Sub-Prime Mortgages Under Fire
MICHEL MARTIN, host:
I'm Michel Martin. And this is TELL ME MORE from NPR News.
Coming up. Has slavery really ended in the U.S.? Activists say some domestic workers are still being treated that way. That's later.
But first, new figures show a big increase in home foreclosures nationwide, with minority borrowers especially hard-hit. A key factor driving the increase - the tens of thousands of subprime mortgages borrowers have taken on in recent years. Mortgage issuer Freddie Mac says that 60 percent of new homes entering foreclosure have subprimes.
Now with a number of default expected to top one million this year, some civil rights and consumer groups are calling for a temporary moratorium on foreclosures. But is that the right approach?
Joining me to talk about this is Jay Brinkmann, the vice president of research and economics at the Mortgage Bankers Association. He joins us by phone from his home in Falls Church, Virginia; and Democratic Congressman Gregory Meeks of New York is here with me in the studio. Thanks so much for speaking with us.
Representative GREGORY MEEKS (Democrat, New York): Good being with you, Michel.
Mr. JAY BRINKMANN (Vice President of Research and Economics, Mortgage Bankers Association): Thank you, Michel.
MARTIN: Congressman, I'd like to start with you. I talked about the national picture. Are you seeing a big increase in foreclosures in your district?
Rep. MEEKS: Oh, yes. I'm seeing a substantial increase. My district is predominantly a homeowner community. And we've seen over the last year almost an increase in the 6th Congressional District of 90 percent, 90 percent foreclosures going up.
So it is a tremendous problem that we have to focus on so that we can began to restore individuals, so that they can stay in their homes, as well as the fact that we've got to look at what is going on with people who are receiving these loans and why they're going into foreclosure.
MARTIN: Do you have any idea how many of the homes going into foreclosure are people who had subprimes?
Rep. MEEKS: Yeah. Well, let me - and I think it's important to make a distinction between predatory lending and subprime lending because I want to make sure that individuals don't wipe out the subprime industry, because subprimes do put individuals into a home who may not otherwise have qualified for a home simply because of their credit rating.
Rep. MEEKS: But what has happened as a result, you know, particularly when the housing boom was going crazy, people then began to get involved in these exotic subprime loans. And that's where the problem came in, with the exotic subprime loans, where people talk about 2/27 or 3/28, 3/27, where people get teaser rates.
So first two years or for the first year, for the first three years, you get these ridiculously low prices for mortgages. And what they qualify you on is the initial payments. They do not look at what your income would be for the mortgage rate when it goes up in a year or two or three. And so therefore, when those rates go up and your mortgage prices go up, the individuals don't have the salaries to increase substantially.
The mortgages that are being foreclosed in my district are those types. Those are the subprime loans with exotic products. And that's been the problem…
Rep. MEEKS: …predominantly.
MARTIN: And I'm sure Mr. Brinkmann appreciates you're making the distinction between subprimes and predatory practices. And I think also when people talk about predatory practices, they're also talking about, say, marketing techniques…
Rep. MEEKS: Absolutely.
MARTIN: …that prey on people's ignorance.
Rep. MEEKS: Absolutely.
MARTIN: And I think that that's also a distinction that you're making. And I'm sure Mr. Brinkmann appreciates that. But just briefly before we get to Mr. Brinkmann, your Web site calls your district the wealthiest African-American congressional district in the country. So why do you think so many of your constituents settled for these loans or fell for these loans, if you could use that term?
Rep. MEEKS: What happen sometimes is, you know, what you want to do is to get a bigger house and you can't afford it, you're still trying to get a house because it's a middle-income community. And so therefore you're trying to push, you're trying to stretch. You can get an extra bedroom or there's, you know, there's more space, more square footage. And so therefore, as opposed to trying to get the house that you can comfortably afford, you push it because you say to yourself, well, you know, the mortgage rate is only $1,000. I can afford that. But it's only $1,000 for two years. And two years, when it goes up to $3,000, then you no longer can afford that.
MARTIN: Well, why do you think that minority borrowers, who seem to be disproportionately represented in these foreclosures and as consumers of these subprimes, why do you think that they are disproportionately represented?
Rep. MEEKS: Well, some of that is advertisement. Some of that is, you know, coming at them and the people and products are pushed on you. Products that, you know, people say, hey, look, you can qualify for this loan. You don't have to settle for that. And you know, and I also think that there is a strong part in our community, which we're trying to focus on, you know, is financial literacy. You know, you go to the salesperson and you don't really understand. Someone tells you you can get more. You're not looking what your income is. You're looking at the immediacy of it and that was projected down the road and you go for it. That is what has to stop.
You look to people who try to steer you into a certain product, and I think that has happened a lot, where folks are steered into a product that they can't afford, and the predatory lenders, they know that. And they know that at some point something's going to happen where their house will be foreclosed on, and you know, we also saw with seniors, for example, that's the kind of thing that really took place and really irritated me in my district, where seniors were basically made victims because individuals came in there and talked to them and refinancing their homes at a predatory rate.
And it got to the point where they could not afford that new mortgage rate and here's a home that they've paid for for 15, 20 years, just about to pay it off, because they needed a little bit of money they were told to refinance their home at this higher rate, then they end up losing their home and being put out. So those are the kinds of incidences that…
MARTIN: Incidences - Mr. Brinkmann, nationally, where is the foreclosure problem greatest?
Mr. BRINKMANN: The problem is the greatest in Michigan, Ohio and Indiana. We've seen very large job loses, particularly in the manufacturing sector in those three states. Situation in Ohio right now is worst than what we saw in Texas in the oil bust of the 1980s. Michigan, I think, has lost a total of almost 300,000 jobs since 2001, population declines. So this has led to a tremendous increase, so these states would represent maybe nine percent of the loans in the country also have about 20 percent of all the loans in foreclosure right there.
But in terms of the increases that we're seeing, those that are coming in states like California, Florida, Nevada, Arizona, to a lesser case, New York, a little bit of New England, areas where there was speculation, certainly overbuilding, particularly the Florida, Nevada, California markets. And as people, as home prices have turned, people are now walking away from these mortgages, simply turning over the keys and it's causing the foreclosure rates in these states to go up much more than a national average. In fact, when we ran in the numbers, if we pull those four states out, the foreclosure rate actually would have fallen.
MARTIN: We're talking about rising foreclosure rates and minority homeowners. And with us are Jay Brinkmann of the Mortgage Bankers Association and Congressman Gregory Meeks of New York.
Mr. Brinkmann, we ask - I was asking the congressman why he thinks minority barrowers are disproportionately represented among foreclosures. Why do you think that is?
Mr. BRINKMANN: I think there are a variety of reasons - socioeconomic factors. Some of the highest delinquency rates we see throughout the South, although that doesn't actually translate into foreclosure rates. I think the important point to remember is that loans, like a 2/28 loan, in which the payment is fixed for two years and then escalates to a 3/27, are very good credit repair products for certain people.
I think what we have, though, is a market situation where perhaps there were problems with brokers who were representing issues to borrowers who were more than willing to accept a deal that was too good to be true. If it's too good to be true in the mortgage market, it is, because it's a national market, they are national rates. But if something gets marketed to someone as, look, let me get you a deal that is two percent, then you can pay off the car loan and you can take care of the credit card bills, that is too good to be true and you're probably been taken advantage of unless you fully understand what's going on.
Now, these loans, perhaps the question has come up of suitability. Should there be some judgment as far as whether or not someone is actually suitable for this loan? That is a question, I think, would also had been raise certain discriminatory issues, that how then would we judge suitability issues, what are the objective criteria to use?
Mr. BRINKMANN: The most important thing is who loses in this. No lender wants to make a loan that's going to get foreclosed on. Because believe me, the lender loses an amazing amount of money on every one of these loans that goes bad. It's the people who are party to the transaction, temporarily take their commissions and disappear, we're seeing that as where the market breaks down.
MARTIN: Congressman, some groups - NAACP included - are promoting the idea of a temporary moratorium on foreclosures. What do you think about that?
Rep. MEEKS: Well, I think that what we've got to do, and a lot of it becomes important for us to deal with in Congress, as we're talking right now, I know Fannie Mae and no Freddie Mac has basically stepped up to the plate and said that if banks would refinance some of these mortgages, that they will then purchase the mortgages so that they won't be any foreclosures and people can stay in their homes.
I think that we've got to figure out a way to do new products to keep people in their homes so that we can talk to these institutions and we're talking to many of them and we're looking at it when we're working on this predatory lending bill that we're working on, and some of the language that we're looking to talk about to make sure that individuals so can maybe work out as opposed to a 2/28 or 3/27, people now can work out 40 or 45 year…
MARTIN: So I hear - I understand what you're saying is. You're concerned that the - you don't want to discourage the industry from creating products that might allow more people to get into a home. But what about the idea of a temporary moratorium?
Rep. MEEKS: Well, I think that we don't want to - we got to look at it. We don't want to - the housing market has been what's been keeping this economy afloat. And we don't need to do something that there may be unintended consequences in what make seemed to be the easiest thing to do and cause some other kind of problem in the market itself.
MARTIN: Jay Brinkmann, last 30 seconds for you. What does your group see as a possible solution to this rising foreclosure problem?
Mr. BRINKMANN: It's going to be on a case-by-case basis. We're working with individual borrowers to see, okay, what can we do to try and help. The issue in many cases, though, in terms of trying to refinance some sort of Freddie Mac, Fannie Mae program is a subprime borrower is generally someone who can make 11 payments a year. Unfortunately, 12 are required. How then do we continue to help these borrowers with blemished credit with declining home prices? And it really, it's going to have to be on a case-by-case basis.
MARTIN: Do you think you're going to do a million - a million people on a case-by-case basis?
Mr. BRINKMANN: That's what the industry is set up to handle. Believe me, it's - we've got a lot of people with a lot of money at stake. We're trying to look out for what's best in everybody's interest here.
MARTIN: All right. Thank you so much. Jay Brinkmann is the vice president of research and economics at the Mortgage Bankers Association. He was with us by phone from his home in Falls Church, Virginia.
And Congressman Gregory Meeks is a Democrat. He represents New York's 6th District. He joined us here in our studio. Thank you so much for coming in.
Rep. MEEKS: Good being with you.
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