Subprime
Loans = Primetime
For Vampire Lenders
By Jim Hightower
24 August, 2007
AlterNet
One of the most dramatic stories
from the New Testament is of the time that Jesus encountered money changers
in the temple. Enraged by their usury and sacrilege, he went on a tear
-- overturning their tables, physically driving them out and chastising
them for converting the temple into a "den of robbers." The
Bible doesn't say where these bloodsucking lenders went, but now we
know: They have re-emerged in recent years to set up their tables right
here in America, working a dark alley of homeowner financing called
the "subprime mortgage market." The what? Don't be deterred
by the finance industry's jargon (which is intended to numb your brain
and keep regular folks from even trying to figure out what's going on).
At its core, this is a classically simple story of banker greed and
outright sleaze. And the astonishing part is that nearly all of the
rank injustice perpetrated by today's money changers is considered legal
and is practiced by supposedly reputable financial firms.
That's when avaricious mortgage
hucksters and high-finance manipulators looked upon this broad pool
of needy, vulnerable castoffs and suddenly shouted, "Eureka, GOLD!"
With interest rates remarkably low, housing prices seemingly on a nonstop
rise, and (this is the Big One) practically no regulation of this low-income
market, the money changers promptly began to devise clever, Enronian
schemes to entice such "subprime" borrowers into high-interest,
high-fee loans. Never mind that these families really could not afford
(and mostly did not understand) the level of debt being piled on their
backs. That was a matter for manana. Today was for raking in profits
from the poor.
The subprime schemes are
run through an intricate, intertwined system of loan brokers, mortgage
lenders, Wall Street trusts, hedge funds, offshore tax havens and other
predators. To entrap borrowers, the industry created an arsenal of arcane
financial devices and maneuvers known by such exotic names as "exploding
ARMs," YSPs, teaser rates, low-doc mortgages, loan flipping and
equity stripping. Ultimately, these schemes are scams, extracting high
payments from the families, sucking out any equity they might build
up and stealing their homes.
This is one of those economic
stories, like the savings-and-loan scam of the 1980s, that are usually
buried back in the business section of newspapers. But, just as with
the S&L collapse, this debacle is growing too big to contain, and
all of us need to be paying attention. The built-in traps of the subprime
mortgage market have already taken the homes of more than a million
people in just the past year, and the dangers are quickly rising for
millions more. This collapse in homeownership for the working poor has
begun seeping into the rest of the economy, causing thousands of job
losses, shaking the soundness and reputations of some major Wall Street
firms, and slowly -- ever so sloooowly -- forcing lackadaisical bank
regulators and clueless politicians out of their laissez-faire stupor.
How it works
You might have seen some
of the come-ons: "Bad Credit? No Problem!" "Zero Percent
Down Payment!" "Creative Financing!" "No Documentation
Needed!" "Quick and Easy Money!"
The key to building the subprime
market is hustle and flimflam -- trying to rush anxious, uninformed
people into signing on the dotted line for what they're assured is the
deal of a lifetime. Of course, the mortgage industry casts its work
in a noble light, asserting that its primary purpose is to help extend
the joys of homeownership to the masses. But an examination of key players
reveals little altruism.
BROKERS. These are independent,
local operators who troll for borrowers in your town and mine, using
flyers, doorbells, phone calls, personal contacts, websites, late-night
TV ads, data banks and every means imaginable to get low-wage renters
to sit still for a home-loan sales pitch or to find vulnerable homeowners
who can be talked into taking out a refinancing loan. Brokers don't
actually make the loans, service them or have any stake in whether the
deals work out. Rather, they are simply "finders" who are
paid an upfront fee by the mortgage lenders for every borrower they
deliver. And 71 percent of all subprime mortgages come through them.
The pretense is that the
broker is the borrower's trusted advisor in the shark-infested waters
of banking. Au contraire, Bubba. In most states, agents have no legal
responsibility to represent a buyer's best interest. And, in fact, they
don't, for the system gives brokers lucrative incentives to deceive
borrowers.
Through a common practice
called "steering," unsuspecting families are guided into the
most expensive, riskiest subprime loans. For doing this dirty job, brokers
are paid cash bonuses called "yield spread premiums" (YSPs)
-- though you would call them by their more common name: kickbacks.
The Center for Responsible Lending reports that these YSP payoffs, averaging
$1,850 per loan, are added to about 90 percent of all subprime loans.
That's right, struggling families are silently assessed an extra fee
for being secretly steered into a loan with higher interest rates and
worse terms than they're entitled to get. They're literally being robbed
by their bankers.
LENDERS. These are the brand-name
players you might recognize. They include nonbank lenders -- for example,
New Century Financial, Ameriquest, Option One, Countrywide and Ownit
Mortgage Solutions -- that sprang up to tap into the new subprime gold
rush, and several of them are now bankrupt or under investigation. Many
big banking firms, including Wells Fargo, Lehman Brothers and Citigroup,
also joined the free-for-all by setting up their own subprime subsidiaries,
Brokers are on the front
lines, but the lenders are the ones who invented the scams that are
bleeding borrowers. Only a decade ago, subprime loans were a mere fraction
of the home-loan market. Today, these financial instruments are an $800
billion business -- about 20 percent of all housing loans.
How did the subprime market
mushroom? The lenders -- again, they are not subject to regulation --
drastically and deceptively lowered normal banking standards to draw
in low-income borrowers. As one broker says, "The culture around
all these subprime lenders has been, 'Hey, bring it to us. We'll make
it happen.'" If a borrower can pay little or nothing down, recently
had a bankruptcy, and doesn't have the income to keep up payments, the
bankers say, "That's OK. Bring us that loan."
Rather than do due diligence,
lenders cavalierly offer "low-doc" and "stated income"
loans -- i.e., they make little or no effort to document an applicant's
ability to take on this burden, instead accepting almost anyone's word
about having the income to meet monthly payments. "You could be
dead and get a loan," says one broker.
The loans themselves are
doozies, filled with numerous and nasty provisions that set unwitting
borrowers up for failure. These are tucked into 20-page loan agreements
written in legal gibberish. A friendly, reassuring, always smiling loan
agent flips through the pages saying, "It's simple, just sign here
... and here ... and here." Among the nasties are:
* TEASERS. Subprime interest
rates are loudly advertised to be only 7 percent or so, with only small-type
notice that these are "adjustable rate mortgages" (ARMs).
This means that the interest rate will explode to 11 percent or more
after a couple of years, causing the families' monthly payments to jump
by half or more. Over 90 percent of subprime loans contain ARMs.
* BLOATED APPRAISALS. Subprime
lenders are notorious for pressuring appraisers to inflate the value
of a house, thus causing the borrower to take out a bigger loan than
the house is worth.
* HIDE-THE-ESCROW. In conventional
loans, the borrower's property taxes and mortgage insurance premiums
are figured directly into the monthly loan payments, with these monies
set aside in an escrow account. For subprime loans, however, lenders
often don't include these costly items in the mortgage, thus making
the loans appear more affordable than they really are. This leads to
borrower shock (and sometimes default) when the tax and insurance bills
arrive separately in the mailbox. At this point, ever-helpful lenders
offer to refinance the loan, thus collecting additional fees.
* EXCESSIVE FEES. On conventional
mortgages, various lender fees typically total less than 1 percent of
the loan amount. By contrast, subprime borrowers commonly are hit with
fees (hidden in mortgage payments) totaling more than 5 percent.
* PREPAYMENT PENALTIES. Obviously,
it's in a borrower's interest to get out of an abusive subprime loan
as soon as possible and to refinance on better terms. But --Gotcha!
-- more than 70 percent of these loans carry a penalty fee of several
thousand dollars for paying off the loan early. In the prime market,
only about 2 percent of loans contain such punishment.
* WALL STREET. None of the
above would be happening (and certainly not on such a massive scale)
if the fast-and-easy money crowd on Wall Street hadn't seen a chance
to make a killing on lowly subprimers. Lured by the flow of sky-high
interest rates being charged to these borrowers (and abetted by the
lack of government regulation in this market), Bear Stearns, Lehman
Brothers, Merrill Lynch, Goldman Sachs and other giants lumbered into
the action.
They set up special investment
units within their banks to buy these risky mortgages from the lenders.
Then the Wall Street behemoths consolidated this bulk debt, leveraged
it into complex IOUs called "mortgage-backed securities,"
and sold these packages to wealthy speculators around the world. This
Rube Goldberg financial mechanism has shoved hundreds of billions of
dollars of capital into the subprime market, fueling lenders' enthusiasm
for making even more of these shaky loans.
What a system! Lenders mislead
borrowers, collect fat fees from them, then shift the risk of any bad
loans to Wall Street. The Wall Street repackagers then transfer the
bad-loan risk to their rich investors, drawing even fatter fees. These
investor elites get phenomenal yields on the IOUs, then plant their
profits in tax-free havens like the Cayman Islands.
It's a brilliant Ponzi scheme
... as long as all those Mr. and Ms. Subprimes keep putting their little
dabs of cash into it every month. Oops! There's the rub.
The bust
Mr. and Ms. Subprime live
on the economic edge, with little margin for financial downturns. In
the last couple of years, three bad storms hit them. First, falling
wages combined with growing inflation (fueled by rising prices for gasoline,
utilities, healthcare, etc.) to squeeze their meager household finances
to the breaking point. Second, their adjustable-rate mortgages began
exploding; someone who was paying $1,000 a month at the start of a $150,000
loan had to pay $1,400 a month two years later.
Third, housing prices (which
the whole system claimed would only rise and rise and rise) began tumbling,
making it impossible for these borrowers to refinance or sell their
homes to avoid financial foreclosure. When home sales were booming,
George W declared this proved that his push for economic deregulation
was creating a glorious new "ownership society." He was so
enthused that he even designated June as National Home Ownership Month.
But his laissez-faire "success" turns out to be a house of
cards. As one market analyst says, "The gain in home ownership
over the last four or five years is almost entirely due to looser lending
standards [for subprime mortgages]."
Those cards are now crashing
down. In the first half of this year, home foreclosures are up by 41
percent. Today, a record number of subprime borrowers have fallen behind
in their monthly payments and face eviction (once you fall 90 days behind,
lenders typically proceed with foreclosure). More than $2.28 trillion
worth of ARMs are scheduled to explode to their higher interest rates
between now and 2009. Two million families are expected to have the
wrenching experience of losing their homes, as well as losing all the
money they invested in them.
All of this is working its
way up the economic chain. More than 80 lenders have gone out of business
in the past six months, thousands of jobs are being cut, and hundreds
of thousands of houses are being dumped on an already-saturated market
(causing a further decline in prices, which makes other subprime homeowners
even more vulnerable to foreclosure, which dumps more houses onto the
market ... and the downward spiral continues).
Wall Street big shots are
being stung as well. Bear Stearns, for example, has had to scramble
to keep its two subprime hedge funds from imploding, bailing out one
of them with a panic infusion of $1.6 billion. Analysts estimate that
these funds are holding more than $200 billion worth of subprime loans
that are in danger of default.
Regulatory shame
This abuse of vulnerable
families and the resulting economic mess would not have happened without
the hands-off regulatory ideology that has infected our government.
There are no less than five financial agencies at the federal level
that could have protected people, yet the subprime surge was allowed
to proceed on the fantasy that the financial players would police themselves.
The Federal Reserve Board, for example, has direct authority under the
Home Ownership and Equity Protection Act to "prohibit acts or practices
in connection with mortgage loans that the board finds to be unfair,
deceptive or ... associated with abusive lending practices, or that
are otherwise not in the interest of the borrower." The Fed simply
ignored this law.
Finally, with the entire
subprime system crashing around them, the regulators issued "guidelines"
on June 29 requiring banks to stop some of the worst abuses, including
prepayment penalties. But the new rules still allow many of the predatory
practices and -- worst of all -- do not apply to the nonbank lenders
that make a large share of subprime loans. In addition, the guidelines
do not directly address the role of Wall Street in pushing such loans.
The subprime industry disingenuously
asserts that any attempt to regulate it only hurts the poor people who
receive these mortgages, for they have nowhere else to turn for homeowner
financing. What self-serving hogwash! There could be subprime loans
-- from public, if not private, sources -- structured and administered
without deceit. Rather than target lower-income families as suckers
to be had, packaging their dreams into investment playthings for speculators
and tax dodgers, let's view these folks as assets to the larger community
and realize that homes for them are investments in the common good.
And while we're at it, let's recognize that the need for "subprime"
mortgages is driven by our low-wage/no-benefit economy and by our country's
growing scarcity of affordable housing. It's not merely a low-income
mortgage system that must be fixed -- our leaders' pursuit of a low-income
America must be stopped.
From "The Hightower
Lowdown," edited by Jim Hightower and Phillip Frazer, Aug. 2007.
Jim Hightower is a national radio commentator, writer, public speaker
and author of Thieves In High Places: They've Stolen Our Country And
It's Time to Take It Back. (c) 2007 Independent Media Institute. All
rights reserved.
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