The Bankruptcy Lawyers Blog

• Send To A Friend
• Print This Article
• Comments

With mortgage foreclosure rates skyrocketing across the country and projected to increase even more as hundreds of millions of dollars in ARMs adjust in the coming months, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, "Preserving the American Dream:  Predatory Lending Practices and Home Foreclosures".  Senator Dodd introduced the hearing with a list of concerns about industry practices that put mortgage borrowers at risk of failure, including:

• More than half of subprime loans are "stated income loans", loans that the industry often refers to as "liar loans".
• Brokers upsell borrowers into loans with unnecessarily high interest rates in order to increase their commissions.
• Minority borrowers are targeted for higher cost subprime mortgages, even when they could qualify for more favorable mortgage terms.
• About 70% of subprime loans have prepayment penalties that make it difficult or impossible for borrowers to refinance under more favorable terms.
• Prepayment penalties are significantly more likely in minority neighborhoods.

The Senator also cited data from Realty Trac indicating that more than 1.2 million foreclosure actions were filed in 2006, a 42% increase over the previous year.

Harry Dinham, President of the National Association of Mortgage Brokers, referred to the various non-traditional loans that have emerged over the past several years as a benefit that allowed people who would otherwise not be able to purchase a home to do so.  He said that these variations on traditional mortgages had been an effective answer to President George W. Bush's 2002  Homeownership Challenge, wherein the President stated the goal of increasing homeownership opportunities for minorities.

However, a recent report by the Center for Responsible Lending projects that as many as 20% of those loans are ending in foreclosure, and many others are repeatedly refinanced, stripping what little equity the borrowers have been able to accumulate and generating new fees each time the loan is rewritten.  "Creative" subprime loans can't be considered an effective solution to the "Homeownership Challenge" if they allow Americans who could not previously have qualified for mortgage loans to take that leap, only to have the home torn out from under them in a few years.  Even worse, it appears that many minority borrowers who could qualify for more favorable loan terms are falling victim to these "creative" solutions.