RISMEDIA, April 18, 2007-The National Community Reinvestment Coalition urged lawmakers to pass legislation immediately to shut down the "foreclosure mills" being operated by law firms, racing to kick out financially-troubled subprime borrowers from their homes. The law firms represent mortgage servicers, Wall Street investment firms and lenders.
Testifying before the House Financial Services Committee, a NCRC official recommended legislation that provides for 60-to-90 day stays in foreclosure proceedings nationwide to ensure that homeowners situations are properly assessed prior to facing needless and expensive foreclosure actions that strip equity.
One of the nation's biggest and most respected advocates for fair housing, NCRC operates an Anti-Predatory Lending Consumer Rescue Fund that has been working directly with subprime borrowers helping them remediate troubled loans with lenders and servicers. Recently, though, its loan workouts have turned into fast sprints against law firms involved in the foreclosures.
"We are struggling to keep up with these aggressive law firms that operate as foreclosure mills and profit from rushing borrowers to homelessness," NCRC Executive Vice President David Berenbaum told committee members. "The greed in the legal system is one of the reasons Congress must pass a stay to give us more time to keep families in their homes. Americans who qualify for forbearance agreements or deserve a new loan or loan modification are being foreclosed upon ruthlessly."
Berenbaum also said a congressionally-mandated stay would establish uniform and reasonable time periods across all states for loan workouts that often contain multiple lending abuses, not just one or two. He presented to the committee a list of 27 abuses often found in subprime borrowers' loans.
Some of the abuses include faulty appraisals, yield spread premiums (fees paid by lenders to brokers for negotiating high interest rates), fee packing, forced placed insurance (more expensive insurance), mandatory arbitration and equity stripping. A sample of 69 CRF loans in NCRC's portfolio shows considerably higher mortgage payment-to-income (front end) and debt-to-income (back end) ratios than standard loans. For example, the median back-end ratio was 50% on the CRF loans, compared to 36% for standard prime loans.
"This shows the problem isn't about borrowers. It's about lenders with abusive products and practices. Blaming borrowers and calling this crisis a market correction, as the lenders have done, isn't a solution," Berenbaum told committee members. "Stopping foreclosures should be the priority; stopping loans to families ready to own a home would be a mistake."
Berenbaum renewed an earlier call by NCRC President John Taylor to re-tool and allow FHA to refinance some of the subprime "exotic" loans that have forced more and more borrowers into default and foreclosure and, as a result, have wrecked havoc on property values of next door neighbors.
Recent statistics issued by the Mortgage Bankers Association's nationwide survey show that 14.44% of subprime borrowers with ARM loans were at least 60 days delinquent in their payments in the fourth quarter of 2006. This is up from third quarter delinquency rate of 13.22% for such mortgages, representing a four-year high.
On March 16th, Taylor told a group of over 500 community activists that the subprime crisis will worsen and "mortgage tsunamis will ravage working-class neighborhoods across this country." Since then, foreclosure and defaults have been on the increase, and some experts have warned that borrowers with more traditional loans could become victims of the predatory lending practices associated with subprime.
In a March letter, NCRC told Administration and congressional leaders that they helped create the sub-prime crisis by ignoring warning signs and, as a result, bear some responsibility for assisting the families facing payment shock and foreclosure.
In his testimony, Berenbaum called for legislation to establish a national rescue fund to support low-income borrowers and enact a strong anti-predatory law that would strengthen consumer laws, expand regulatory guidance and eliminate abusive, nontraditional loans and bad lending practices.
He urged the committee to support nonprofits' efforts to assist borrowers through programs, such as NCRC's Consumer Rescue Fund. The CRF has assisted borrowers on over 5,000 loans since 2001. In a sample of 112 predatory loans, the mortgage rates ranged from 5.5% to 17%. The new loans negotiated by CRF ranged between 1% and 8%. The difference in savings for borrowers averaged $276 or $100,000, over a 30-year period, a substantial amount of equity saved over the life of a loan.
Berenbaum also outlined for the committee common patterns of subprime lending:
- Most loans involved brokers, who often receive fees (yield spread
premiums) from lenders for placing borrowers into loans with above par
interest rates. NCRC testing in six metropolitan areas also found that
brokers targeted minorities for loans with higher interest rates and
- A NCRC review of CRF loans show that abusive lenders are targeting
minority and low-to-moderate income borrowers. About 77% of the CRF
sample was African Americans; 45% resided in low-to-moderate income
neighborhoods and about 83% of the borrowers had incomes below $45,000.
- In another NCRC review of faulty appraisals in CRF loans, about one-
fifth of the homes were overvalued by more than 50% of their true value,
and two thirds were overvalued by 15% or more.
NCRC is a nonprofit founded in 1990 to ensure all Americans who can afford to borrow can get a loan. It has 640 dues-paying members in every state.
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