Week of 4.27.07
Q&A with Housing Expert Maeve BrownHousing and Economic Rights Advocates, a non-profit group based in California.
NOW: Where should homeowners who might be in financial trouble turn?
MB: A whole other level of scam artists are out there peddling so-called 'foreclosure rescue.' People will get inundated with solicitations for assistance that are false promises.
NOW: What advice do you have for prospective homebuyers?
MB: Some states have great first-time home buying programs that they're sponsoring. A broker probably won't tell you about them because they don't know about it or cannot get paid to market it. It really pays to go to a HUD-sponsored housing counseling agency. Or call your state housing finance agency. Sometimes cities and states even have downpayment assistance.
Be careful. People need to be educated that they are going to be solicited [by unscrupulous lenders, brokers and realtors]. If a loan comes to you and you haven't sought it out, then it's probably no good. If anyone's pressuring you to sign something you are not comfortable with, walk away. You are legally allowed to see you loan documents at least 24 hours ahead of time. Get the loan documents and take them to a housing counselor. If the lender or broker doesn't want to let you see the documents, walk away.
NOW: What can be done to prevent this situation in the future?
MB: We need to change the way payment incentives [for mortgage brokers] are made. Right now brokers are encouraged to put you in a more expensive home. This encouragement comes in the form of a lending industry practice of paying kick-backs (also called yield-spread premiums) to brokers for placing borrowers in a more expensive loan. Thus, you cannot trust that a broker will place you in a loan that is the least expensive or best one for you. Up-front pricing should be mandatory, so that consumers have an agreement in writing specifying how much their fees will be for the transaction before any work is performed. That would also give consumers a chance to shop around and compare fees.
Local jurisdictions should be allowed to institute protections for their citizens. Right now, federal regulators, such as the Office of the Comptroller of the Currency, are claiming that their rules preempt state and local laws regarding the activities of nationally chartered banks and other lenders. Also, pre-purchase counseling should be required for everyone, regardless of income.
NOW: How is what's happening in the subprime market likely to affect the prime market?
MB: Many of the victims of abusive subprime lending have been people who would have qualified for a prime rate loan. In other words, people with good credit and a good debt-to-income ratio and clearly documented, adequate income to support the mortgage they sought. It may take them years to recover from the financial losses they suffered from the abusive subprime product or related practices, and they will be unavailable to the prime market. They won't be in a financial position to take out a prime rate (or any other) mortgage loan for years to come.
Sales of existing homes are at an 18-year low as a result of the economic losses suffered by victims of predatory lending and predatory broker practices. Presumably, some prime rate loans would have been used to support the purchase of those homes, and thus the prime market suffers from the lack of borrowers to access their products.
NOW: How big is the problem of homeowners defaulting on mortgage payments?
MB: It's a huge problem. There is a study from the Center for Responsible Lending showing that, of subprime loans made in the past two years, about 20 percent are likely to end in default. RealtyTrac put out a notice as reported in the Seattle Post Intelligencer that foreclosures in March were up 47 percent compared to last year.
I don't think we've seen anything this bad since the 1990s. It really is national crisis. I've laughed when I've read occasionally experts say there's not going to be any kind of ripple effect.
NOW: How do widescale foreclosures affect communities?
MB: You have many sectors that are affected. We already have a negative savings rate nationally. Home ownership is one of the ways Americans use to create wealth, so the net impact could be over generations.
Cities and neighborhoods have their tax base affected. Blight is created. Property values decline. Then you have investors who are affected. Real estate was supposed to be a safe investment! Who would've thought that the regulators would permit such egregious subprime mortgage lending practices to be sold and marketed. In addition to the other harm, lenders themselves are taking a massive hit to their bottom line. That represents jobs. And it means you have investments that are not worth a whole lot.
U.S. Housing and Urban Development (HUD)
Steps to take when you may be unable to pay your mortgage
Homeownership Preservation Foundation
National hotline for assistance in avoiding foreclosure: 1-888-995-HOPE
Americans for Fairness in Lending (AFFIL)
Yahoo Finance: Six steps to avoiding foreclosure
Business Week: Existing home sales plunged in March
Bloomberg News: Foreclosures up 47 percent over last year
Housing and Economic Rights Advocates
Center for Responsible Lending: Losing Ground—Foreclosures in the Subprime Market and Their Cost to Homeowners
HUD-certified home counseling agencies
To find legal service agencies that work on foreclosure prevention: Findlaw, Legal Services Corporation
National Association of Consumer Advocates
National Community Reinvestment Coalition