Lending practice changes mulled

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The era of the high-risk mortgage loan could soon come to a close.

With many of the economy’s current struggles being blamed on overzealous mortgage lending by financial institutions, federal regulators are stepping up efforts to crack down on loose lending practices.

Responding to pressure from Congress, the Federal Reserve is considering several reforms, including:

• limiting loans that do not require proof of a borrower’s income;

• barring subprime lenders from imposing penalties for early payments; and

• pushing lenders to require set-aside payments for taxes and insurance.

But solving the problems that led to a torrent of foreclosures throughout the nation and state is not as simple as tightening the screws on “subprime” loans, as over-regulation could cut off all access to credit by low- and moderate-income potential home buyers.

Reforms Require Balance

Steve Adamske, press secretary for U.S. Rep. Barney Frank, D-Mass., said the House Financial Services Committee chairman urged the Fed to increase its guidance and oversight of lending practices to put a stop to the “bad actors” — lenders who knowingly loan people more money than they can afford to pay back — and was working on his own predatory lending bill for introduction this fall.

“We are also seriously looking into creating liability so that people who make loans but did not do the requisite checks can be held liable (for foreclosures),” Adamske said.

Still, Adamske echoed the sentiments of many mortgage lenders when he said adjustable-rate mortgages, or subprime loans, cannot be completely dismissed.

“They can be a very viable tool,” he said. “We don’t want to go down a path that shuts off access to capital from those that can legitimately pay it back.”

Along with Frank’s bill, Adamske noted plans to expand the Federal Housing Administration, already the largest mortgage insurer in the world, and create an $800 million federal affordable housing trust fund that will put a greater emphasis on providing quality rental housing, so people aren’t pushed into risky home loans.

“We think by combining all those related elements, the loan situation will look very different by next year,” Adamske said.

Right now, that situation is less than rosy.

Up in ARMs

Throughout the early-decade housing boom, banks and other lenders offered adjustable-rate mortgages during a prolonged period of low interest rates, which many home buyers of little means or poor credit viewed as a viable path to home ownership.

But when rates finally shot up, the same loans intended to provide a step up instead led to the gallows. State foreclosure rates rose to 1.46 percent in the fourth quarter of 2006 and worsened to 1.51 percent in the first quarter of 2007. Wisconsin ranks 13th in the nation in foreclosure inventory, according to a survey by the Mortgage Bankers Association.

And with interest rates again resetting to higher rates this year and next, according to Fed Chairman Ben Bernanke, even more foreclosures are expected.

About 10 percent of Wisconsin’s 580,000 borrowers fall into the subprime category, which had a first-quarter foreclosure rate of 7.74 percent, compared to 0.68 percent of prime loans, 3 percent of FHA loans and 1.81 percent of VA loans. The foreclosure rate of subprime fixed-rate mortgages was 4.48 percent, compared to 9.86 percent for subprime adjustable-rate mortgages — the sixth-highest figure in the country last quarter.

So it’s not hard to see where the foreclosures are stemming from. But Tom Liebe, director of government affairs for the Wisconsin Credit Union League, said credit unions and banks would continue to offer adjustable-rate mortgages to worthy borrowers.

“There is a difference between subprime lending and predatory subprime lending,” said Liebe, who defined predatory lending as high-rate, high-fee home equity products that are intentionally deceptive or disadvantageous to borrowers. “When done the right way and managed and structured well, it can be a good thing for consumers. It has successfully put a lot of people in challenging situations in homes that they’ve kept, and that’s extremely important.”

Rescue Efforts

Liebe said WCUL members were responding to the rise in predatory practices by setting aside funds for customers who fell into traps and might lose their homes.

“Landmark Credit Union in Milwaukee pledged $10 million to its Rescue Refinance program for victims of rapidly increasing interest rates on their subprime home loans, allowing them to keep their homes,” said Liebe, who also noted the new Home Loan Relief Payment program for low-rate home loans in which state credit unions have allotted $32.3 million. HLRP loans fix an interest rate for three years and cap future increases at 1 percent annually and 5 percent over the life of the loan.

State Sen. Jim Sullivan, D-Wauwatosa, said the state government was not in the business of telling banks how to set interest rates, so it would not interfere in that regard. But the chairman of the Senate’s Committee on Veterans and Military Affairs, Biotechnology and Financial Institutions does plan on addressing predatory lending practices when the committee meets this fall.

“Certainly, we would like to see action by the federal government as this is a nationwide problem, but we are not going to wait to deal with our own pre
datory lending issues,” Sullivan said. “By and large, financial lenders here have been very responsible, but there are the outliers who don’t properly disclose (interest) information.”

Sullivan’s main beef is with unethical foreclosure agents who take advantage of other people’s foreclosure troubles. He said some agents seek out vulnerable homeowners in the foreclosures listings, often senior citizens, convince them to sign over power of attorney for refinancing help, and then turn around and sell the house from under them, thereby stealing years’ worth of built-up equity.

“It’s a reprehensible practice, and we have to put a stop to it,” said Sullivan, who intends to push for regulation similar to Minn-esota’s that requires licenses for foreclosure agents.