Problematic mortgage lending practices have become too common, particularly in the subprime market. As we are all reading in the headlines, this is resulting in hardship for families, and a sharp increase in foreclosures in communities across the country. According to RealtyTrac data released last week, Oregon’s foreclosure rates were up over 50% in September compared with rates last year at this time.
These foreclosures have broad impacts. They hurt families who thought they were doing the right thing buying a home. They make fertile ground for “mortgage rescue” scams. Foreclosures can also weaken whole neighborhoods and reduce property values. They’ve made prices in the mortgage-backed securities market collapse, and impacted international credit markets.
It’s critical for Oregon to take steps now to rein in the specific lending practices that contributed to this fiasco. Specific elements that have combined to contribute to the current crisis include:
• Borrowers are paying higher rates than they qualify for. This problem is driven in part by kickbacks lenders pay brokers for steering borrowers into a loan with a higher interest rate.
• Abusive prepayment penalties. Many subprime borrowers could theoretically refinance for a lower rate when their credit improves, but excessive prepayment penalties trap a borrower in a high-interest loan with fees as high as $10,000 or more.
• “Exploding” adjustable rate mortgages. Lenders determine whether a borrower qualify for loan based on an initial low “teaser” rate that lasts for two or five year, but then jumps to a higher rate that they cannot afford. Lenders explained to borrowers that they would be able to refinance before the higher rate kicked in, but that is not possible with declines in expected property values and the existence of prepayment penalties.
• Failure to assess the borrower’s ability to repay the loan, or only assessing their ability to pay the low, introductory rate on a loan, and not at the fully indexed rate.
• An increasing proportions of loans that are “non-traditional,” such as loans with negative amortization, where a borrower can pay a minimum monthly amount less than the amount needed to cover even just the interest payment. The unpaid interest is added to the loan’s
principal amount, causing the total amount the borrower owes to increase each month instead of getting smaller.
The current mortgage crisis has revealed that the concept of homeownership itself is eroding. Homeownership ought to mean the steady building of equity for the consumer. The consumer, through property appreciation, home improvement, and paying down the loan principle, accumulates equity. Ultimately, over time, he owns the property outright.
It is not in the public interest for the ownership of our homes -- equity held in previous generations in Oregon’s neighborhoods – to be stripped away by excessive fees and interest rates. In too many cases, the “homeownership” gained through a subprime mortgage looks very much like renting with more paperwork, higher fees, property taxes, and insurance costs. The “homeowner” is stuck in a loan where he can’t build more equity, but instead accumulates more debt, and likely ends up losing his house.
To protect consumers and the stability of communities in Oregon, it is critical to add reasonable standards to mortgage lending to prevent predatory practices, including:
• Brokers and lenders must make sure a loan or a refinancing arrangement is in the borrower’s financial interest, including the best rate the borrower qualifies for.
• Lenders must be honest with borrowers about what they can afford, and qualify borrowers based on the fully indexed rate of the loan, not the teaser rate.
• Limiting excessive fees, which are not reflected in rates but which can be financed.
• Elimination of abusive pre-payment penalties that trap borrowers in high-interest loans.
On behalf of OSPIRG, I urge Oregon’s elected leaders to do everything they can to protect the benefits of homeownership for Oregonians.
