Boom2Bust.com

Subprime Lenders Still Pushing Dangerous Loans

According to the consumer advocate group Center for Responsible Lending (CRL), abuses by subprime mortgage lenders persist, even with the recent meltdown. The Center presented its findings on subprime loans included in 10 recent packages of mortgage-backed securities to a Senate subcommittee hearing on mortgage abuse earlier this week. Keith Armstrong, CRL’s senior policy counsel said in CNN Money on June 27 that, “A lot of the terms that make these loans so dangerous are still being used. We had been told that these things are going away.” The CRL found that more than 75% of the subprime loans turned out to be adjustable-rate mortgages (ARMs), with 90% of those hybrid ARMs. Hybrid ARMs have 2 to 3 years of cheaper, low-interest, fixed-rate payments, commonly known as “teaser rates.” However, these loans reset at higher rates later on, leading to significantly-increased payments for the homeowner. In addition, more than two-thirds of the subprime loans it looked at contained pre-payment penalties, which make it very expensive to re-finance out of them and into a lower-rate fixed mortgage. Finally, the Center uncovered many loans which don’t require proof of earnings, assets, or both- commonly referred to as “liar loans.” Americans will lose up to $164 billion in home-based wealth due to foreclosures in the subprime mortgage market, according to the CRL. Due in part to adjustable-rate mortgages, 1 out of 5 subprime loans issued during 2005 and 2006 will fail, they predict.

CNN Money asked Doug Duncan, chief economist for the Mortgage Bankers Association, as to why lenders are continuing to offer subprime loans when they’ve proven so dangerous? Duncan said that troubled lenders are aggressively making new loans for an infusion of cash. “They’re gambling,” said CRL’s Armstrong, “doubling down and that’s a recipe for disaster.” On June 29, MarketWatch reported that federal regulators issued new rules, effective immediately, for adjustable-rate mortgage products that can cause payment shock. The new regulations call for banks to improve disclosures, limit prepayment penalties, limit the use of “stated income” loans, and include a fully-indexed, fully-amortized qualification for borrowers. The problem is that while banks are held accountable to these new rules, mortgage brokers are not. As John Taylor, president and chief executive of the National Community Reinvestment Coalition told MarketWatch, “This guidance is simply not enforceable against the majority of people who do these kinds of activities.”