Dec 19, 2007
Housing Bulletin—Who’s to Blame for the Subprime Mortgage Mess?
Sometime last spring, when the present subprime mortgage crisis was on hardly anyone's radar screen, one blip showed up at the office of Lisa Madigan, the Illinois attorney general.
Some attorneys who work in Madigan’s consumer protection division had spotted newspaper ads for mortgages that seemed too good to be true—a suspicion confirmed by the attorneys’ subsequent investigation.
One ad in the Sun-Times offered a $250,000 loan for a payment of $656 a month—but made no mention that the only way to get that deal was to take out what’s called a Payment Option Adjustable Rate Mortgage. That is a loan where borrowers can opt to pay just a small part of the interest due each month, but by doing so, they add that month’s principal and interest to what they owe, potentially building up an enormous debt.
That, suggests Debbie Hagan, was when she began to suspect that some mortgage lenders were actively preying on unsophisticated consumers. “Anyone who looks at how complicated those loans are would easily see that borrowers couldn’t understand what they were getting,” says Hagan, chief of the attorney general’s consumer protection division. It appears some lenders knew they could dazzle cash-strapped borrowers with the promise of astonishingly low payments, then baffle them with impenetrable paperwork that concealed the truth about how those payments would skyrocket after grace periods, interest-rate adjustments, and refinancings.
Many pronouncements from the mortgage industry have blamed over-eager borrowers for the subprime mess. But yesterday, Ben Bernanke, chairman of the Federal Reserve, announced a proposed tightening of home-lending rules that put much of the blame on pushy lenders. Hagan points out that some mortgage lenders, at least, knew full well that they were using a loose system to their own advantage. In late November, Madigan brought a case against One Source, a now-closed Northwest Side mortgage brokerage. The attorney general’s office claims that, among other things, One Source:
- blatantly exaggerated a borrower’s income on forms that would be forwarded to the actual lender;
- told borrowers only about the minimum payment on an option loan and didn’t mention that the borrower could also choose to make higher payments, keeping the debt from growing;
- quoted only the attractive initial interest rate, not mentioning that it would jump after a certain period.
“To think that homeowners would be put in very risky loans like this says something about the lax underwriting standards,” Hagan says. But, she suggests, the potential for high broker fees were just too great a lure for lenders to resist. Fees that One Source collected, according to the department’s research, ranged from about 3.8 percent to about 4.5 percent of the loans. On a $215,000 loan, for example, the company collected $9,150.
Hagan also notes that subprime loans that charged borrowers big penalties for early payment “made good money in securitization,” making predatory lenders especially eager to push them. The practice of bundling loans into packages to hand off to large-scale investors helped obscure the looming problems.
The One Source case got Madigan a nod in the New York Times, but Hagan emphasizes that One Source “is just a microcosm of what went on” during the height of the subprime lending boom. Her department is also looking at other mortgage brokers in the state. It has subpoenaed Countrywide, the biggest national home-lender and, according to the Chicago Reporter, the biggest lender in Illinois of the now-troubled “high-cost” loans. Countrywide was the lender of many loans that One Source brokered. “We’re taking this upstream, to see where it starts,” Hagan says.
More is likely to develop as the crisis broadens and Hagan’s department continues investigating. Check back here for updates. And if you are facing foreclosure or having trouble making mortgage payments after an interest-rate adjustment, a good place to start looking for help is at www.illinoisattorneygeneral.gov. At the bottom right, click on Illinois Mortgage Lending Guide.
Posted at 10:58 AM in Housing Bulletin | Permalink
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Reader Comments:
hey everyone thought they'ed get rich in real estate (tm). too bad so sad. Wake me when I can afford a "HOME" again.
What is not noted is how much government interference in the housing market contributed to this phenomena.
Current problems in the housing market are primarily due to the Fed's policy of pursuing artificially low interest rates, which created a boom. The mistake was compounded by implied Fannie Mae and Freddy Mac government safety nets that encourage risk-taking. This has resulted in a banking industry whose credit standards have slipped irresponsibly. But make no mistake the root cause of this problem was and is residing at the foot of the Federal Reserve.
The unsustainable appreciation in home values subsidized a lifestyle that was far beyond what people could afford. Lower interest rates and loose lending policies enticed millions like them to make unwise personal financial decisions.
Freezing interest rates or pursuing taxpayer-funded bailouts will reward those who made irresponsible financial decisions on all levels.
Several members of our Loan Compliance Advisory Group attended the "March on Wall Street." We support the "Save Our Homes/Restructure Loans" important message that Rev. Jackson and his dedicated coalition members are spreading across America. The December 10th rally, one of several across the United States, sponsored by Rev. Jessie Jackson's Rainbow PUSH Coalition, the National Association for the Advancement of Colored People and the Urban League, was a magnificent well planned informative event.
Our Loan Compliance Advisory Group is committed to helping "Protect The American Dream." We are dedicated to helping Homeowners Nationwide, that may be victims of Deceptive Lending Practices.We are open for any suggestions on how we can help. Please contact Joseph Bisogno at (800) 529-7184 or visit our web site at www.loancomplianceadvisorygroup.com
Option ARMs are not "Sub-Prime" loans....they are considered "Portfolio" loans.....this means that the lender is keeping the paper (money)in their portfolio. the paper on sub-prime loans is invested by a secondary market (outside inevestors).
The title here is a little misleading.
Sept 13, 2008
The American people have been duped by the entire lending industry. How lenders post information to credit bureaus and how another potential lender interprets those postings are creating and continuing the mess. I see no related officialinvestigation as to how the credit reporting system and the artificial intelligence rules using a RETE algorithm, developed years ago as a "business tool" with a grant from the US Department of Defense has impacted this whole mess. The credit scores are totally an artificial intelligence scheme. Many of us never heard of a FICO score. That was treated as some sort of top secret. More intense criminal investigation needs to be done by US Dep't of Justice and the various Dep'ts of Justice in each state. The rampant organizational and institutional fraud must be stopped now. Another broader issue is how the Fair Isaac company(FICO)is proudly attempting to export their system to other countries around the world. No wonder the good people in other countries hate us. They don't want to be suckered in to the same mess we are in.
Certainly as it is stated..a handful of people agonize over ALL the paper work involved..They trust the loan officer is up front.
Not the case with a loan officer on Cape Cod Mass..This guy was sued,,sentenced to the House of Corrections,,has been evicted
several times,,and preys off woman on dating sites..Claimed he was a financial planner ect..His own BAD credit SPEAKS VOLUMES..He owes the IRS..and has been in and out of court for fail to pay debts...He is in part responsible for a foreclosure
on a home in Sandwich Ma..He recently started using his first name,which is Julian..but most people in his past know him by Phil.."Phil's Homeowner's News"..google it..Then RUN!