Now mortgage brokers are facing congressional investigation. The Banking, Housing, and Urban Affairs Committee, chaired by Christopher Dodd, D-Ct., held a hearing entitled "Preserving the American Dream: Predatory Lending Practices and Home Foreclosures," to look at sub-prime and predatory lending as the reasons foreclosures have risen so fast recently nationwide.

Senator Dodd's stated purpose for the hearing was to "create, sustain, preserve, and protect the American dream of home ownership, and to stop abusive practices in the housing market."

At the hearing, held on February 7, 2007, Senator Dodd heard from two homeowners who were targets of abusive business practices. Delores King, who has owned her home in Chicago for 36 years, may lose her home due to an exotic mortgage she was duped into signing by a telemarket mortgage broker, she says. North Carolina native Amy Womble faces a similar plight after a popup Internet advertisement led her to a broker that intentionally misrepresented her income in order to secure a home loan she could not afford, she testified.

The Committee also heard from the Rev. Jesse Jackson, president and founder of the RainbowPUSH Coalition; Hilary Shelton, executive director of the NAACP; and Jean Constantine-Davis, senior attorney for AARP who claim that predatory and sub-prime lenders target minorities, immigrants, the elderly, and other vulnerable individuals. Also testifying were banking officials such as Harry Dinham, president of the National Association of Mortgage Brokers; Martin Eakes, CEO, Self-Help Credit Union and the Center for Responsible Lending; and, Doug Duncan, chief economist, Mortgage Bankers Association.

Senator Dodd also considered testimony over adjustable rate products such as the 2/28 which comprise up to 80 percent of subprime loans today. The 2/28 is an adjustable rate mortgage that fixes payments for the first 24 months, and refinances at the two-year anniversary date. These loans are deceiving, says Dodd, as their monthly payments spike up after the initial quoted rate and often force individuals to refinance, generating fees that leave consumers even worse off.

Despite the booming economy, with better-paying jobs, more jobs, and strong consumer spending, defaults and foreclosures are rising. Dodd says it is time for Congress, the Administration, and the lending industry to face up to the fact that predatory and irresponsible lending practices are creating a crisis for millions of American homeowners.

"The system is out of balance," said Dodd. "There is a chain of responsibility that makes these abusive loans possible. I look forward to working with each link in that chain -- the brokers, the bankers, Wall Street, the regulators, the Congress, and the Administration -- to help restore this balance for the sake of the homeowners who are being victimized and to make sure that subprime credit can, once again, play a constructive role in the marketplace."

The Mortgage Bankers' Association was quick to fight back with a fact sheet claiming that 35 percent of homeowners own their homes outright, forty-seven percent are in fixed-rate loans, with only 18 percent of homeowners in adjustable rate products. Only six percent are sub-prime borrowers with adjustable rate loans, contradicts the MBA.

The MBA also claims:

 

• About one percent of mortgage loans are in foreclosure, which is well within historical norms, despite record home sales in the past five years.

   

• Three-fourths of loans that enter the foreclosure process do not wind up in foreclosure sales. Homeowners either cure the delinquency, work out a payment plan with the lender, or sell the home.

   

• The number one cause of delinquencies and foreclosures is job-related. There is no evidence that increased delinquency rates are due to hybrid ARMS or other nontraditional loan products such as interest-only or payment-option mortgages.

   

• Delinquency rates tend to peak 3-5 years after origination. With more than half of all outstanding loans less than three years old, it's reasonable that delinquency and foreclosure rates may rise.

   

• Stating the obvious, nonprime borrowers have always had a higher delinquency and foreclosure rates than prime borrowers. Nonprime borrowers also have a higher percentage of ARM loans.

   

• Lenders don't want to foreclose -- the costs are typically 30 to 50 percent of the outstanding loan balance, a lose-lose for the borrower and lender.

   

• Between $1.1 trillion and $1.5 trillion of ARMs could reset in 2007. Approximately $600 to $700 billion will refinance prior to or at reset, keeping those borrowers from facing a payment increase as their loans reset. The remaining $500 to $800 million will reset.

   

• Investors, rating agencies and lenders have already tightened underwriting standards because of the high volume of nontraditional loan products. The marketplace is working, says the MBA, and does not need to be regulated further.

   

• Interesting to note is that one of the proposed regulations to be imposed on lenders is "fiduciary duty."

Published: February 9, 2007
http://realtytimes.com/rtapages/20070209_mortgagebankers.htm