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Prosecutors Pressure Lenders as Foreclosures Soar

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Prosecutors Pressure Lenders as Foreclosures Soar

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Prosecutors Pressure Lenders as Foreclosures Soar

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SCOTT SIMON, host:

Home foreclosures at the United States are at their highest levels in 50 years, in part because of subprime loans that are adjusting to very high interest rates. President Bush and members of Congress have appealed to the mortgage industry to lower rates; the industry says it's working with struggling homeowners. But housing advocates say the response has been paltry. Now, the top prosecutors in 37 states are bringing more direct pressure on lenders.

NPR's Chris Arnold reports.

CHRIS ARNOLD: If you are a top executive at a big company in the lending industry, you'd be aware of politicians in Washington asking you to help avoid a historic flood of foreclosures. But you might sit up a lot straighter in your chair if you started getting phone calls from state prosecutors.

State Attorney General TERRY GODDARD (Arizona): The companies, of course, which would rather not deal with 50 separate lawsuits.

ARNOLD: That's Arizona Attorney General Terry Goddard. He recently met executives from most of the major lenders and loan servicers - Countrywide, Wells Fargo, Chase and others. He's part of a group of A.G.s that has sued lenders in the past in one large settlement.

State Attorney General GODDARD: We have a pretty powerful stick to talk about, okay, what are you going to put in place, which will put some meat on the bone to your pledge to work with homeowners to try to make sure that they stay in their homes and avoid foreclosure.

ARNOLD: At issue here are millions of unorthodox subprime loans with interest rates that are just up to 9, 10, 11 percent or higher. Many borrowers who can't afford that say they were misled about those terms.

Meanwhile, the investors who own those loans stand to lose upwards of $50,000 on each foreclosure. So in some cases, both parties can win if the loan is modified and made more affordable.

That's what the industry should be doing says Iowa Attorney General Tom Miller, who heads up the group of prosecutors.

State Attorney General TOM MILLER (Iowa): Well, you know, we'll figure out, you know, who's doing the job and who isn't.

ARNOLD: But industry insiders say the issue is messy. The loans are now pooled together and owned by investors with different interests. Loan servicing companies aren't set up in staff to deal with this massive wave of looming foreclosures. Some say borrowers won't return calls.

Tom Kelly is a spokesman for Chase.

Mr. TOM KELLY (Spokesman, Chase): What we're trying to do is make sure we can reach out and get in contact with borrowers because sometimes when borrowers are behind on loans, they stop answering the phone and they don't call us. And you can't work anything out if you can't reach people.

ARNOLD: Joseph Mason is a finance professor at Drexel University. He says the A.G. s should push the industry to offer workouts that are really affordable and that don't just string borrowers along only to have them default again, but…

Dr. JOSEPH MASON (Associate Professor, Finance, Drexel University): At the end of the day, you do come back to the ultimate moral hazard problem.

ARNOLD: Mason thinks the government shouldn't pressure lenders to bail out people who were just borrowing and spending way too much or buying more house than they could afford.

Dr. MASON: If people are allowed to lay off part of their debt, they will typically go out and build new debt so to the extent that people dodge the bullet this time and say, poof(ph), I got my loan modified. So now, I have my payments reduced, I can go borrow to get that new car that I wanted. Again, putting the modified loan at risk.

ARNOLD: But the A.G.s say there are a lot of people who got into loans but they just didn't understand, and who are otherwise pretty responsible homeowners. The prosecutors are requesting documents from the lenders so they can monitor how many and what kind of loan workouts the companies are offering to borrowers.

Chris Arnold, NPR News.

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