FDIC official urges curbs on subprime loan firms
The heat intensified yesterday on the subprime mortgage industry as the nation's top banking regulator urged Congress to pass federal legislation cracking down on predatory lenders in the poorly regulated industry.
New loan underwriting laws should require mortgage companies to lend based on the borrowers' ability to pay over the entire loan -- not just during the introductory, two-year "teaser rate," which then rises to around 10 percent on a typical high-cost or "subprime" mortgage -- said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corp., said before the House Committee on Financial Services on Capitol Hill.
"This requirement would go a long way toward helping borrowers avoid loans that they cannot repay, and would improve the quality of lender portfolios," Bair said.
The committee's chairman, US Representative Barney Frank, Democrat of Newton, has said he wants to pass legislation by year-end imposing national standards on mortgage lenders and protecting borrowers from loans they cannot pay.
But industry representatives say subprime mortgages offer an opportunity to purchase homes for borrowers who might not otherwise qualify. Subprime loans, which exploded in recent years to a $600 billion annual business, are high-interest mortgages offered to borrowers with credit problems. Mortgage companies also argued tighter regulation would shrink the credit available for home purchases at a time when the housing industry is in a slump.
As many as 2.4 million Americans with subprime loans may lose their homes, the Center for Responsible Lending said in testimony to Congress.
"We do not see a need for legislation at this time," John Reich, the director of the Office of Thrift Supervision, another loan industry regulator, told the committee.
But both federal and Massachusetts officials yesterday said subprime mortgage lenders and their brokers misrepresented loans to customers, who are now facing seizure of their homes. At the Massachusetts State House, regulators, lawmakers, and community groups expressed broad support for legislation to stem the tide of foreclosures and to increase regulation of mortgage companies.
"This is a crisis in Massachusetts, a crisis created by the proliferation of subprime loans," said state Senator Jarrett Barrios, a Democrat who represents districts from Cambridge to Revere.
Barrios sponsored one of several bills in the Legislature that grapple with foreclosure filings in Massachusetts, which soared to a record of nearly 20,000 in 2006. His bill would provide counseling to home buyers and foreclosure relief to those already having difficulty paying their loans. To prevent some foreclosures, he also proposed giving borrowers 30 days to catch up on delinquent monthly payments, a time period one community activist said was too short.
Tales of questionable loans were recounted. Barrios said an elderly resident in Cambridge's Huron Village neighborhood signed a refinancing loan that put her on the path to foreclosure, even though she had Alzheimer's and was "unaware of what was going on." And Isabel Frias, a former homeowner and single mother of three, said she lost her savings when her lender seized her $340,000, two-family home in Lawrence. She learned at the loan closing, she told the committee, her mortgage payment would be $1,000 higher than she had been promised by the broker, a friend of her boyfriend.
He "did not explain to me" the transaction, said Frias, who spoke Spanish to Senator Susan Tucker of Andover, and Representative Kevin Honan of Allston-Brighton, Democrats and chairs of the Joint House and Senate Committee on Housing.
Asked by the panel why she signed the loan, Frias explained through a translator that the broker had told her, "if she changed her mind she would lose her down payment, a life savings of $12,000."
Massachusetts Attorney General Martha Coakley said her office has seen evidence some lenders "inflated the income of the consumer," adding, "You have consumers getting loans they should not get."
Secretary of State William F. Galvin said mortgage bankers should be required to certify they complied with state disclosure rules, particularly when offering no- or low-documentation loans that can lead to "misrepresentations" about the financial details of mortgages. Lenders "have had a free pass in Massachusetts for a long time," he said.
There were also calls to impose the state's Community Reinvestment Act, which requires state banks to make loans that build communities but does not apply to the largely out-of-state subprime companies doing business here. One proposal would license individual loan brokers, rather than just the company they work for. The industry is "completely unregulated," Barrios said.
Tina Brooks, undersecretary of the Massachusetts Department of Housing and Community Development, said the subprime problem is acute in African-American and Latino neighborhoods. A March study by the Federal Reserve Bank of Boston found that foreclosures were rising fastest in Brockton, Springfield, Lawrence, Lowell, and Lynn. Many of these cities have large minority populations.
High-cost loans are "unaffordable and a recipe for foreclosure," said Brooks.
Kimberly Blanton can be reached at blanton@globe.com. Material from Bloomberg News was used in this report. 
