| IN THE BEGINNING | | | | 3. Borrower realizes that he/she cannot continue to |
| In a manner similar to the numerous economic crises | | | | make payments based upon the consensual terms. |
| before it, the subprime lending bust actually began | | | | 4. Borrower files a civil action against Lender to nullify |
| decades before anyone knew it. The Community | | | | the loan, recoup costs incurred in filing the lawsuit, and |
| Reinvestment Act of 1977 pushed banks to extend | | | | to recoup attorney's fees. |
| more credit in communities where they operated. This | | | | 5. Lender must then overcome the substantial |
| drew many lenders to lower-income borrowers. Later, | | | | rebuttable presumption of guilt in order to be |
| in 1986, the federal government began allowing | | | | successful in its defense. |
| taxpayers to deduct the interest paid on mortgage | | | | It should be noted that the bill provides no presumption |
| loans. The effect was a boon to the market for | | | | that the borrower must overcome. Nowhere in this |
| refinancing. In addition to the benefits attached to | | | | proposed legislation is the borrower required to show |
| building equity - paying a fixed monthly payment | | | | good reason for his/her inability to pay. The Act would |
| instead of rising rent, for example - homeowners could | | | | not even require the borrower to show good reason |
| now take advantage of the tax break. This led directly | | | | for seeking recission of his/her financial obligation. |
| to a steady increase in home ownership, in many | | | | The basic effect of these provisions would allow |
| cases regardless of how the borrowers would afford | | | | borrowers to sue lenders simply because the lenders |
| the loans in the future. Risky loans were made across | | | | should not have loaned them money. The potential |
| the board, from small rural towns to inner city | | | | effect of such legislation would be to curtail lending to |
| neighborhoods to affluent suburban areas. | | | | a point where mortgage lenders would avoid making |
| From 1986 through the mid-nineties, mortgage | | | | loans to all but the highest order of borrowers. This |
| securities began to catch the eye of Wall Street. The | | | | would decrease homeownership solely because the |
| focus in that time shifted from investment in regular | | | | number of lenders willing to take on even normal-risk |
| "prime" mortgages, to the riskier "subprime" loans. The | | | | borrowers would shrink precipitously. |
| risk of default on subprime loans was higher than that | | | | The general issue of whether those not materially |
| of prime loans, but they were still more attractive to | | | | affected by the subprime lending collapse should "bail |
| investors. The volatility in the subprime market was | | | | out" homeowners facing foreclosure has come to the |
| very low in comparison to the stock market. This low | | | | foreground of the political landscape. Any Pennsylvania |
| volatility rate made subprime loans the "must-have" for | | | | resident who has seen a campaign advertisement |
| mutual fund companies, regular banks, pension funds, | | | | leading up to the crucial April 22, 2008 Democratic |
| and insurers - all of whom were looking to further | | | | Primary could attest to this. On March 7, 2008, Senator |
| diversify their holdings. | | | | Kit Bond (R-MO) introduced the "Security Against |
| There have been several bubbles in the financial | | | | Foreclosures and Education Act" (the SAFE Act). The |
| markets. The market is prone to human emotion, and | | | | purpose of the SAFE Act is to help families and |
| investors sometimes become overzealous with the | | | | neighborhoods facing home foreclosure and address |
| proverbial "next big thing." Similarly, investors in | | | | the subprime mortgage crisis. Senator John Cornryn |
| subprime loans took the initial gains as indicative of | | | | (R-TX) and a number of other Senators are on board. |
| future windfalls, and began to put more and more | | | | The SAFE Act provides an example of the steps |
| money into the industry. By the time housing prices | | | | Congress is taking in attempting to bridge the gap |
| peaked (from 2004 to 2006), over a quarter of all | | | | between the two main viewpoints on the issue. The |
| loans made were high-rate subprime loans. Thirty-five | | | | plan is to provide over $10 billion to refinance subprime |
| billion dollars was invested in subprime loans in 1994 - | | | | mortgages which are stressed or facing foreclosure. It |
| $11 billion of which was bought on Wall Street. This | | | | also provides for a $15,000 tax credit, spread over a |
| ballooned into $332 billion in loans in 2006. A whopping | | | | three year period, for the purchase of a "qualified |
| $203 billion of those outstanding subprime loans were | | | | personal residence." "Qualified personal residence" is |
| purchased by investors on Wall Street that year. This | | | | defined by the SAFE Act as "an eligible single-family |
| aggressive lending and concurrent demand for | | | | residence that is purchased to be the principal |
| homeownership resulted in many borrowers enjoying | | | | residence of the purchaser." |
| houses they could never afford. | | | | Other new regulations proposed by the SAFE Act |
| SUBPRIME LENDING: A SHEEP IN WOLF'S | | | | would require borrowers who are considering an ARM |
| CLOTHING? | | | | (Adjustable Rate Mortgage) to be educated with |
| Key to the understanding of the current issues facing | | | | regards to any introductory rates, payments, expiration |
| the mortgage lending industry is the distinction between | | | | dates, prepayment penalties, what the rate will be at |
| "subprime" lending and the oft-unmentioned "predatory" | | | | the outset, and what the monthly payment will be if |
| lending. A subprime loan, also known as a "second | | | | rates increase. These measures are inherently |
| chance" loan, is tailored to borrowers with "less than | | | | proactive. The SAFE Act, if passed, would not look |
| perfect credit," credit problems, or who are less likely | | | | back to those who have dealt or are currently dealing |
| to qualify for conventional home loans. Many times, it is | | | | with foreclosure. The disclosure requirements, |
| the only option for home ownership that the borrowers | | | | however, would place a strong burden on mortgage |
| have. The loans are typically short term, and generally | | | | lenders to inform potential borrowers about nearly |
| extend over a two to four year period. The loans | | | | every financial aspect of buying a house. |
| come with higher interest rates and fees, which is | | | | The proposed borrower education and increased |
| standard for any line of credit approved for higher-risk | | | | disclosure requirements would not end after purchase. |
| borrowers. Most important, however, is the fact that | | | | Section 327 of the SAFE Act would amend Section |
| these loans are intended to allow the borrowers a | | | | 106(c)(4) of the Housing and Urban Development Act |
| chance to pay back debts and clean up their credit. At | | | | of 1968, which currently provides for financial |
| the end of the lending period, the borrowers should be | | | | counseling for homeowners who cannot meet their |
| able to qualify for or refinance into a loan with a lower | | | | current mortgage loan obligations due to job loss. The |
| rate and risk from a major bank. | | | | change would make the counseling available to those |
| Predatory lending involves engaging deception or even | | | | who cannot make payments due to divorce, death, |
| fraud, through misinforming and manipulating the | | | | unexpected or significant increase in medical |
| borrower. This often involves pushing aggressive sales | | | | expenses, unexpected or significant damage to the |
| tactics onto naïve consumers, and taking | | | | property, and/or a large increase in property tax. The |
| advantage of any lack of understanding. The | | | | counseling would still be available only to first-time |
| predatory lender does not care about the borrowers' | | | | homebuyers, and would continue to include counseling |
| ability to repay. It occurs in both the prime and | | | | with respect to financial management, available |
| subprime market, but thrives in the latter due to the | | | | community resources and social services, and job |
| greater amount of oversight that prime lenders | | | | training/placement. |
| (typically banks or credit unions) provide. Predatory | | | | In order to spur an increase in homeownership |
| lenders use abusive loan practices that generally | | | | following the foreclosure crisis, the SAFE Act would |
| involve one or more of the following problems: | | | | create a pilot program for borrowers without credit |
| 1. loans structured to result in seriously disproportionate | | | | history sufficient to buy a house. Addressing this |
| net harm to borrowers, | | | | lending demographic was necessary, given that |
| 2. harmful rent seeking, | | | | persons with bad credit were primarily targeted by |
| 3. fraud or deceptive practices in lending, | | | | predatory lenders. The pilot program would use an |
| 4. other forms of lack of transparency in loans not | | | | "alternative credit rating" to give those with insufficient |
| actionable as fraud, and | | | | credit history a chance to buy a house without having |
| 5. loans that require borrowers to waive meaningful | | | | to wait for a long time just to build a good credit |
| legal redress. | | | | history. The new credit rating system would take into |
| The Coalition for Responsible Lending recently | | | | account information such as rent payment, utility |
| estimated that predatory lending alone costs | | | | payment, and insurance payment histories. One could |
| borrowers in the U.S. over $9 billion every year. A | | | | easily argue that rent and utility payment information |
| prominent indicator of the rise of predatory lending is | | | | would be far more useful to mortgage lenders than |
| the unprecedented increase in foreclosures across the | | | | normal credit rating information. |
| United States. While interest rates were dropping from | | | | There is no word from the Democrats in Congress as |
| 1990 to 1998, the home foreclosure rate increased | | | | to when this proposed legislation could be up for a |
| massively - rising 384%. | | | | vote. The new required disclosures proposed by |
| Why the differentiation? For starters, many consumer | | | | Senator Bond are not unreasonable. They would |
| advocates and hard-line opponents of subprime lending | | | | create a new standard for lenders, while emphasizing |
| have claimed that there was no distinction. This | | | | the importance of financial education to borrowers. |
| unfortunately blurred the line between lenders offering | | | | The requirements would not relieve irresponsible |
| a second chance to the borrowers who need one and | | | | borrowers of the obligations they created through their |
| those lenders who target for the sole purpose of | | | | own volition by entering into financial agreements with |
| squeezing blood from the proverbial stone. While | | | | which they could not comply. Both schools of thought - |
| subprime lending creates homeowners, predatory | | | | those who believe that lenders do too little, and those |
| lending eliminates them. Predatory lending is most | | | | who believe that borrowers should be more diligent - |
| prevalent in the subprime market, but occurs across | | | | are addressed in a way that encourages |
| the entire lending spectrum. It affects middle- and | | | | self-education and diligent disclosure. |
| upper-class in the same destructive way as it does | | | | BALANCING PERSONAL RESPONSIBILITY AND |
| the lower-class. The only requirements for a predatory | | | | MARKET CONCERNS |
| lender are that his victims must have two things: | | | | The precipitous change in home ownership and the |
| financial problems and a lot of equity in their homes. | | | | steep increase in foreclosures endured by the U.S. |
| A perfect example of predatory lending is found in the | | | | have been debilitating, and the crisis is far from over. |
| story of Ken and Pat Leahy, who live in the suburban | | | | Illustrating the effect are the recent cuts in interest |
| Chicago town of Glenview, Illinois. The couple is | | | | rates made by the Federal Reserve - the first since |
| currently fighting a business that conducted "mortgage | | | | 2003. American home prices recently dropped for the |
| rescue" operations, which is another term for one of | | | | first time since most likely the Great Depression, and |
| the numerous predatory lending scams. The couple | | | | according to a March 2007 study conducted by First |
| lived in the same house for forty-seven years, and | | | | American CoreLogic, the market should expect |
| had refinanced several times (as many Americans do) | | | | another 1.1 million foreclosures by 2013. Lawmakers |
| to build onto the house and send their daughters to | | | | now face a tough balancing act between protecting |
| college. In March of 2002, Ken lost his job. After | | | | vulnerable holding borrowers and allowing borrowers to |
| struggling for a while to make their $1,700 mortgage | | | | skirt the responsibilities attached to taking out |
| payments and receiving numerous solicitations from | | | | mortgages that they could never afford. |
| lawyers and loan brokers, the couple decided to meet | | | | In 2007, the Bush administration loosened some lending |
| with Harrison & Chase. The business advertised | | | | rules, which could help around 80,000 borrowers |
| itself as a "foreclosure mitigation firm," and pledged that | | | | refinance to avoid higher rates. A bill has also been |
| its services were provided "free and pro bono." As the | | | | introduced to reform subprime lending practices, and to |
| couple sat down to meet with Mr. Hantzakos, a | | | | help weed out more predatory lenders by targeting |
| company rep now named as a defendant in their | | | | them more specifically. The bill would, among other |
| lawsuit, he assured them that they should not worry | | | | things, expand the Homeownership and Equity |
| because he "talk[s] to different people than [they] do." | | | | Protection Act (HOEPA) to cover more loans, expand |
| The couple then hesitatingly signed two forms - one | | | | the protection for HOEPA loans, clarify state law |
| which authorized Harrison & Chase to negotiate | | | | regarding mortgage loan broker duties to emphasize |
| on their behalf, and another that was an exclusive deal | | | | the fiduciary duties owed to borrowers, and create a |
| to help the Leahys sell their home. | | | | new section of protections for subprime loans. |
| The Leahys never received a copy of either form. | | | | In general, those opposed to government intervention |
| After the supposed meetings with the couple's lender | | | | believe that although the lending industry will probably |
| failed, Mr. Foxx, the president of Harrison & Chase | | | | experience some short-term pain, the economy will |
| contacted the couple and offered them a new idea. | | | | emerge healthier. Others also believe that overriding |
| Foxx told them that they could put their home in a | | | | personal responsibility for investments by instituting a |
| "protected trust," which would protect them from | | | | federal bailout would be a "subsidy for risky behavior" |
| creditors while Ken found a new job, they improved | | | | in the marketplace, and would encourage future risky |
| their borrowing power, and refinanced. Though the | | | | credit transactions by saying ". . . the government . . . |
| trust would have the power to sell their home, the | | | | will bail out bad lenders." |
| Leahys were assured that they would have the first | | | | Talking heads at the Center for Responsible Lending, a |
| chance to buy it back. | | | | nonprofit research group, call such a bailout |
| While the couple had not intended to give up the title to | | | | "unconscionable," because there was a huge amount |
| their home of nearly fifty years, they unfortunately did | | | | of money initially made on investments in subprime |
| exactly that. They learned that they had sold their | | | | loans, and that investors should be allowed to "feel the |
| home for $230,000 in an area which they at the time | | | | pain" in the free market. Bailing out investors seems |
| could have gotten over $500,000 for the same | | | | counter-intuitive at first glance. It does make sense - |
| property. After satisfying their mortgage with the | | | | why should investors be covered by the government |
| $230,000 for which they sold the house to Harrison | | | | when they lose money if they are not then forced to |
| & Chase and paying property taxes, the Leahys | | | | turn over money when the government believes they |
| walked away with only $10,361. Adding insult to injury | | | | have made too much of it? Bailing out someone who |
| was the fact that the couple would up paying $2,500 | | | | engaged in risky behavior will most likely only |
| per month to rent their own home back from the | | | | encourage such behavior in the future. |
| "rescuers," and agreed to pay nearly $300,000 to buy | | | | Those in favor of the bailout option contend that some |
| their beloved home back. Unfortunately, due to another | | | | industries are "too big to fail." This argument was first |
| series of unfortunate hospital visits, the Leahys cannot | | | | used about ten years ago, when the Federal Reserve |
| afford that. | | | | intervened on behalf of the enormous hedge fund |
| The Leahys are not alone, either. Predatory lenders | | | | Long Term Credit Management. Currently, almost 100 |
| have been taking advantage of sentimentality and | | | | subprime lenders have closed their doors since the |
| human attachments to property all over the country, | | | | initial bust, and the ripple effects are only beginning to |
| using "sales leaseback" schemes like Harrison & | | | | be felt by other areas of the United States economy. |
| Chase. All a potential victim needs is exactly what the | | | | The financial system is so interconnected, through the |
| Leahys had: financial problems and a lot of equity in | | | | slice and dice of mortgage loan bundles amongst |
| their homes. Until these operations are squeezed out | | | | investment funds, that when a homeowner in Ohio |
| by the increase in oversight effectuated by the | | | | defaults, a retiree in Hawaii might take a hit in his |
| mortgage bust, borrowers must not make the same | | | | portfolio. Whichever way the decision is made, the |
| mistake as the Leahys. Both new and veteran | | | | stakes are huge for those in Pennsylvania planning to |
| homeowners who find themselves in financial trouble | | | | enter into homeownership in the next few years. |
| must sort through the frustration and educate | | | | APPLICATION TO THE GRADUATE STUDENT |
| themselves. Seeking independent legal and financial | | | | The result of the confusion between subprime and |
| advice is paramount, and there are many private and | | | | predatory lenders is clear: subprime loans are utterly |
| public outlets in which to do so. | | | | feared and avoided by all borrowers, many of whom |
| MERGING CRIME WITH CAPITALISM | | | | would greatly benefit from such a situation. Home |
| In addition to highlighting the predatory lending that had | | | | prices are falling, yet those who could take advantage |
| been taking place, the bust in the real estate market | | | | of the low prices will never do so. Potential borrowers |
| turned the spotlight on potential criminal activity in the | | | | have decided to stay put after hearing about the |
| real estate market. For example, New York Attorney | | | | foreclosures, dreaded adjustable rates, and others |
| General Andrew Cuomo has filed suit against the real | | | | losing their homes. A sign of the times is that |
| estate appraisal unit of First American Corporation - a | | | | apartment turnover has recently stagnated, as |
| Fortune 500 company. Attorney General Cuomo | | | | apartment dwellers are choosing to forgo the |
| believes that the practice is "widespread" and has | | | | financially beneficial route of building equity. According |
| been a large contributor to the crash in the market. | | | | to the National Association of Realtors, there are |
| The lawsuit against First American alleges that the | | | | nearly a million such people who are foregoing any |
| company inflated the values of homes in order to get | | | | purchase of real estate. |
| more loans approved. The mortgage companies were | | | | A recent study conducted by Congress' Joint |
| apparently pressuring the appraisers to do so. Such a | | | | Economic Committee has projected that by the end |
| practice makes it very easy for borrowers to either | | | | of 2009, nearly seventeen percent of Pennsylvania's |
| overpay for a home or borrow too much against their | | | | subprime loans could fail. The study showed that |
| current home. Therefore, when home prices began | | | | twenty-nine percent of all first mortgages in Beaver |
| falling, the borrower would be unable to refinance if his | | | | and Armstrong counties, twenty-six percent in |
| house ended up being worth much less then he had | | | | Washington County, and twenty-five percent in |
| thought at the time of purchase. | | | | Allegheny and Westmoreland counties were all |
| More absurd than even the artificial inflation of | | | | subprime. In Philadelphia County, a startling forty-six |
| appraisal prices was the fact that an entire industry | | | | percent of all mortgage loans were subprime. |
| based on assisting borrowers in fraudulently obtaining | | | | As far as Pittsburgh is concerned, those in the area |
| loans had sprung up. At the zenith of the subprime | | | | have only experienced an eleven percent appreciation |
| lending market, a low credit score, insufficient monthly | | | | in real estate values from 2001-2006. This is a painfully |
| income, and even a history of bankruptcies could not | | | | low increase, as compared to Philadelphia |
| keep borrowers from obtaining mortgages. For | | | | homeowners, who experienced an increase of over |
| example, all an unqualified borrower had to do if he | | | | fifty percent in home value. Allegheny County residents |
| wanted to qualify for a loan that he thought he might | | | | have also experienced around 400 foreclosures in |
| be able to afford was visit For only a $55.00 fee, the | | | | February 2008 alone - the highest for the month of |
| small California-based company would help an | | | | February in over twenty years. Real estate agents in |
| unqualified borrower get a loan by listing him as an | | | | the area do not believe that residents should fret, |
| "independent contractor." In doing so, the company | | | | however, since the Pittsburgh market has escaped the |
| provided pay stubs that "proved" the borrower's | | | | larger amounts of foreclosures experienced |
| income to be much higher than it really was. For only | | | | elsewhere. Instead, those looking for homes in the next |
| $25.00 more, the company would also provide a | | | | few years can apparently count on local real estate |
| telephone call to the lender in which they would give | | | | agents to come up with better deals and buying |
| the borrower a glowing reference. Another website - - | | | | opportunities. While the outcome for the former |
| provides interested borrowers with fake names, | | | | owners of the houses have been unfortunate, young |
| addresses, credit card numbers, social security | | | | first-time homebuyers will probably be able to make |
| numbers, and basically anything else one would need | | | | the proverbial lemonade by taking advantage of the |
| to secure a mortgage loan. | | | | low prices that will probably stick around for the next |
| More recently, mortgage lending fraud in Pittsburgh has | | | | few years. |
| been picked up by the national newswire. U.S. | | | | There is no clear solution to those who plan - or |
| Attorney Mary Beth Buchanan announced on April 10, | | | | planned - to buy their first home soon after finishing |
| 2008 that two mortgage brokers pleaded guilty in | | | | their education. Graduate students many times face |
| federal court to mortgage fraud charges. The two | | | | student loans around $100,000, and mounting credit |
| brokers, Aaron Thompson and Randy Carretta, | | | | card debt from extraneous expenses incurred during |
| operated People's Home Mortgage. While the stated | | | | school. Overall, debt-laden grads are not very |
| purpose of the business was to "assist borrowers in | | | | attractive to the lending industry in its current state. |
| obtaining financing to purchase homes," the duo instead | | | | This is especially compounded where the student |
| submitted for borrowers applications containing patent | | | | burdened by high education loan debt does not make |
| misrepresentations about the borrower's financial | | | | much after leaving college or graduate school. Simply |
| condition. The applications also included inflated | | | | making student loan payments on time, however, will |
| appraisals of the properties prepared by unlicensed | | | | boost your chances of getting a better interest rate on |
| appraisers and falsified employment documents. | | | | a home loan. Those considering purchasing their first |
| Sentencing is scheduled for September 2009, and the | | | | home must decide whether they feel secure enough |
| two are each facing the possibility of $250,000 in fines | | | | to stay there for at least the next five years to wait |
| and twenty years in prison. The two convicts are only | | | | for the inevitable market rebound in prices. |
| a drop in the growing pond, however, and are not the | | | | There is good news, however. The Federal Housing |
| only ones to blame for the subprime lending crash. | | | | Administration (FHA) insures specialized first-time |
| Laissez-Faire lending oversight and standards also | | | | homebuyer loans, which greatly encourage new |
| provided an avenue for "fraud for profit." In one New | | | | homeownership. These loans are funded by lending |
| York case, the FBI has charged twenty-six people for | | | | institutions and insured by the U.S. Department of |
| fraud. The defendants allegedly used stolen identities, | | | | Housing and Urban Development. For those looking for |
| invented buyers, and inflated appraisals in order to | | | | a single-family home here in Allegheny County, the |
| obtain over $200 million worth of properties. Several | | | | current lending limit is $327,500. A major perk of |
| other similar operations have been eliminated by law | | | | obtaining such a loan is that the down payment |
| enforcement - in an Ohio case, almost half of all the | | | | requirement is reduced from to only three percent of |
| mortgages processed by a single broker did not make | | | | the total loan amount (down from ten percent). |
| a single payment. Unfortunately, many other fraudulent | | | | Adding to the benefits enjoyed by today's first time |
| borrowers and lenders will get away with it, because | | | | homebuyers is that real estate prices have dropped to |
| the money is "out of the door" and there is no | | | | all-time lows as more houses are put on the market, |
| recovery to be had. | | | | and will probably stagnate for the next few years. This |
| For many investors, the growth and rapid bust of the | | | | will provide a benefit to those with student loan |
| lending industry reminds them of the savings and loan | | | | payments to make, due to the incredibly low prices |
| crisis of the early 1990s. That crisis ended with the | | | | (and, ergo mortgage payments) that will be |
| federal government pumping the market with a bailout | | | | manageable even when compounded with student |
| of $150 billion, and a small number of high-profile fraud | | | | loan payments. In addition, many private loans are not |
| convictions. Presently, however, the major losers in | | | | even reported to credit rating agencies, and therefore |
| terms of real dollars have been the hedge funds. | | | | do not burden the aspiring borrower. Until more |
| Though these funds are in theory only limited to the | | | | solutions are put in place to stop criminal practices in |
| more wealthy investors, small business and borrowers | | | | lending, students looking at first-time homes must |
| alike could soon feel the famous "trickle-down" effect. | | | | resort to more aggressive self-education to help |
| The present administration is considering its available | | | | ensure success in home buying. |
| options and will probably end up pressured into out | | | | IN CONCLUSION |
| lending companies, the borrowers facing foreclosure, | | | | The total fallout from this economic crisis will be |
| or both. In the meantime, class action litigation has | | | | widespread. The immediate results from the bust in the |
| begun, and will not end anytime soon. | | | | industry are clear, and explained with simple |
| ADDRESSING THE PROBLEM IN CONGRESS | | | | economics. As mortgage rates rose, the demand in |
| On October 22, 2007, Representatives Brad Miller | | | | housing decreased. Those with ARM loans could no |
| (D-NC), Mel Watt (D-NC), and Barney Frank (D-MA) | | | | longer afford to keep their houses, so they sold them |
| introduced "The Mortgage Reform and Anti-Predatory | | | | (or, to a lesser extent, foreclosed). The result was a |
| Lending Act of 2007." The stated purpose of the Act | | | | speedy growth in supply coupled with a sharp |
| is to "reform consumer mortgage practices and | | | | decrease in demand caused by the increase in rates. |
| provide accountability for such practices, to establish | | | | The excess created in the housing market drove |
| licensing and registration requirements for residential | | | | prices down. |
| mortgage originators, to provide certain standards for | | | | It is unclear where they will finally stagnate, as there |
| consumer mortgage loans, and for other purposes." | | | | are several factors that could contribute in the near |
| The purpose of the Act, in summary, is to place a | | | | future. The Federal Reserve has lowered interest |
| substantial burden on mortgage lenders while vaguely | | | | rates twice to encourage both home retention and |
| ignoring any irresponsibility in borrowing. | | | | home purchasing. Assuming that inflation remains |
| Title II of the Act is entitled "Minimum Standards for | | | | stable after the rate cuts, there could be more coming. |
| Mortgages." Under this Title, no mortgage lender is | | | | At some point, the trickle-down effect of the rate cuts |
| allowed to make a residential mortgage loan unless it | | | | will influence the adjustable rates that many borrowers |
| makes a "reasonable and good faith" determination | | | | face. Home construction will likely also be a contributing |
| that the borrower has a "reasonable ability to repay" | | | | factor, as the coming slow down in that industry (a |
| the loan. The basis for such a determination would | | | | result of decreased demand for new homes) will |
| have to be the borrower's credit history, current | | | | stabilize the supply of available housing inventory. |
| income, expected income, current obligations, | | | | Andrew J. Wronski, a Partner at Foley & Lardner, |
| debt-to-income ratio, employment status, and "other | | | | LLP, has recently published an educated and intelligent |
| financial resources." There is also a rebuttable | | | | summary of what he believes will be the effect of this |
| presumption against the mortgage lender, under | | | | crisis on the consumer lending industry. Mr. Wronski |
| Section 203 of the Act. | | | | states that there will be a dramatic increase in federal |
| When Sections 201 (Ability to Repay) and 204 | | | | and state regulation of consumer finance. Many other |
| (Liability) are read in conjunction, the burdens the Act | | | | types of consumer loans - even everyday financing |
| would place on lenders are far clearer in nature. If a | | | | options - will be affected, because they were |
| mortgage lender does not comply with the "reasonable | | | | packaged and sold in the same manner as mortgage |
| and good faith determination" standard in deciding to | | | | loans. Already Mr. Wronski has been proven correct in |
| lend a borrower money, and the borrower is unable to | | | | his first assertion; this is evidenced by a simple review |
| repay, the borrower could file a civil action against the | | | | of the proposed legislation discussed earlier. |
| lender pursuant to Section 204 of the Act. This civil | | | | In 2006, this author had a simple five-year plan: work |
| action could be filed for the following: rescission of the | | | | hard, do well, pass the Bar, get married, and lose the |
| loan, costs incurred by the borrower as a result of the | | | | shackles of endless rent payments by building equity |
| violation and in connection with getting the loan | | | | through responsible homeownership. At the time, the |
| rescinded, and even attorney's fees. The step-by-step | | | | latter seemed far easier. Facing the all-too-familiar |
| lending process, according to the Act, would look like | | | | burdens of six-figure student loans, credit card debt, |
| this: | | | | and pressure to land a secure job as a new attorney |
| 1. Potential Borrower applies for a mortgage loan. | | | | begs the absolute question: Would the "American |
| 2. Mortgage Lender, based upon information provided | | | | Dream" put a recent law school graduate in over his |
| by Potential Borrower, agrees to lend the money | | | | head? |
| based on terms both parties agree to. | | | | |