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Kia Franklin

Preventing Predatory Mortgage Lending…

This morning I attended DMI's Marketplace of Ideas event on Preventing Predatory Mortgage Lending. Here's the link to the liveblog re-cap of the event.

Making the link between preventing predatory lending and the civil justice system, Minnesota Attorney General Lori Swanson noted the importance of preserving a private right of action for individuals victimized by predatory business practices, while larger-scale, policy-level efforts work on the structure that allows for the people to be victimized in the first place. This concept of the civil justice system as one of the many different "cops on the beat," as Swanson put it, applies not only to the home foreclosures context but to any other context in which corporate activity, government regulation, and individual decision-making intersect.

Swanson's insights gave the audience a fresh perspective on the importance of a strong civil justice system as just one component of a comprehensive effort to ensure that the government is working for the public good, that businesses are operating responsibly and safely, and that individuals are empowered to make the most informed, responsible decisions about their welfare.

Again, the liveblog from this morning's event is really worth the read.

Kia Franklin: Author Bio | Other Posts
Posted at 2:04 PM, Oct 11, 2007 in Civil Justice | Consumer Rights | Corporate Abuse | DMI Events/News
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Comments

Education, not legislation, is the best method to eliminate predatory lending in this country.

By the borrower completing this simple Mortgage Loan Comparison Worksheet when shopping for a mortgage, predatory lending in this country could virtually be eradicated:

http://www.januspresentations.com/MortgageLoanComparisonWorksheet.pdf

Problem is, most borrowers only make a decision once every seven years, so how would they even know what to look for? The loan officer's mission is not to educate, but to get a signature on the bottom line.

Here are the Top 10 Mistakes Mortgage Borrowers Make:

1. Not knowing which mortgage fees the borrower can -- and cannot -- negotiate.

2. Choosing and trusting the first loan officer the borrower interviews.

3. Using an interest-only or "payment option" adjustable-rate loan primarily to qualify for a more expensive house than you could normally afford.

4. Thinking the interest rate is always the main thing.

5. Not comparing the final fees listed on the closing documents to the up-front estimates to avoid the lender packing the loan with added-on fees without the borrower's knowledge.

6. Not knowing if the mortgage has a pre-payment penalty - until it's too late.

7. Thinking that renting is always just throwing money away.

8. The borrower does not know if he or she is paying a back-end yield spread or Service Release Premium.

9. Paying for mortgage life insurance, credit insurance or other expensive lender add-ons to increase the amount of kickbacks the lender can receive from various vendors.

10. Paying hundreds of dollars to have a company set up a biweekly mortgage payment plan, something the borrower can generally do for herself or himself -- for free.

From "Kickback: Confessions of a Mortgage Salesman," one of the best-selling books on mortgages on Amazon.com.

Posted by: Ted Janusz | October 17, 2007 1:38 PM

I think this needs to be a two-pronged approach--education to borrowers and accountability for lenders. I agree that borrower education is a critical component to this. But we should not underemphasize the role of irresponsible, predatory approaches to lending. Both are important.

Posted by: Kia | October 17, 2007 3:10 PM

Also check out this article by Mark Winston Griffith. It's worth reading the whole thing, but for the sake of space here are a few quotes from The Myth of the Risky Subprime Borrower that examine the problem of focusing too much on the borrower in assessing the subprime crisis:

Some analysts suggest that sub-prime lenders are being punished for giving high-risk loans to borrowers in low- and moderate-income neighborhoods and communities of color, people, they say, who perhaps never should have received a loan in the first place. After all, their logic follows, not every American can handle the responsibility of credit and owning a home.

This is a convenient, yet misguided, conclusion to draw from the sub-prime mortgage debacle. In truth, sub-prime lending is just the latest example of how lenders have tarred entire segments of the population as credit unworthy through the mortgage industry's own discriminatory, irresponsible -- and now reckless -- behavior.

This recklessness begins with the way the sub-prime industry has built into it financial incentives that defer risk, and liability, along a long chain of sub-prime role players. This marks a sharp departure from the past, when loans were typically originated and held by a single bank that assumed any and all of the risk.

Now, actors in sub-prime lending treat these loans like they are radioactive hot potatoes, making a tidy profit with every hand-off.

Ironically, because savings and loans and commercial banks over generations systematically failed to address the credit needs of low and moderate income communities and communities of color -- despite the passage of the Community Reinvestment Act and fair lending laws -- mortgage companies and sub-prime bank affiliates swooped in and aggressively peddled sub-prime mortgages to areas starving for credit.

Not surprisingly, more than 50% of African-American and 40% of Latino mortgage borrowers have sub-prime loans. While of course many of these folks do in fact have poor credit histories, many of them, often targeted by hyper-aggressive marketing campaigns, would otherwise be eligible for low-cost, "prime" loans. A study by the Center for Responsible Lending documented that African Americans and Latinos get high-priced mortgages far more frequently than whites -- even when they are equally qualified for prime loans.

...In Maryland's Prince George's County the middle-class, majority black, residents have credit scores that on average are higher than the state average and national averages, but refinanced their homes in 2005 using high-cost loans at almost twice the rate as homeowners regionwide, according to a recent Washington Post article.

Sub-prime lending often works as self-fulfilling prophecy. The most efficient way to ruin a person's credit, and thus make him or her truly eligible for a sub-prime loan, is to make a loan unaffordable, or indiscriminately jack up the price of the loan after a few years, to a person who has a good credit history, but whose income is unlikely to rise along with the payments.

Posted by: Kia | October 17, 2007 5:52 PM