Subprime Lending Abuses Risk Owner Wealth

February 1, 2007

More than 2 million subprime mortgage loans that lenders made during the boom years are in foreclosure, putting at risk $164 billion in wealth accumulation, the Center for Responsible Lending says in a study.

“We’re in the worst foreclosure crisis in modern American history,” Michael Calhoun, the organization’s president and chief operating officer, said at a press conference in late December.

The study found that, thanks to aggressive tactics by subprime lenders who prey disproportionately on minority households unfamiliar with the financing system, one in five households with a subprime mortgage loan now face losing their home. “We’re talking about unwinding much of a generation’s effort to secure a place in the middle class,” said Calhoun.

One of the biggest problem loans has been what the mortgage industry calls the “exploding ARM,” a loan that after a short low rate period adjusts upward without regard to the direction in which interest rate indices are moving. Thus, even if interest rates are heading down, these borrowers can face monthly mortgage payment increases, typically in the 30 percent to 40 percent range.

Real estate professionals would be in a position to help keep borrowers from getting locked into bad loans, but since the lion’s share of these loans are refinancings, practitioners typically don’t have a chance to intervene, says Keith Corbett with the Center for Responsible Lending.

The NATIONAL ASSOCIATION OF REALTORS® is taking steps to address the problem of trapped borrowers with a new series of brochures that practitioners can give to customers warning them to tread carefully.

“We’re encouraging borrowers to contact their REALTOR® right away,” said NAR President Pat Vredevoogd Combs, who spoke at the press conference. “[Refinancing] borrowers still have an opportunity to salvage their situation by putting their house on the market that is, if they’re not upside down already.”

NAR published the brochures in partnership with the Center for Responsible Lending but didn’t participate in its subprime foreclosure study.