Fixing the Subprime *Disaster*

[planet]

Re: Fixing the Subprime *Disaster*

My limited understanding of this situation is that teh bailout is urged to protect the greater market at this point, not so much a feel good situation for the average Joe in over his head. Am I worng? Aren't the bad debts sold and circulating what make this such an awful situation? So preventing more defaults from impacting the greater investment circles makes sense in that way. But what irks me is that in helping a few individuals and some banks by coming to the rescue of bad investments (for whatever reason) means change to correct the market is then influenced by this factor.

[GrayMatterWife]

Re: Fixing the Subprime *Disaster*

Not BS in the least. You're comparing apples and oranges, so your analogy is not legitimate, at least from a legal point of view, which is how I was analyzing it.

Uh - she's a lawyer too. :huh:

I know. Lawyers talk to each other like this.

Lawyers generally have thick skins and are used to people challenging them. I seriously doubt I will persuade her, or anyone who shares her concerns, differently. That wasn't the point. It was just to present the best argument you can for your point, to advance thoughtful discussion. What may be perceived as a lack of delicacy or deference that would be socially required in other circumstances does not imply a lack of respect when lawyers argue (and, by argue, I mean, "share discourse").

And, I mean it's not like her point is lost under the weight of my response: her initial point still stands--it seems incongruent that some types of personal debts, whether recourse or nonrecourse, are subject to restructuring while others are not. If the government allows that for student loans (esp. gov-subsidized loans), what's the problem with the gov encouraging the same workouts in the more urgent context of distressed loans on residential real estate?

[peggyfromwastate]

Re: Fixing the Subprime *Disaster*

I am not a lawyer- so my head is spinning a little...

The articles I've read about this crisis specifically indicate that the flippers are the ones who are throwing everything off. They don't need to be bailed out. They are flippers. They should know better...

But the ones who have a problem are the immigrant households who get into a loan and really, truly don't get it. They don't understand the language, and even with spanish speaking lenders and realtors, they don't get the full picture nearly enough. They are told what they have to pay per month, and the details of prop tax, Adjusting rate, and possible foreclosure are really never fully explained. In lots of cases, the immigrants are illiterate in their native language, as well as in English of course. They depend entirely on the realtors and the lenders to verbalize everthing, and it just isn't happening. Mac has on occassion gone through the "Spanish" language line for talking to banks because it's faster. The quality of eplanation he gets is really different from the English line...

I'm not saying that the immigrants should get the bail out either. I think it's too bad that they are buying houses without understanding it in the first place, and when the seasonal labor dries up they are not able to make payments, etc., etc. It's bad all around. I think there could be some type of mandatory class about loans/mortgages for first-time homebuyers and/or for buyers with lower credit ratings. I don't think we can count on the lenders to walk every client through every form-- especially if you aren't asking questions...

[GrayMatterWife]

Re: Fixing the Subprime *Disaster*

But the ones who have a problem are the immigrant households who get into a loan and really, truly don't get it. They don't understand the language, and even with spanish speaking lenders and realtors, they don't get the full picture nearly enough. They are told what they have to pay per month, and the details of prop tax, Adjusting rate, and possible foreclosure are really never fully explained. In lots of cases, the immigrants are illiterate in their native language, as well as in English of course. They depend entirely on the realtors and the lenders to verbalize everthing, and it just isn't happening. Mac has on occassion gone through the "Spanish" language line for talking to banks because it's faster. The quality of eplanation he gets is really different from the English line...

Interesting observation, I think...I have no idea how many of the affected homeowners speak English as a second-language. A lot of subprime lenders provide the contract in Spanish (not to sign, but to review) and have Spanish-speaking representatives. But, of course, that's not the same as having a Spanish-speaking agent who works for you, the buyer.

I have never liked truly predatory lenders. I think it is morally repugnant to exploit those who are least capable of effectively advocate for themselves. But I also get nervous about a legal presumption that all non-native or non-English speakers aren't competent to understand the terms of a contract. At the law, we're talking then about infantilization. If understanding English to the degree necessary to comprehend a legal document (without translation, etc.) is required to ensure that someone really understands what they're getting into, then by that argument, those same folks wouldn't be allowed to enter into other contracts--like CC agreements, permission slips for vaccinations, all sorts of stuff. I worry anytime we start talking about relegating people to a state whereby we need to "look out" for them--we might "look out" for them effectively enough to keep them from earning the American dream. We might be protecting some who can't handle their finances at the expense of many others who, if given a chance, can.

[Rapunzel]

Re: Fixing the Subprime *Disaster*

#1 This underscores the absolute necessity of learning the language of the country in which you reside - to a level of fluency. That way you can double check for information in both the native language and the language to which you having the information translated.

#2 I was under the impression that subprime loans were offered to "minorities" because of social pressure derived from studies and research in the past showing that large percentages of these cultural/ethnic groups were not homeowners. Affirmitive action on a real estate level.

#3 A good chunk of my inlaws are from Mexico and are native Spanish speakers. They prefer to do business in Spanish and nobody has yet to have a problem understanding the terms of their mortgages (all of which are in Texas, btw). They're also not stupid - they understand the basic premise behind adjustable vs. fixed-rate. Heck I understand the basic premise behind these terms and I don't understand nor speak Bank-ese at all!

[PrincessFiona]

Re: Fixing the Subprime *Disaster*

If you google subprime loans, it becomes obvious that this was bound to happen. As far back as 200 people were saying that minorities were being targeted despite income and credit ratings and that the subprime market was heading for trouble.

US: Banks prone to sell minorities pricy loans

by Joanne Morrison, Reuters
April 4th, 2007

The largest U.S. banks sold expensive subprime loans more frequently to minorities than whites, according to a study released Wednesday by a community activist group.

Fair Finance Watch found that big lenders such as Citigroup (C.N: Quote, Profile, Research), JP Morgan Chase (JPM.N: Quote, Profile, Research), Wells Fargo (WFC.N: Quote, Profile, Research) and UK-based HSBC (HSBA.L: Quote, Profile, Research) extended higher-cost subprime loans to African-Americans and Latinos far more frequently than whites, according to an analysis of 2006 mortgage lending data released this week.

At Citigroup, for example, blacks in the New York metropolitan area were sold subprime loans 4.41 times more frequently than whites, according to the study.

"The problem is many of these lenders confine people of color to high-cost loans even though they would be entitled to normally priced loans," said Matthew Lee, executive director of Bronx, New York-based Fair Finance Watch.

"Alongside the chaos in the subprime industry, predatory lending has grown and not diminished," warned Lee.

Officials at Citibank defended their lending practices, which was based on credit scores and other criteria including loan-to-value and debt-to-income ratios.

"We consider each application by the same objective criteria, which are blind to race, ethnicity, gender and any other prohibited basis," Citibank said in a statement, adding that the bank has ongoing dialogue with community groups to explore ways to make fairly priced credit more available.

Subprime mortgages, which have been increasingly popular in recent years, carry a higher interest rate and are offered to borrowers who often have a poor credit history and lower incomes. While the loans have helped to increase home ownership, they have been at the center of a recent surge in mortgage defaults.

LOAN DENIALS

Still, loan denials nationwide were more frequent among minorities. For example, Citigroup denied applications from blacks 2.10 times more frequently than those of whites and it denied mortgage applications for Latinos 1.84 times more frequently.

Wells Fargo, with nearly 20 percent of its 2006 mortgages in the subprime category, denied the applications of blacks 1.72 times more frequently than whites, while denying those of Latinos 1.57 times more frequently, according to Lee's group.

The bank said race was not a factor in its loan pricing and said regulators have studied the data for signs of biased lending.

"The Federal Reserve has repeatedly emphasized that the limited data analyzed in the report cannot support a conclusion that lending practices are discriminatory," a spokesman for Wells Fargo said.

Lee and other community activists for years have pushed for stricter fair lending standards, fearing that predatory lenders prey on the poorer minorities.

MORATORIUM ON FORECLOSURES

On Wednesday, national civil rights groups called for an immediate moratorium on foreclosures in subprime loans, noting that the bulk of them are made to minorities.

"As foreclosures continue to rise on subprime mortgages, a disproportionate share of the harm falls on African-American and Latino homeowners and the neighborhoods where they live," said the groups which include the NAACP and the National Fair Housing Alliance.

Some 40 percent of Latino families and more than half of African Americans who receive home loans get higher-cost mortgages, predominately subprime loans, those groups said.

To date, an estimated 1.5 million homeowners are facing foreclosure, according to research firm RealtyTrac, and Congress is now looking at tighter lending standards to protect unwary Americans from taking on loans that cannot afford.

Larger banks, Lee says, tend to set up their subprime lending shops in poorer neighborhoods. While they make credit available to riskier borrowers who have poor credit quality, these lenders tend to sell minorities these pricier loans regardless of credit quality, Lee says.

"Where the rubber will meet the road will be in how the Federal Reserve and other agencies act on specific disparities at specific lenders," said Lee.

HSBC sold 6,295 super high-cost loans that were at least 8 percentage points over comparable Treasury securities, or more than 12 percent interest on a 30-year mortgage in 2006 and about double the average for a borrower with the best credit.

HSBC, with 63 percent of its mortgages in the subprime sector last year, said it reviewed its lending practices and the bank was "confident that we are treating our customers fairly and with integrity," said Kat Hurham, a spokeswoman for

HSBC.

Even with the housing downturn, predatory lending is a still-growing problem, impacting not only homebuyers but also consumers, said Lee.

He warned that black and Hispanic borrowers taken together are much more likely than non-Hispanic white borrowers to obtain credit from institutions that report a higher frequency of higher-priced loans.

"It may be more symptomatic of a more serious issue," Lee said. "These patterns may stem, at least in part, from borrowers being steered to lenders or to loans that offer higher prices than the credit characteristics of these borrowers warrant," Lee said.

http://www.corpwatch.org/article.php?id=14440

NEW YORK (CNN/Money) - African-Americans and Hispanics are disproportionately represented in the subprime home refinance market. And the racial disparity between whites and minorities actually increases as incomes rise.

Those were among the key findings of a study released Wednesday by the Center for Community Change, a non-profit consumer advocacy group.

The study, entitled "Risk or Race?," revealed that lower-income African-Americans receive 2.4 times as many subprime loans as lower-income whites, while upper-income African-Americans receive 3 times as many subprime loans as do whites with comparable incomes.

At the same time, lower-income Hispanics receive 1.4 times as many subprime loans as do lower-income whites, while upper-income Hispanics receive 2.2 times as many.

Subprime lenders provide high-interest loans to borrowers with bad credit or no credit history -- those who do not qualify for the prime market. Many offer a legitimate service. But the "wave of foreclosures...in the subprime market" indicates that many borrowers are being forced into mortgage loans they cannont afford, the study found.

Predatory lending occurs when banks and mortgage providers target individuals with a lot of built up equity in their homes, talk them into refinancing their loan and then saddle them higher interest rates and higher monthly bills. When they default on the loan, the banks collect the equity.

Foreclosures have a negative impact on entire neighborhoods, as the repossessed homes often stay vacant for extended periods and depress the value of the surrounding properties.

The CCC study analyzed the 331 metropolitan statistical ares (MSAs) in the U.S. and ranked the areas using a variety of subprime lending measures. It found that El Paso, Texas, is the nation's leader in subprime lending, where 47.3 percent of loans made were subprime, well above the average of 25.3 percent.

At a level of 5.93, St. Louis has the nation's highest disparity ratio between upper-income African-Americans and upper-income whites. It was one of five metropolitan areas where this disparity ratio was greater than 4. In another 18 cities, this ratio was between 3 and 4.

Sen. Paul Sarbanes, D-Md., chairman of the Senate Banking Committee, has introduced measures that will further restrict subprime lending practices. There is a similar measure in the House of Representatives.

http://money.cnn.com/2002/05/01/pf/banking/subprime/

[Rapunzel]

Re: Fixing the Subprime *Disaster*

So, the question is: Why were so many minorities not doing their homework before making one of the biggest financial decisions of their lives? And, why were minorities more prone to accepting bad loans?

When dh and I were househunting not too long ago we had a mortgage broker who offered us several different choices. We researched, asked many questions and really thought it out before we chose what was best for us (and, was really quite a good mortgage). DH is latino and didn't have any problems with being offered subprime loans. And, I don't see how online brokers such as Lending Tree could possibly know the ethnicity of many people who log on and hunt down a loan. Even hispanics such as dh often do not have identifiable hispanic surnames.

Even if the banks were specifically targeting minorities for bad loans (which doesn't make any sense) the bottom line is that every person who signed for a bad loan is responsible for...taking a bad loan. Nobody forces you to take out a loan. You are offered terms and then you accept or you don't - or you negotiate. So, why were so many minorities not researching their options?

[DCJenn]

Re: Fixing the Subprime *Disaster*

Jenn-

Your husband is a doctor. The fact that he's latino is not the issue. They prey on us, too, but differently. How many of us were told how much we 'could afford' based on current or future earnings?

I bet all of us have been given mortgage amounts well over what any of us would or could pay.

We have an ARM on the DC house and it's going to adjust in July of '09. Will the DC house sell for 1) what we owe or 2) before the mortgage adjusts? I have no idea. I know that if it adjusts before it's sold, we're screwed, even without any lingering consumer debt hanging over us.

But that's what happens when you live in an expensive market.

and the targeting of minorities was supposedly to let everyone 'live the American dream'.

Jenn

[SuzySunshine]

Re: Fixing the Subprime *Disaster*

I bet all of us have been given mortgage amounts well over what any of us would or could pay.

Oh the amount they told us we could get with only DH's salary was RIDICULOUS! Now that we're truly going to only his salary the amount would have killed us, its insane.

[PrincessFiona]

Re: Fixing the Subprime *Disaster*

Jenn-

Your husband is a doctor. The fact that he's latino is not the issue. They prey on us, too, but differently. How many of us were told how much we 'could afford' based on current or future earnings?

This is totally true, Jenn. When we finished fellowship, we didn't qualify for the good 'ole loan because of our debt load. We had no money for a down payment (of course...duh...we had been doing residency/fellowship for way too long to save money). Our first mortgage was at such a high rate that I won't tell you, and our second which covered our down payment?....18% (wince) This was not because of failure to pay...it was debt load...and possibly that I (the US citizen) was not working and didn't have an income to report and DH (non us citizen at the time) was the one with the income. Discrimination? Anyone that tells you not to worry about the money you are taking out for med school, residency etc needs to be kicked in the pants.) We were told that we could refinance later and that the payments would be affordable.

The real kicker though is that the bank we went with was recommended by our realtor, who btw...is a med spouse . We found out later that she has a deal with this bank and uses them for all of her deals that she possibly can. The mortgage person sat down and carefully explained our terms to us and we were really unsure about the amount that they said that we could afford. She calculated our take home salary out EXACTLY to the penny for us to show us that we could afford the house. Many of you may remember this, but...she was OFF by $1000. Seriously. She told us we would have $1000 more per month than we ended up having. What do you do with that? We were so broke that we didn't have furniture in 1/2 the rooms and Kelly surely remembers me coming to see her and not having enough money to hit the garage sales with her and barely eeking by with gas money. As a resident's spouse, she had more cashflow than I did. I was bitter.....so was Thomas.

We were sooo lucky to hear about a diff bank in our area offering refinancing on homes. DH was convinced that we would get the same bad rate because we hadn't managed to pay off much debt, but we talked to them anyway and got an awesome rate. With the lower rate, our payments went down substantially.....we could then afford to start digging ourselves out of debt.....

Here is what bothered me about our experience:

1. We were lied to about what our monthly income would be.
2. We were told that we could afford an amount for a home that we couldn't. (Also, we picked an average size/amount for our area and didn't go over the top. It was no McMansion by any stretch).
3. Our interest rates were outrageous.

The thing is...we could have rented and it was the other option that we threw around. After suffering through nearly 8 years of residency/fellowship and with 3 little children, could we move into an apartment? The answer was "yes". We looked into the cost of renting at a place that wasn't a rundown rats nest. (After all, dh DID go to med school and complete a residency and fellowship and we were hoping that the end of training meant moving on a little bit. We already had done the apartment next to the prostitutes and the rodent infested rental...that is what we were leaving.)

Our rent for a 3 bedroom apartment would not have been too much less than a house payment.....we banked on the fact that we would also be able to write the interest off on our home at the end of the year to make up for the difference. (DAMN that alternative minimum tax. )

I don't think it's possible to make general assumptions about the people applying for loans or their motivations for signing on the dotted line.....The lenders really do prey on people....

Kris

[peggyfromwastate]

Re: Fixing the Subprime *Disaster*

My husband's family is largely uneducated and monolingual. They've lived here for decades, but it is very easy to stay speaking spanish only and not assimilating/getting an education. My husband and one of his cousins are the only ones out of over 150 in his generation to get a college education. The vast majority of his family has serious financial problems- and they are offered loans all the time.

To complicate it, home ownership is really really valued in their community. And they are not skeptical of lenders. They feel like this guy is here to help me, this guy cares about me and my family and he wants us to get the car/house/trailer we want. They trust the lenders to be telling the truth, and to be looking for their best interest.

There is a small group of educated immigrants, but the majority who fall prey are not educated. And the loans Mac's parents have signed up for for cars are just atrocious. And then they cosign with lots of people, because to not do so would be "rude". So I'm sure my In-laws may not have good credit, since they cosign so much, but my FIL owns lots of land, and several houses, and he insures them the best he understands.

One perfect example of how they are preyed upon is this: When Mac was in community college, he lived with his older (alcoholic, coke snorting) brother in a house that his father owned. He didn't live with his parents. Mac and his brother were renting this piece of crap house. The insurance guy told FIL that he needed to have renters insurance for the house, since Mac and his bro were renting. Somehow, through the sale of the house, etc., etc., his father was told that since he intended to rent out this house, he DID NOT need to have homeowners insurance. This isn't even legal, but hell, who cares for the illiterate immigrants anyway. So, the house burned down when Mac was living there, and they were left with 13K in renters insurance coverage, and no homeowners coverage at all. Did FIL get mad and sue the insurance guy who didn't know what he was talking about? Did he get mad at the lender who should've been aware of the insurance situation? No... He was grateful that he was able to sell the land for 20K, when the house he'd bought had been 100K. So he thought he was getting a lot out of that....

This is just the level of service we're talking about. THis kind of thing happens all the time in my husband's community. I am not prepared to let them all just deal with the consequences of their lack of education. I don't think it's unreasonable to mandate some type of class put forth by a 3rd party to educate people on something as huge as home ownership.