Sub-prime loans come home to roost
by mrickard, Wed Apr 11, 2007 at 02:58:22 PM EDT
Millions of homeowners who assumed subprime mortgages during the past decade are feeling the pressure, as adjustable interest rates have risen up to 40 percent while incomes have stagnated.
Foreclosure rates are at an all-time high with projected foreclosures estimated at 2.4 million, according to the Center for Responsible Lending.
Sub-prime loans - high interest loans usually made to borrowers with poor credit records - are contributing to 60 percent of foreclosures.
Are the homeowners themselves responsible for assuming the risky loans they are now unable to repay? Homeownership has long been perceived as the safest and wisest investment an individual can make. President George W. Bush himself touts homeownership not only as an admirable goal, but has said expanding homeownership is a primary achievement of his administration.
The sub-prime lending industry may actually be reducing homeownership, according to "Losing Ground," a recent study by The Center for Responsible Lending. Although 1.4 million first-time homebuyers have acquired homes since 1998, 2.4 million are projected to foreclose.
New homebuyers who could not qualify for loans through commercial banks due to stricter standards, sought out sub-prime loans.
They were convinced to take on more debt than they could realistically afford by misleading advertisements, brokers who received handsome commissions and lending institutions financed not through the federally insured banking industry but by Wall Street investors.
Families with imperfect credit histories or unstable incomes are now being faulted for losing the homes in which they've invested so much while the brokers and lenders are off scot-free, having sold the predatory loans on the secondary market.
If home ownership is a desirable goal for our society, promoting family life, stability and job retention, should homeowners be punished for the imprudent act of buying a home they may ultimately not be able to afford? Or should a hold be put on foreclosures to change the laws regulating home mortgages?
Because the primary mission of ACORN is to help working families, our members have been fighting against predatory lending since 1999. We have attempted to pass city and state legislation restricting predatory lending and won reforms.
ACORN is now proposing a one-year moratorium on foreclosures involving subprime loans that were recklessly underwritten without adequate consideration of the borrower's ability to pay. These include adjustable rate loans that used the initial rate to qualify the borrower and so-called "stated income" loans that lacked income verification.
During this one-year period, lenders and current holders of the loans should modify them by converting ARMs to a fixed rate loan at the initial ARM rate and reducing the principal and or interest rate for stated income loans so that the monthly payment is affordable based on the borrower's actual income.
Lenders should adopt the changes announced by Freddie Mac and recommended by the federal regulators regarding stated income and adjustable rate loans in order to reduce the number of future loans resulting in foreclosure.
Wall Street Investment Banks should change their guidelines and refuse to buy loans that are not originated in accordance with the above ability to pay rules.
ACORN completed a study last September that predicted the crisis.