Congress Told Subprime Standards Needed

WASHINGTON - CDCU champion Martin Eakes joined civil rights leader Jesse Jackson and the head of the NAACP before Congress to call on lawmakers last week to pass national standards to protect subprime mortgage borrowers from predatory lending practices.

Eakes, who told members of the Senate Banking Committee he grew up in predominantly African-American south Greensboro, N.C., said that millions of Americans will default on subprime mortgages they purchased over the last few years-a disproportionate number of them African-Americans, Hispanics or other minorities.

"Subprime foreclosures threaten to displace more African-American families than (Hurricane) Katrina did, but it will be a silent and invisible storm," said the founder of Self Help CU, the largest and most influential community development credit union in the country, and who was appearing on behalf of the credit union's affiliate Center for Responsible Lending.

Jackson, the head of the Rainbow/PUSH Coalition, said "people of color are economically exploited" by predatory mortgages sold by many subprime lenders, citing statistics showing that half of African-Americans and 46% of Hispanics, but only 17% of white borrowers are in homes bought with subprime mortgages.

Throughout the hearing, witnesses focused on a landmark study issued recently by the credit union-backed Center for Responsible Lending, which predicts that almost one-in-five subprime mortgages sold between 1998 and 2006, an estimated 2.2 million homes, will end in foreclosure.

The hearing, the panel's second in two weeks over lending practices, made it clear that new chairman Chris Dodd, a Democratic candidate for president, will use the committee as a focal point on populist issues, like predatory lending, credit card abuse, and home foreclosures.

The Connecticut Senator said that subprime lending has soared over the past few years to the point where 20% of the home mortgage market-$650 billion in loans-are now originated in the subprime market. And 70% of those loans have costly prepayment penalties that trap borrowers into high-cost mortgages.

But Dodd made it clear he wasn't opposed to subprime lending, but to abusive practices in the subprime market that prey on unsophisticated and lower income borrowers. He cited a recent survey that indicates that 43% of all mortgage brokers make loans they know a borrower won't be able to repay, simply because they make higher commissions on those loans.

Most of the loans cited were adjustable-rate mortgages that reprice into much higher rates and that carry high prepayment penalties. The rise in ARM rates over the past 18 months has caused "sticker shock" for many of these borrowers and pushed foreclosure rates significantly higher, several witnesses testified.

A number of witnesses singled out a product known as a 2/28 mortgage, also known as "exploding ARMs," which now dominate the subprime market. This product features a two-year "teaser rate," followed by interest rate adjustments in six-month increments. According to Dodd, as many as 80% of subprime mortgages are now 2/28s, for which monthly payments will spike 30% to 50%.

'Unaware of Payment Shock'

"Many of the borrowers who take these loans-unaware of the payment shocks that await them-have no prospects of being able to make the higher payments, and are forced to refinance the loan, if they have sufficient equity to do so. Each refinance generates new fees for the lenders and brokers, and strips more equity from the homeowner. One lender, in discussions with my office, called subprime 2/28 loans 'foreclosure loans,'" said Dodd.

Eakes, who helped write the anti-predatory lending bill in North Carolina, called on lawmakers to draft a national law that will bar some predatory practices and require lenders and brokers to consider a borrower's ability to repay the loan, something they have lost their motive to do because lenders now sell most of their mortgages on the secondary market and no longer hold them to maturity. "Seventy percent of subprime loans are made by brokers who never even own them, then they are sold to a financial institution, which then sells it on the secondary market," said Eakes. "There is no responsibility to make the loan work. Repayment of the loan is not their financial concern."

He also suggested that government sponsored enterprises Fannie Mae and Freddie Mac should not be allowed to buy loans and bonds backed by certain subprime loans with high default rates.

Several senators on the panel indicated they are drafting legislation that will address these issues.

Other witnesses at the hearing were Hilary Shelton, executive director for the National Association for the Advancement of Colored People; Harry Dinham, president of the National Association of Mortgage Brokers; Jean Constantine-Davis, senior counsel for AARP; Douglas Duncan, chief economist for the Mortgage Brokers Association; and two borrowers who said they were victimized by predatory mortgages.