Panel highlights pitfalls in home mortgage industry

June 13, 2007; As originally appeared in The Advoate by Doug Dalena

FAIRFIELD - The lure of home ownership can be a strong motivator to clean up a less-than-stellar credit rating, pay off debt and save for a down payment.

Sometimes, the lure can be so strong that it draws prospective home buyers into less-than-ideal, or even less-than-scrupulous mortgage deals that can cost more, and eventually cost them the home they waited so long to afford.

In Fairfield County, where the barriers to home ownership are already high, the results can be disastrous, affordable housing experts and lenders said during a panel discussion on predatory lending yesterday at Fairfield University.

"It traps buyers in very unstable debt situations," said Joan Carty, executive director of the Stamford-based Housing Development Fund, a nonprofit affordable housing lender and counseling agency that sponsored the seminar along with the university's Center for Faith and Public Life. "They're squeezed. They might sell at a loss and then they're five steps behind where they were."

The increasing use of nontraditional mortgages, such as subprime loans - having higher interest rates for higher-risk borrowers - as well as interest-only loans and adjustable-rate mortgages, have increased the risk of default and opened the door to predatory lenders, panelists said.

Use of nontraditional financing has ballooned in the past decade, according to panelist Josh Silver, vice president for research and policy at the National Community Reinvestment Coalition, a group of nonprofit lenders and community organizations that promotes responsible lending and community development.

In 2000, 2 percent of home buyers nationwide used interest-only loans or adjustable rate mortgages, compared to 39 percent last year, Silver said, quoting statistics from the Mortgage Bankers Association.

Higher interest rates on subprime loans are designed to compensate lenders for the increased risk of lending money to buyers with less solid credit histories, but they can tempt unscrupulous mortgage brokers to take advantage of those buyers, who often have less experience with borrowing, Silver said.

Those brokers, and lenders they work with, often charge exorbitant fees and interest rates far above the amount they need to compensate for the additional risk, Silver said.

Other hallmarks of predatory lending include large and inflexible prepayment penalties for paying off adjustable rate mortgages after the interest rate goes up, encouraging borrowers to refinance frequently without sufficient reductions in interest but with additional fees, and last-minute changes to the mortgage terms just before closing, when a buyer has already invested a lot of time and emotion in the purchase.

Silver's organization, which sponsors rescue loan programs and mediates with lenders on behalf of home buyers in mortgage crisis, often deals with foreclosures on owners who borrowed too much without knowing what they could truly afford. Some of the worst lenders exacerbate the problem by encouraging borrowers to overstate their income or offering loans without proper documentation of credit history and income.

Nearly half of the brokers who used loans with low documentation - 43 percent - said borrowers could not afford to qualify for loans under traditional standards, which require them to spend no more than 35 to 40 percent of their income on debt payments.

The consequences don't just hurt the individual, Silver said. Money from a loan that goes into foreclosure is not available to other, more responsible buyers, he added.

"It robs individuals and communities of wealth," he said. "It devastates communities."

Panelist Kenneth Willis, vice president of housing and community investment for the Federal Home Loan Bank of Boston, agreed.

"Every time there's a foreclosure in the neighborhood, or a short-sale in the neighborhood, it decreases the property value for their neighbors," Willis said.

Silver shared with about 50 community lenders and social service agency workers statistics showing that communities most often hurt are those with the lowest incomes and the highest proportion of minorities.

For example, subprime loans were used by 44 percent of African-Americans in the Bridgeport-Stamford-Norwalk metropolitan area in 2005, compared to 14 percent for whites, according to federally mandated mortgage data. The disparities also were great between income levels, with 28 percent of low-income buyers using subprime loans compared to 15 percent of middle-to-high-income buyers.

Delinquencies on subprime loans in the same area increased from 5.7 percent of loans in the spring of 2005 to 10.4 percent in the fall of 2006, Silver said.

The disparities don't just have to do with ability to pay, Silver said, adding that low-income and minority neighborhoods where federal law requires banks to report their lending statistics tend to have more prime loans - those with better interest rates and more traditional structures.

"I know some of those people could have qualified for prime mortgages," he said.

The National Community Reinvestment Coalition is pushing a bill in the U.S. House of Representatives that would expand the areas covered by the law, called the Community Reinvestment Act, as well as a Senate bill that would tighten mortgage practices to weed out loans and practices most susceptible to predatory lending.

The key to combating predatory lending is educating buyers, Housing Development Education Coordinator Melvina Peters said.

Counseling and outreach programs for potential buyers, targeted in the same neighborhoods and cities where predatory lenders strike most often, can inoculate borrowers to shady pitches, as well as let them know about assistance programs that could make risky loans less necessary.

The education, which in Housing Development Fund's programs continue after closing, also can help buyers manage their finances better so they are less likely to miss payments or need quick cash promised by predatory lenders who offer too-easy refinancing, Peters said.

Sometimes, Carty added, counseling will show a prospective buyer that they aren't ready to buy yet, no matter how much they want it, and show them how to save for downpayments and repair their credit so they can be ready in six months or two years to get a more secure mortgage.

"Sometimes you can't get what you want immediately, and that's not always a bad thing," she said.