U.S. Mortgage Woes Leave Poor Homeowners Adrift
WASHINGTON, 24 Aug
The prospect of widespread dispossession is prompting closer scrutiny of U.S. mortgage lenders and calls for regulators to help poor borrowers, not big banks.
About a dozen U.S. states have begun taking measures to protect homeowners whose modest incomes and weak credit forced them to accept mortgages at punitive terms designed to limit banks' risk in lending to subprime, or less-than-ideal, borrowers. Legislative proposals aimed at helping low-income homeowners have been put forward in more than two dozen states.
In Washington, Charles Schumer, a Democrat, used his position on the Senate Banking Committee Wednesday to urge federal regulators to aid nonprofit housing groups that are seeking to help troubled borrowers to refinance their homes on less severe terms.
'I urge you to use your leverage over financial institutions... to encourage them to match the federal government's efforts to provide funding to nonprofit groups working to prevent foreclosures,' Schumer wrote to U.S. Treasury Secretary Henry Paulson and Ben Bernanke, chairman of the Federal Reserve or U.S. central bank.
The moves come as industry experts warn that one million or more U.S. homeowners face foreclosure in the next year or two. Some 550,000 U.S. borrowers lost their homes in the past year, according to the national Mortgage Bankers Association.
Lenders say subprime loans are needed to contain their risk of loss and to enable them to open credit markets to chancy customers, the alternative being to deny them loans outright and thus shut them out of home ownership.
Opponents counter that subprime lending companies deliberately impose loan terms that borrowers could never meet, all but guaranteeing default and foreclosure. Suspicion and complaints about predatory lending have been reinforced as foreclosures have increased amid rising interest rates and stagnant or falling housing prices.
The credit crunch has spread from U.S. subprime mortgages to other loans and has gone on to roil world financial markets. Some 15 U.S. lenders have filed for bankruptcy since December and on Wednesday Lehman Brothers Holdings Inc, the biggest underwriter of U.S. bonds backed by mortgages, announced it would shut its subprime unit and cut loose some 1,200 employees.
Washington has sought to ease the flow of money among banks but in the states, officials appear to have been seized by what many see as a growing unmet need to shield vulnerable borrowers in a bid to stop the financial fire from spreading not only in the financial markets but in the so-called real economy where people live, work, and consume.
New laws are being proposed in at least 20 states that would toughen policing as well as criminal penalties for deceptive lending practices. Measures under consideration also would hold mortgage brokers accountable for allowing borrowers to take on debts they cannot repay.
The state of Minnesota has begun acquiring foreclosed properties to resell to low-income people on relatively favourable terms. Six other states have unveiled programmes to refinance subprime borrowers' loans with subsidies derived from state bond issues and federal lending agencies.
Analysts at the International Monetary Fund (IMF) also have been struck by the rate at which subprime loans have gone sour.
'The speed with which delinquency and default rates have risen for the 2006 vintage of loans has been striking,' John Kiff and Paul Mills of the IMF monetary and capital markets department wrote Thursday in a research paper.
Kiff and Mills added their voices to a politically diverse chorus calling for increased consumer protection and tighter oversight, and in urging that regulators not bail out lenders.
'Policymakers will face continuing pressure to bail out or subsidise stretched subprime borrowers,' they said. 'However, such pressures generally should be resisted due to the danger of reinforcing speculative or fraudulent behavior -- losses should be dispersed to exposed investors rather than taken over by taxpayers if borrowers cannot be assisted through loan modifications.'
Even as state officials have mounted efforts to spare vulnerable homeowners, they have acknowledged that their nascent programmes likely will benefit relatively small numbers and that those already evicted or in the throes of foreclosure would not be eligible for loan-refinancing schemes.
To prevent wholesale evictions, Dean Baker, a director of the research and advocacy group Centre for Economic and Policy Research, this week advanced another idea: change the rules of foreclosure.
'There is a simple and direct way in which the federal government can help out millions of moderate-income families struggling to keep their homes,' Baker said. 'They can simply change the rules on foreclosure to allow moderate-income homeowners the option to remain in their homes indefinitely as renters, paying the fair market rent.'
Under existing rules, if a borrower is unable to keep up with mortgage payments, the mortgage holder can go to court to place the house in foreclosure. If the sides fail to reach an arrangement, the lender can repossess the house and have the borrower thrown out.