[NYTr] Predatory Lenders & US Mortgage Chaos

[All the News That Doesn't Fit]

sent by rick kissell

BBC News - Aug 23, 2007
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/6960961.stm

Shrewd lenders spark US mortgage chaos

By Joe Lynam
Business reporter, BBC News, Milwaukee, Wisconsin

Crippled by domestic violence and with no income, Peg at least still 
has her home. Now, though, even the very roof over her head is in 
jeopardy.

A divorcee from a white middle class family in suburban Milwaukee, Peg 
had run up large medical bills and was too proud to tell her own family 
that she was paying for everyday expenses with her credit card.

Then a man called and offered to help consolidate her bills and pay off 
her credit card.

The man was friendly and appeared to understand her situation, and he 
wanted to help.

The way he explained it, all she had to do was refinance her house at a 
really low rate of interest and she would get rid of those mounting
bills.

Heck she'd even get a nice cheque to buy some new furniture.

Tempting proposition

Peg only met the man once, on the day when she read the contract, the 
day when he stood over her as she signed.

A couple of months later and the "really low" interest rate had jumped 
dramatically and Peg is now in court, fighting eviction, claiming she 
was hoodwinked into signing the deal.

As tales surrounding America's housing crisis and the now infamous 
sub-prime mortgage problem come to the fore, it has become clear that 
Peg's case is more the rule than the exception.

"This is not a poor, black or Hispanic thing," explains Michelle Derus 
from the Milwaukee Sentinel Journal, who has been following the growth 
of sub-prime loans for more than two years.

"This is a suburban white problem.

"If you drive around this city you'll see plenty of houses with 
boarded-up windows and For Sale signs in the driveway."

In the US, foreclosure rates - that is homes being repossessed by 
lending institutions - have hit the kind of levels not seen since the 
1960s, according to the website marketoracle.com.

Wisconsin in America's Mid-West is experiencing above average rates of 
default.

In Milwaukee alone, 20 to 25 new homes with a combined market value of 
some $2m (£1m) are being foreclosed, or repossessed, every day. 
State-wide there was a 34% rise in the number of people who faced 
eviction in 2006 and Ms Derus believes that that number will double
this year.

"The question many people ask me is why would anyone go for a sub-prime 
loan in the first place?" she says.

"These new brokers selling sub-prime loans are a friendly face offering 
to do all the paper-work for you at very tempting starting rates. Many 
people are still afraid of the big scary bank and prefer dealing with 
brokers."

Warning signs

A sub-prime mortgage is where someone with a poor credit or financial 
history is given a home loan at higher than normal interest rates - 
after being lured by lower introductory rates at first.

They now account for one in five mortgages in the US.

Paradoxically, as many as one third of those who took out sub-prime 
loans would have qualified for "normal" or "prime" interest rates in
the first place.

Some observers say the fact that Wisconsin should end up with a large 
middle class sub-prime problem is a warning for the rest of the United 
States as it is famed for is financial conservatism.

"I guess it's our Germanic heritage," says Catie Doyle, senior attorney 
with the Legal Aid Society of Milwaukee, who works / pro bono / (for 
free) helping less well off citizens fight eviction and legal action 
after signing "unconscionable" sub-prime contracts.

"The people here hate owing money," Ms Doyle says. "We have 
traditionally saved more than other states and don't take financial
risks."

Ms Doyle recites the story of a local woman called Patricia who suffers 
from cerebral palsy but no mortgage because she inherited her house.

After having run up credit card debts to pay for her medical bills, 
Patricia was persuaded by a mortgage broker to refinance her entire
home just to repay her smaller healthcare debts, she explains.

"That's the problem here in America," she says.

"Medical care can bankrupt people, especially older people. Brokers who 
sell these sub-prime loans based on "teaser" introductory offers, have
a fiduciary duty to tell the borrower about all the risks involved."

But many fail to do so, Ms Doyle's clients tell her.

"Unfortunately for the people we talk to, [the brokers] include all the 
down sides to the loans in the small print," she says.

Chain reaction

With sub-prime contracts often running to more than 100 pages of 
financial jargon, the proverbial devil is usually found in the detail.

This makes brokers the key part in the Five B's that make up a
sub-prime chain that has led to recent global problems.

Put simply, banks and lenders approach brokers or middle-men to sell 
their loans to borrowers.

The less financially literate the borrower, the more likely it is that 
they will be sold a sub-prime mortgage at an above average rate of 
interest.

Once the borrower signs on the dotted line, the broker gets a 
commission. Meanwhile, all responsibility for that loan is passed on to 
the bank or lender.

The lender can then repackage these mortgages as bonds, which are
traded on international money markets.

This all worked well for a while as house prices soared in America, 
though once interest rates started to rise and house prices cooled, 
home-owners with sub-prime loans soon owed more money than their houses 
were worth. They were trapped by negative equity.

That then exposed the bank that had re-sold that mortgage as a bond,
and this is behind the recent falls in the world's money markets.

Cold comfort

The brokers who sold mortgages to the likes of Patricia and Peg operate 
in a regulatory grey area.

The National Association of Mortgage Brokers (NAMB), the body that 
represents them, says they have done no wrong and point out that 
borrowers should always examine the fine print in any contract and
could always avail of the three day cooling-off period on offer.

Many brokers have also accused homeowners of trying to buy houses that 
were well beyond their means.

Both the banks and the NAMB have called for consumer education on the 
real risks involved in taking out a mortgage.

But the US Congress is now actively looking at changing the law and 
putting the onus of responsibility more on these financial middle-men.

That offers little comfort to the thousands of Wisconsinites and 
potentially millions of Americans who face eviction because their home 
loan costs have spiralled out of control.

In an ironic twist, though, property owners are now taking legal action 
in larger numbers.

If nothing else, coming before the courts allows them to stay in their 
homes until a judge makes a final ruling on whether an "unconscionable 
contract" had been signed.

"I've been talking about this for more than two years now, but no one 
would listen," says Ms Derus as she bangs the desk at the Milwaukee 
Journal Sentinel.

"Now that the markets have been all over the place, people are calling
me."

© BBC MMVII