Foreclosure Moratorium Seeks to Rescue Borrowers
MICHEL MARTIN, host:
I'm Michel Martin and this is TELL ME MORE from NPR News. Coming up, the Hollywood writer's strike is finally over. We'll talk to television and media critic Eric Dagan for about what we can expect now that the writers are headed back to work. But first, there's a new development in the ongoing mortgage crisis. The Bush Administration yesterday announced a program that could mean a 30 day freeze on foreclosures for many Americans. That could get homeowners who've fallen seriously behind in their payments, a chance to recover.
The program is called Project Lifeline and it's backed by Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alfonso Jackson. Joining us in our studios to talk about this is Shanna Smith, President and CEO of the National Fair Housing Alliance. Also with me is Hilary Sheldon. He's the director of the NAACP's Washington Bureau. Thank you both so much for coming in.
Ms. SHANNA SMITH (National Fair Housing Alliance): Thank you for the invitation.
Mr. HILARY SHELDON (NAACP): It's great to be with you.
MARTIN: Shanna first just tell us how this is supposed to work, how the lenders participate, how do homeowners get relief?
Ms. SMITH: Well if you read the notice from Paulson, people have the next 30 days to try to make contact with their servicers. And then they'll try to do loan modifications and possibly work outs. The difficulty with that is, that if you've ever tried to call your loan servicer, you understand that you run into a chain of barriers, step by step by step. And lots of people give up after that time of trying to call or they are treated rudely.
So while this program is interesting, it is not a major step that you would expect from the Administration to take a major step to deal with this massive foreclosure occurring in the United States today.
MARTIN: What do you think though, if you could clarify. From my understanding this is also homeowners who don't necessarily have sub prime mortgages, who have regular mortgages are eligible for this relief if they are in foreclosure. Is that correct?
Ms. SMITH: Yes, it says that anybody who is within, just over 90 days late on their mortgage can call and try to get assistance.
MARTIN: But it's my understanding that if you're 90 days late, you're already in foreclosure. You are in foreclosure after 60 days. So why 90 and not 60?
Ms. SMITH: You know what's interesting to me is that it says that if you are in this month and foreclosure is already underway, they are not going to be able to help you. So this program is too little too late for the massive problem we are facing.
MARTIN: Hilary Sheldon I wanted to talk to you about this. It's been projected that nearly a million homeowners are at risk of losing their homes this year and people of color are disproportionately affected. Why is that?
Mr. SHELDON: Because people of color were, had this loan steered in their direction. For some reason, they thought they were easy prey by some unscrupulous lending institutions and mortgage brokers. What we found out is that today, about 54 percent of all, 54 percent of African-Americans have sub prime loans. That is 54 percent of all African-Americans that have loans, have sub prime loans, which creates a major problem.
What that means is that we're going to lose our homes at a higher rate. We were first steered into packages. They were more expensive. They were more problematic, that very well, we found that African-Americans that had the same rating on their ability to pay back very well, their mortgage ratings, were steered into sub prime loans anyway.
MARTIN: Is it your contention that is the problem here, the product itself, which is the subprimes that are inherently flawed in your view or is it the processes used to market them?
Mr. SHELDON: It was both. It was both. What we have is packages that were not very clear. People started out at an introductory rate. It was nice and low and quite affordable. When the mortgage brokers sat down with people seeking their first home or wanted to refinance their homes if they were getting older, to do whatever they wanted or even to educate their children for that matter, prepare for their retirement. Did very well, they were steered into these loans that seemed very affordable. Four percent introductory rate will grow two percent over the next year, two percent the year after that. But they were told this, well no, your salary is probably going to grow about four percent anyway so you should be able to afford this.
Most people didn't do the math. They trusted their loan broker and they were steered into these very flawed packages that were extremely problematic for their particular circumstance.
MARTIN: Shanna though, I think that some do argue that this is an individual homeowners responsibility to be acquainted with the terms when you sign any contract.
Ms. SMITH: Well what you have to do is go all the way back. These sub prime products started on Wall Street. The adjustable rate mortgages, the interest only loans and the payment option arms, were created for a very narrow, niche market, a market whose a person whose financial characteristics were that their home was appreciating pretty much, a lot during those next coming years and their income was going to increase more than four percent annually. And those products were made for that niche market. Then Wall Street decided to pay a premium to lenders to push these sub prime arm products.
Ms. SMITH: Greed. You make a lot more money when you sell these products, higher fees. They were able to securitize these packages and sell them all over the world. That's why we are seeing the crisis now.
MARTIN: But why would you be getting a higher fee for loans backed by people with poor credit?
Ms. SMITH: Because it's only going to be for that two year period. So they are taking that risk for that two years to see if they can make the loan fees from that and from interest during that period. And then they sold it when they securitized it, they sold it. So their financial risk was much, much lower. And then the lenders pushed that arm, exploding arm as we call them now, out to the general public and found that we knew these loans weren't suitable.
More than 12 years ago consumer advocates and fair housing advocates told the industries, these were unsuitable loans. They were developed for a very narrow market and yet they continued to push them. And then you had your real estate agent saying to the buyer, oh I know you are qualified for a 200,000 but I can get you in a 300,000 on this adjustable rate loan. You trust your real estate agent. You trust your mortgage broker to give you good advice about your abilities. And you know, most of us have seen some loan documents and they are 50 pages. We don't read them. We trust the people we're working with and that...
MARTIN: Because this is something one does only occasionally. Maybe you buy you know, a skirt you know, two or three times a year but you buy a house two or three times in your lifetime.
Ms. SMITH: Right.
MARTIN: Is that your sort of contention? So Hilary Sheldon I wanted to ask you, you are a part of a group of civil rights organizations who last April, called for six month moratorium on foreclosures. Why do you think this is a civil rights issue?
Mr. SHELDON: Because very clearly, these loan packages were targeted at racial and ethnic minority and the poor - did very well. We know if we look at it again, the steering process and a new form of red line in many ways, which these packages were applied, that they affected African-Americans and other people of color. So...
MARTIN: Well we think of red lining traditionally as denying credit to people within these groups or who live in neighborhoods dominated by these groups. You're saying that it's a form of steering of...
Mr. SHELDON: Absolutely.
MARTIN: ...mortgage products to people in these groups.
Mr. SHELDON: Exactly. It's denying them the kind of products they are most suitable for them to be able to sustain. Did very well denying them a prime loan at a fixed interest rate that is affordable because they know they can handle throughout the duration. Most people do 20 or 30 year loans, always thinking that far ahead. And indeed what we found is very clear that was not the case.
As Shanna mentioned earlier, these packages were really meant for people that for instance, a doctor in residency. You know that you are finishing your last year of residency. Your income is going to skyrocket in the next year, in some cases more than double it. So certainly you can afford to escalating cost as you move into actually refinancing your home at that more suitable rate.
MARTIN: I see or executives who perhaps might be anticipating a short term assignment in a specific location. I see.
Mr. SHELDON: Exactly.
MARTIN: I see. Shanna the FBI is looking into allegations that fraudulent practices were used to market these loans. So that sort of investigation is ongoing. But are there additional law enforcement steps that you think are warranted in this case, particularly given that this seems to have been such a widespread practice involving so many major lending institutions.
Ms. SMITH: Well I think the city of Baltimore has been very thoughtful by using the Federal Fair Housing Act to file the lawsuit against Wells Fargo. The Federal Fair Housing Act says that if you do anything that perpetuates segregation, you are violating the law. And as Hilary was saying, this reverse redlining, this targeting of this unsuitable product to low and moderate income neighborhoods to people of color, come under the Fair Housing Act. And we are hoping more cities will deal with this, because you've lost the tax base. The homes around here have gone down $100,000. Homes in Michigan and Ohio, 20 percent loss of value. That hurts our schools, it hurts our city services and right now it's hurting the urban community.
You see it starting to spread into the suburban communities, the whiter communities and now you are seeing the Administration getting more involved.
MARTIN: But no companies have been officially charged to this point.
Ms. SMITH: No the lawsuits have been filed.
MARTIN: Private, so those are private matters, which mean private entities but no government agency has charged anyone with a crime to this point.
Ms. SMITH: The attorney general in New York has been looking at it and more attorney generals will be looking at it. But these lenders tend to settle before it goes into litigation. And one of the difficulties is, in a big class action lawsuit you don't get down to the issue and you know...
MARTIN: And I think it's fair to point out that even if there is some sort of law enforcement action, those take years to resolve. There's no immediate relief for anyone. So finally, very briefly, is there some additional relief that you would like to see homeowners offered. And these people that are in distress right now, what should they do?
Ms. SMITH: Well, clearly they should call HOPE for assistance. They should call their local fair housing centers and housing counseling agencies. They should call the National Councils (unintelligible) and the NAACP to see if we can get people moving. They should report, anytime they call these organizations and they get help, they should report it to civil rights groups so that we can make sure people of color, female head of households, are being helped by this program.
MARTIN: Shanna Smith is a president and CEO of the National Fair Housing Alliance. We were also joined by Hilary Shelton, who is the director of the NAACP Washington Bureau, and they were both kind enough to join me here in the studio in Washington. Thank you both so much.
Ms. SMITH: Thank you.
Mr. SHELTON: Thank you.