The subprime barn door
HOME FORECLOSURES are on the rise, and lenders specializing in subprime mortgages -- that is, loans for homebuyers with blemished credit -- have been evaporating left and right. At long last, lawmakers and regulators have taken an interest in this untidy corner of the mortgage market, and financial-services trade groups are getting in on the act, too, recently issuing a joint statement offering their response to the mess.
Nobody should lend people more than they can pay back, urged the American Bankers Association, Mortgage Bankers Association, and other industry groups. The terms of a loan should be clear to the consumer. Ways should be found to help struggling mortgage holders stay in their homes.
These recommendations sound suspiciously like what should have been happening all along. Instead, some brokers knowingly wrote mortgages far larger than their clients could afford -- and did little to make sure clients understood the terms.
Earlier this month, Attorney General Martha Coakley requested public comment on regulations that would ban "no-documentation loans" and prohibit brokers and lenders from inflating a borrower's income on application forms. The lateness of the industry response underscores the need for such rules -- and for legislation like that filed earlier this year by state Representative David Torrisi and Senator Jarrett Barrios. Their measure calls for better licensing for mortgage brokers, a cooling-off period during which borrowers who miss payments can catch up without incurring prohibitive fees, and provisions allowing state banking regulators to scrutinize the mix of loans that mortgage lenders offer to different communities.
Industry groups, however, are wary of state-by-state regulation. And the solutions they propose tend to be more modest. Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, suggests that lenders can reduce the concentration of unsustainable loans in low-income neighborhoods by hiring more employees from those areas and hammering out better relationships with community housing groups. Such measures would help, but they only go so far.
While lenders have been chastened by the subprime scandal, avoiding future excesses will require regulatory action. Coakley has also issued emergency regulations to ban foreclosure-rescue schemes, in which struggling homeowners are persuaded to sign over their homes in exchange for "help" that may or may not materialize.
Other nuts-and-bolts changes would promote smarter behavior among consumers before they borrow. For instance, standardized loan forms should drive home the long-term costs of a loan, not just the monthly payments during a teaser period. William Apgar of Harvard's Joint Center for Housing Studies notes that subprime mortgages are less likely than standard ones to include escrow mechanisms for property taxes and insurance -- which makes monthly payments seem deceptively low. Federal banking regulators could help by classifying such an omission as a deceptive practice.
In the past two years, mortgage lenders have become more cautious; an orgy of exotic loans has given way to morning-after regrets. But these lessons may be forgotten when the housing market trends upward again -- unless lawmakers and regulators act now. 