have been warning for years about the danger of the housing bubble bursting. Now that it has begun to pop, even the Federal Reserve has taken note, though it has tried to put a happy face on the situation. In testimony before Congress on March 28, Fed Chairman Ben Bernanke said, Ã¢â‚¬Å“The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.Ã¢â‚¬Â But he added that the Fed needs Ã¢â‚¬Å“flexibilityÃ¢â‚¬Â in case the problem spreads.
Ironically, the Fed all along could have done something about the predatory practices in the subprime market. In 1994, Congress passed the Home Ownership and Equity Protection Act. It gives the Fed the authority to Ã¢â‚¬Å“prohibit acts or practices in connection withÃ¢â‚¬â€(A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and (B) refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.Ã¢â‚¬Â
But the beatified former Fed chief Alan Greenspan was not all that concerned about the interest of the borrower. His interest lay with the financiers, so he hailed subprime lending as the Ã¢â‚¬Å“democratization of credit.Ã¢â‚¬Â In fact, as Senator Christopher Dodd noted at a recent hearing, the Fed actually Ã¢â‚¬Å“seemed to encourage the development and useÃ¢â‚¬Â of adjustable rate mortgages Ã¢â‚¬Å“that today are defaulting and going into foreclosure at record rates.Ã¢â‚¬Â
Congress may finally be rising to its responsibilities. Representative Barney Frank and Senator Chuck Schumer both say they expect to introduce legislation that would crack down on the unscrupulous lending in the subprime market before the year is out.
But whatÃ¢â‚¬â„¢s the wait?
We canÃ¢â‚¬â„¢t allow these vulture-like lenders to keep circling over the heads of vulnerable consumers. It is the proper role of government to defend the consumer against just such predatory behavior and to make the dream of homeownership something people can afford and enjoy, not something they get haunted by.