Foreclosures rising among high-risk US mortgages
Loans made to people with weak credit during the housing boom have pushed more than 20 companies into bankruptcy.
from the March 2, 2007 edition
Page 2 of 4
Deregulation has allowed the mortgage industry to create products like the no-down-payment mortgage and the even riskier "no documentation" loan where all borrowers have to do is state their income without providing proof of their ability to repay the loan.
"There was a real rush to make these loans and make as many loans as they could," says Jordan Ash, director of the ACORN Financial Justice Center in Minneapolis, a national low-income housing advocacy organization. "That's because the mortgage companies could sell them off right away" to Wall Street investors.
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Investors profited from the high interest rates that consumers were paying.
"Wall Street wanted the mortgage brokers to keep making loans even though they were riskier and riskier," says Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, D.C. "They didn't care that ... people were getting loans they couldn't afford because there was so much money to be made."
Abuses got so bad that some lenders were making loans to borrowers who ended up defaulting on their very first payment, according to housing experts.
Defaults ignored in soaring market
While the housing market was soaring, lenders shrugged off borrowers' problems because the value of the property was rising. But now that the housing market is in a tailspin in some areas, as many as 2.2 million people could end up losing their homes, worth a total of $164 billion, according to CRL. Another report, by Lehman Brothers, concluded that as many as 30 percent of people who obtained subprime loans in 2006 may end up defaulting on them.
"Many families are going to lose their homes," says Deborah Goldstein, executive vice president of the CRL in Durham, N.C. "There's a need for federal regulators to address the kinds of abusive mortgage practices that we're seeing."
Last fall federal regulators started to step in, requiring lenders to disclose more clearly the benefits and risks of some subprime loans to borrowers. On Tuesday, Freddie Mac, a quasi-public backer of home loans, announced it would cease purchasing the riskiest subprime mortgages. This week, Fannie Mae, another quasi-public housing organization, said it is working on "rescue" products to try to help troubled borrowers.
Housing advocates believe the regulators are reacting too late. "They're good positive steps but it's not close to being enough – the genie's already out of the bottle," says Mr. Rheingold. "What we're seeing now with the incredibly high foreclosure rates ... is a product of the complete deregulation of the mortgage industry over the last 10 to 15 years."
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