I was reading this article in the Globe today about increasing foreclosure rates in Massachusetts, fueled by subprime lending to low-income, minority communities. How terrible!
I hope to start volunteering for Jamie Eldridge soon, in part because I know he’s done some work with this. He was a legal aid attorney and he’s sponsored some legislation on it too. Hopefully we’ll hear from him soon!
Does anyone know if other congressional-candidates-to-be have worked on this?
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Update, from Charley: Raj points us to this article by Anya Kamenetz, author of “Generation Debt”:
America is at another Enron moment. Rather than shedding a tear for the traders who pumped up this market, we are now required as a country to reexamine the responsibility that creditors have to borrowers-to make a sane assessment of the ability to repay, not merely to make as much money as they can out of the risk. It is high time to block predatory lending of all kinds by reinstating usury laws, limiting interest rates, penalties and fees that creditors can charge.
Will our Democratic lawmakers accept this moral challenge? The jury’s still out. On the one hand, 14 Democratic senators voted for the credit-industry-authored bankruptcy bill in 2005. On the other hand, Senator Carl Levin, D-Mich., recently held some pretty harrowing hearings on predatory credit card industry practices, in which he raked over the CEOs of the top three credit card issuers in the country.
Several lawmakers, including Ted Kennedy, D-Mass., and Hillary Clinton, D-NY, have introduced reforms of the extremely predatory practices of student lenders. And Senator Chris Dodd and Representative Barney Frank, D-Mass., are each discussing introducing legislation on subprime lending, Dodd to protect the borrowers already trapped and Frank to restrict these risky mortgages going forward.
I have high hopes that predatory lending could become the moral values issue of 2008. In the meantime, let’s keep in mind who the real casualties are.
I’ll just refer you to an article that I saw this morning
here on the subject
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“Subprime”? No. Predatory? Maybe. High risk? Yes.
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Dangerous for the financial system? Most definitely yes. Remember when, a few years ago, the collapse of a relatively small participant in the derivatives market, Long Term Capital Management, threatened to bring down the entire world financial market? Th high-risk lending fiasco probably isn’t as dangerous, but, well, it could be.
How much can the state lege do to protect those currently in predatory-loan-land, and to help protect against this situation getting worse in the future?
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Can the state limit the interest rate to “prime + x“?
Can the state require a down payment of $y or $z% of the property value?
Other restrictions/requirements?
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I don’t see why not.
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This is where it gets tricky. If you do that, you’re going to have a lot of people not able to purchase homes.
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There’s a difference between subprime and predatory lending. With subprime, banks are able to charge higher interest rates to people with poor credit histories. While the higher interest rates may be unfair, other banks will not ordinarily take the credit risk business to begin with. These subprime loans often allow borrowers to purchase homes without downpayments, again for higher interest rates. There’s obviously a trade off – you get your home, but you’ll get by paying more over the long run.
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I read a great quote in the Globe today, burried in the business section, from a realtor in Lowell. She said she saw a lot of people – just last year – making about $11 an hour trying to make payments on a $400-500K home – without a downpayment. Hey, guess what? That’s not going to work.
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Is that predatory lending? All things being equal, if a borrower read and signed a valid and accurate Federal Truth and Lending disclosure, then no, it’s not predatory. What it is is an opportunity for someone of lesser means to afford a home. The onus is on the borrower to know what they can afford, and then make the payments.
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On the other hand, if the borrower doesn’t speak english and isnt provided an interpreter, is misled by the mortgage broker, is not given a valid TIL…then yes, those are misleading business practices.
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But we have to watch out new legislation doesn’t go too far and ultimately prevent lower income people from eventually owning under the right circumstances.
Having just purchased my (first) home (yes, with a mortgage), there were some places where I felt that were I not “on the stick”* my mortgage broker would have helped me decide a different loan — one that would have made me more susceptible to tragedy down the line should my wife or I find ourselves unemployed at just the wrong time.
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One place where I was frustrated: closing costs actual vs. closing costs estimates. Yeah, they weren’t that close. $1000s off in total. I expected it and made sure I had plenty of extra cash lying around, but I could see this really screwing over some folks.
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Another area that raised my brow: getting a second mortgage — a home equity line — to make up the difference between actual down payment and 20%, to avoid PMI. It can be used quite elegantly (floating for a few months to wait for the right time to sell investments for tax or other purposes) or it can be used to simply stretch how much home can be purchased… and put the buyer (and the bank!) in a dangerous place because if the market stutters, suddenly a person may have negative equity.
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I think money down is important — maybe more important than the interest rate, in the sense that it helps prevent the potential disaster of lots of new homeowners with negative equity. If the bank forecloses and recoups 100% of the loan value, than just that family is SOL. If the bank recoups less than 100%, and this happens many times in a short period of time, now we’ve got financial institutions in danger, and those ripples could make life miserable for far more people.
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For sure. Let me guess, they didn’t include their “attorneys fees” as being “closing costs.” Yeah…that happens a lot. People always show up to a closing shagrined that they’re bringing about $1000 more than they thought.
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Money down is HUGE. Especially if you’re a first time buyer. Because it helps you avoid PMI, and also because there’s a fair chance you won’t want to live where you’re living in five years. You’ll want to sell. The less principal you have to pay with the sale of your house the better – that way you sell more quickly and get where you want to go.
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Amazingly, a lot of buyers don’t actually hire attorneys for closings. The bank provides one, and they typically (in my experience) do a good job of explaining the loan. Also, attorneys cost money that buyers dont want to spend. But… lets face it, wouldn’t it be great to have someone there to really explain the process to the uninitiated? Perhaps there is call for a legal services entity to help low credit/high risk borrowers with these transactions.
as we purchased a condo and had done lots of the negotiating and back-and-forth before the unit was finished — including paying more for certain features (after getting them in the contract), and then fighting for them.
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Attorneys aren’t cheap, but it came out to be about a third of a percent of the cost of the home, and we easily came out ahead in terms of money negotiated/saved. We also didn’t need a real estate buyer’s agent, since we found the home ourselves and had an attorney — that was a big savings.
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No question. The hard part is this — once a family has a home in their sights, some rich attorney’s advice will often ring hollow to the family, due to the “when was the last time you walked a mile in my shoes” line of thinking.
There is legislation filed this year, to better protect consumers from predatory lenders.
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H 1290, sponsored by Senator Barrios and Representative Torrisi (I’m a co-sponsor), would establish a “Home Preservation Fund” to direct funds to non-profits around the state to provide financial education and counseling to consumers who are right at the margins of being taken advantage of by subprime lenders.
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In addition, the bill would impose Community Reinvestment Act (CRA) requirements on all mortgage lenders, and improve protections for homeowners in order to save their homes before they’re foreclosed.
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Finally, H 1290 would beef up the Commissioner of Bank’s regulatory powers to rein in, punish and prohibit predatory lenders from doing business in Massachusetts.
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This morning I spoke at the CRA Coalition Press Conference in Leominster about a report that emphasized the severity of these problems, especially among low-income and minority populations. One of the speakers was a gentleman named Mike Alvarado, who talked about how his family’s dream of owning a home was destroyed by an out-of-state lender who failed to tell him that his monthly mortgage payment would roughly equal his entire month’s salary. He lost his home recently, and is now trying to rebuild his family’s life in Fitchburg.
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As a Legal Aid attorney in Lowell and Lawrence, I had clients who either had to file bankruptcy or accrue bad credit because they had been taken advantage of by similar lenders.
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Government needs to be there to protect families from corporations that take advantage of their lack of knowledge, to establish more economically secure communities. Increased regulation of lending institutions, plus a greater commitment to providing low-income people a living wage with more affordable housing in Massachusetts are the things that state and federal government can do to make sure all residents have a shot at the American Dream.
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I’m going to be talking a lot in my campaign for U.S. Congress about ways that government can help working families in Massachusetts, and if you’re interested in getting involved, please call my campaign at 508-274-0055.
You are entitled to do anything with your life including getting yourself up to your ears in debt. People are now incapable of watching their pocketbooks? I was denied a loan from a lending institution that I had done business with for many years, they said , “you can’t afford it”. I replied that I work three jobs and I eat peanut butter and jelly sandwiches (true story) they still denied me. I bought the house from a lender that wanted a big interest, I sold the house five years later at a huge profit.
People that can’t speak English, you can already guess where I’m going so I will save you the sermon.
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Not that many years ago, banks were raked over the coals for “red lining”. Banks/lenders were advised to cease and desist and start writing mortgages. Banks are burdened with fiduciary responsibility ergo if they are going to potentially write bad paper they have to cover their backsides with ARM’s and the like, so up go the interest rate, perhaps exhorbitantly but it is the cost of doing business. Granted there are robber barons out there: Ameriquest, AKA Long Beach Pawn Shop Inc. comes to mind. Perhaps our governor can help out with this.
…It is unlikely that I’ll do diaries, but I provide comments like this so that others may.
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If things are as worrisome as some suggest, something has to be done about it. There were–I believe–some reforms in the derivatives market after the Long Term Capital debacle. What they were, I don’t know.
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It’s amazing to me the hoops that these “traders” (traitors?) jump through just to make a few bucks.
There are/were efforts and several states this year to limit the terms charged by payday lenders. I’m not well versed in the effort, but it seems a coordinated one, becasue I know bills showed up in NM, CA, WA, AR, VA. Probably other states too. The WA bills have died. They were supposed to cap the APR at 36%. Loans typically run 300-400% APR. Black and military communities are the usual targets for these predatory businesses.
I understand that there are economic reasons for preventing some of these ill-advised high-risk loans, but where do you draw the line?
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Most so-called predatory lending practices, as they are commonly portrayed are merely shananigans by the loan officers to get a loan approved and out the door. Those things are already unlawful.
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Other things such as so-called teaser loans and prepayment penalties make economic sense. They compensate the lender for making a loan that is a higher risk . This puts more credit-risky applicants in homes. It also puts more poor people into homes.
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There are more foreclosures because lenders made high risk loans and many of them are loans that they shouldn’t have made. However, the borrowers have to take responsibility for their actions. No one forced them to sign the note and the mortgage. Most likely, they were so excited about their purchase, they didn’t appreciate the burden they were taking on.
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If you preclude such higher risk higher yield loans, the lenders just won’t make them. It wouldn’t make economic sense.
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I realize this is the issue de jure of the moment, but I doubt passing more restrictive usury laws would actually benefit society.
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There has to be a personal responsibility aspect to the discussion.
I agree with you regarding the “personal responsibility” aspect, but I also see the mortgage industry as very exploitive, preying on the vulnerable seeking the American Dream.
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I witnessed this first hand with a young collegue of mine, who was buying his first house. The seller set him up with a mortgage broker “friend”, who promised him that he would not only qualify for this no money down mortgage, but also pay off his car loan. There were no lawyers involved, just this tag-team and this young family. At the 11th hour, the seller/broker team informed him that – no deal, they weren’t going to pay off the car loan. Now, this young man had already given notice to his landlord, and was supposed to pass papers in a week. When he told me this story and after reviewing his P& S, – I told him to get an attorney, and fight back on this cute little squeeze play. They were threatening him with financial ruin if he didn’t play ball. With the help of a good attorney, he was able to walk away from the deal without a scratch and wound up buying another house.
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The seller/broker teams can make a very plausible pitch to first-time buyers. They will wipe away credit problems or reduce a credit burden and make all the buyers’ dreams come true. Except – they really don’t.
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Something needs to be done. There has to be some level of oversight to protect consumers.
Rep. Eldridge’s post was an excellent summary of a bill that has a great chance of passing this year given the attention paid to the high-cost lending issue. Thirty years ago, Congress passed the federal Community Reinvestment Act (Massachusetts followed suit five years later) and since 1990, that law has done more to clean up bank lending practices that anything else.
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I agree that it is a losing proposition to ban certain products – 1) you would get opposition from all lenders including responsible lenders who use those riskier products only in limited situations and 2) predators will just devise new products and new schemes to circumvent the law. Extending the state’s CRA (which really should stand for Community Responsibility Act, since it encourages responsible lending) is the single most important response to this crisis.
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I work for the non-profit Massachusetts Affordable Housing Alliance which is part of a coalition of 25 organizations working for the passage of the Barrios/Torrisi bill. If any readers know of people who would be willing to tell their story about unfair and deceptive lending, they can call MAHA at 617-822-9100 and ask for Tom or email us at tcallahan@mahahome.org.
the young man that I mentioned and see if he would be willing to provide his story. It’s pretty compelling, and had he bought that place, he would have been in Senator Barrios’ district. I’ll be in touch, one way or the other.
…ColorMePurple. That call for stories is for all of the rest of you out there as well. Even if people want to tell it anonymously, it would be helpful to compile as many as we are able.
A revamping of the criminal usury statute, c. 271 s. 49. Get rid of the automatic exemptions for filing a notice with the AG and more clearly defined what is meant by interest.
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If you’re going to ban default interest and prepayment penalties, then just say it and be done. The murkiness of the statute is no help to consumers or lenders
for prepayment penalties?
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I can understand that the lender likes them because it guarantees them a stream of x% return even if the market rate falls to some lower rate y%.
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But it also seems to create unnecessary friction in the marketplace, and directly undermine competition in loan rates. It simply doesn’t allow the lendee to adjust his portfolio as interest rates change, and that seems to be a social ill.
Prepayment penalties guarantee the investors are compensated for losing the return they would have had, if prepayment had not occurred.
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It’s all about the investors and guaranteeing a return. Otherwise, without the big potential return, these loans are less attractive, and less likely to be made.
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Of course, it’s true that it reduces the flexibility of the borrower during the lockout period. However, like anything else in business, that’s the cost of being a credit risk.
but they do get their money back — with the option of lending it out again or doing something else with the money. It’s not as if they’re really losing in the deal. And, a result is that the market is less fluid, which is generally a bad thing because it’s artificially reducing lending competition.
…do a little research on the reasons behind the Rule of 72. Lenders go to more than a bit of up-front time, effort and expense that goes into placing a loan, some of which is paid for up front via the mortgage application fee, but a lot of which is not, but is recouped through the on-going payments. Moreover, after a mortgage is granted the mortgage servicing operation sets up accounts, etc., that are reflected in the pre-payment penalty.
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I have no involvement with mortgage lending other than as a buyer, so I have no personal interest. But it is fairly clear to me that mortgage lenders and mortgaging servicing operations reduce the fees that would reflect their up-front costs so that people can get into a mortgage, with the expectation that they would be able to recoup their costs later through a repayment penalty if the borrower decides to terminate the mortgage within a predetermined time period.
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I don’t know how to put it more succinctly than that. Eliminate prepayment penalties, put the burden on the up-front costs to the borrower. Do you understand? Do you really want to increase the up-front costs to the borrower?
The market is operating to link high risk buyers to lenders willing to lend to them. Without prepayment penalties, the lenders will either not make the loan, or will find some other way to ensure a profitable rate of return that is equally disagreeable to the borrower.
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From a policy standpoint, perhaps you can cap the prepayment penalties at a point lower than what it is now. It might reduce the funds available to high-risk borrowers, but may also reduce the aggregate servicing costs to the lenders (e.g. foreclosure, litigation, bankruptcy etc) which will free up additional funds for lending. I don’t know the specific economics of it enough to know whether this would have a downward pressure on interest rates for higher risk (but not so high) borrowers.
By one of George Soros pals (forgot his name). This guy alleges that this latest foreclosure trend is the tip of the iceberg. He claims that we are looking down the barrel of a financial collapse.
Apparently the scam was this. When the real estate market was appreciating with double digit returns, lending institutions didn’t care if you foreclosed or not because they would make money either way. They foreclosed, put the house on the market and got their money back and more. Now with the market declining and in a free fall in some places not only are these lenders losing the loan, but they can’t sell the house and the house is worth 30% less than what the original paper was written for. On top of that the homeowners did lines of credit and 2nd’s so now the lenders are really in the whole. This is going to spread like a rock thrown into the middle of a pond the story went. Apparently some bank in PA has just failed and there are more on the horizon. This guy said that he sees homeowners nationwide losing up to 40% of equity, people just walking away from homes, literally, then the financial institutions fail shortly thereafter. Lovely.
Thank god I haven’t any money in Ameriquest.