March 27, 2007 > Many borrowers felt misled by subprime industry's hard sell
Many borrowers felt misled by subprime industry's hard sell
By Alex Veiga
LOS ANGELES (AP), Mar 23 _ A divorce led Daniel Peart to refinance his four-bedroom home with a subprime loan.
Like many borrowers with spotty credit, the self-employed handyman said he agreed to a relatively high interest rate in exchange for two years of low, fixed payments.
In less than a year, however, the payments jumped beyond his budget, forcing him to seek bankruptcy protection while trying to sell the home he bought 19 years ago, he said.
``I put the majority of the blame on the broker, for not being upfront, telling me what the charges were all going to be, and rapid-signing all the paperwork,'' said Peart, 53, whose home is located in the San Diego suburb of Poway.
Peart is not alone in his claims. Many bankrupt homebuyers are now pointing the finger at subprime lenders, claiming they approved mortgages for people who couldn't afford them to keep loan volumes high as the housing market slowed.
Some analysts cite those tactics for the subprime meltdown that has seen several lenders seek bankruptcy protection amid rising default rates.
``Both lenders and brokers had a string of incentives to keep their volumes up, even as market conditions tightened, and the way that they could do that is by lowering their qualification standards,'' said Paul Leonard, director of the California office of the Center for Responsible Lending.
``There's plenty of blame to go around,'' he said.
Doug Duncan, chief economist for the Mortgage Bankers Association in Washington, D.C., acknowledged that, in some cases, aggressive lenders obscured facts and made loans that borrowers couldn't afford.
``Most of those companies are closing their doors,'' Duncan said, adding that so far this year, 27 companies have gone out of business because they made bad loans.
Still, experts say borrowers could share some of the responsibility. Many jumped too quickly at the lure of low initial mortgage payments without fully considering the impact of higher interest rates and account balances in the years ahead.
It was their responsibility to fully understand the terms of their loans, said Nick Larson, an assistant vice president at the Mortgage Asset Research Institute.
``Borrowers need to protect themseleves, need to read what they're signing,'' he said. ``At the end of the day, bottom line, you can't stress this enough: The person who is signing the papers is committing themselves financially.''
Subprime lenders thrived during the real estate boom, when appreciation rates soared and equity protected most homebuyers from defaulting on their loans. Most could simply refinance or sell homes at a big enough profit to pay off mortgages and move on.
Investment banks also jumped in, eager to buy loans from sub-prime lenders then slice them up into bond products to sell on Wall Street.
Brokers and lenders promoted the loans as a way for would-be homebuyers to get into the market with low initial payments.
The loans were also touted as a way for people who already owned homes to unlock equity. It wasn't unusual to see mailers offering refinancing deals at initial rates of 1 percent or less.
About 50 percent of the subprime mortgages were ``stated income loans,'' with no verification of borrowers' incomes, Leonard said.
Such loans speed the approval process but carry risks of abuse.
Last year, the Mortgage Asset Research Institute sampled 100 such loan applications and reported that 90 percent listed significantly higher incomes for borrowers than they had reported on their tax returns.
About 5.1 percent of all homeowners hold subprime adjustable loans. Among those borrowers, 85 percent are making payments on a timely basis, Duncan said.
Still, with many borrowers now stretching to make payments, the Center for Responsible Lending predicts that one of every five subprime loans made in the past two years will end in foreclosure.
Antonio and Celina Lopez recently began the bankruptcy process. They fell behind on payments just eight months after buying a home in Escondido in San Diego County.
Celina Lopez, 49, a teacher's aide and thrift store owner, blamed her lender for overstating the couple's income by $5,000.
``We didn't even know it,'' she said.
Daisy Ramirez and Jose Mendoza, both 21, said they asked an agent to find their extended family a home but stressed that they couldn't afford a payment of more than $3,200 a month.
The agent found them a three-bedroom house for $570,000. After signing a blank loan application, the couple was approved for a piggyback mortgage _ two loans requiring monthly payments of $3,200 and $1,200, Ramirez said.
She said they told the agent that was too expensive but closed escrow in January 2006 after being advised they could refinance in a year with enough equity to slash their monthly payment and even take a vacation.
The house is now in foreclosure.
``We were told the opposite of what was going to happen,'' Ramirez said.