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Archive for Sunday, April 15, 2007

Reforms could take pain out of subprime loans

April 15, 2007

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We've all been reading stories about the subprime mortgage meltdown for months, but the release of a comprehensive study by The Reinvestment Fund, a nonprofit that works to stimulate growth in low- and moderate-income neighborhoods, made the issue hit home.

To be precise, the TRF study was on predatory lending - selling high-risk mortgages to people who cannot afford them. That's not quite the same as subprime mortgages, which are loans to people with poor credit. Not every subprime mortgage is predatory. But most predatory loans are subprime mortgages.

The study found that many subprime loans exceeded the value of the house, and that many were used to pay off other loans such as credit-card debt.

In other words, these borrowers were engaging in high-risk financial behavior.

Why do people get into these messes?

Many borrowers use poor judgment in their eagerness to own a home or extract cash from it. But with its accounts of heavy promotion by lenders in less-affluent neighborhoods, the study makes it clear that borrowers are being lured into this trap with visions of easy money and low starting payments, and no clear disclosure of how those payments can rise.

Most subprime borrowers are ordinary folks with very little experience buying homes and shopping for mortgages. Many already are in financial straits or they wouldn't need to resort to subprime loans. They don't have fallback funds to carry them through a financial setback, such as a job loss or illness.

To make the problem worse, the mortgage broker and real estate agent have no incentive to wave the red flag. They get paid only if the deal goes through - and they don't have any financial stake in what happens later.

TRF joined with other consumer groups in calling for a federally mandated "suitability standard" that would prohibit a lender or broker from selling a loan that's too risky for a particular borrower. Like stockbrokers who already live under a similar rule, violators could be fined, or even kicked out of the business.

That's a good idea, but I'd go a step further and make the real estate agents accountable as well. How many times has a real estate agent sat silently at a closing table, knowing that the buyer she spent days with is walking off a cliff?

Current laws make the agent responsible for warning the buyer about flaws in the property, such as leaks, termites or cracks in the foundation. Why shouldn't they address mortgage flaws, too?

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