senior policy counsel for the Center for Responsible Lending
Subprime loans have led to one million American families losing their homes in the past decade, a new study by the Center for Responsible Lending has found. In the last 10 years, the subprime loan industry has emerged as a major, and controversial, player in the housing market. We speak with an attorney at the Center for Responsible Lending. [includes rush transcript]
JUAN GONZALEZ: Subprime loans have led to one million American families losing their homes in the past decade. This according to a new study by the Center for Responsible Lending. In the last 10 years, the subprime loan industry has emerged as a major, and controversial, player in the housing market. Under a subprime loan, customers with low credit ratings are offered mortgages in return for high interest rates. Proponents have advocated subprime financing as a way for low-income residents to own their first home. But new figures suggest the subprime industry is having the opposite effect.
The Center for Responsible Lending estimates that between 1998 and 2006, about 1.4 million first-time home buyers purchased their homes using subprime loans. But the study also finds that the number of projected subprime foreclosures in that same period was a whopping 2.4 million. This means subprime lending resulted in a net loss of home ownership for almost one million families.
Here in New York, the Neighborhood Economic Development Advocacy Project put out a report showing foreclosures rose 50 percent last year, with more than 9,000 homeowners facing the loss of their homes. And in this year, foreclosures are on track to hit 15,000.
We now go to Durham, North Carolina, where we’re joined by senior policy counsel for the Center for Responsible Lending, Keith Ernst. Welcome to Democracy Now!
KEITH ERNST: Good morning. Thanks for having me.
JUAN GONZALEZ: Well, in the last few months, we have seen many news articles basically about the lending companies and the financial crisis among some of these subprime lenders, and we’ve seen some coverage of the impact on homeowners around the country, but could you put this crisis in context, from your perspective, what is happening around the country?
KEITH ERNST: Of course. You know, for years, the subprime market has been this just burgeoning industry, and the lenders have been making loans to millions of families. And for a while, it looked like things would go on smoothly, but as housing prices softened and weakened, what we saw was the weakness in these mortgages they were making exposed to the light of day. And essentially, now the sad ramifications of this is an uptick in foreclosures, sometimes in places that haven’t really seen a spike in foreclosures in years, places like New York and California and northern Virginia, where, you know, for all intents and purposes, we’ve been in a boom for the first half of this decade.
JUAN GONZALEZ: And in terms of the — your group issued a report at the end of last year projecting what the potential impact would be over the next few years in terms of foreclosures. Could you talk about that?
KEITH ERNST: Sure, that’s right. So we projected that more than 2.2 million — now 2.4 million families — will lose their homes ultimately to foreclosure as these mortgages come to a halt, or at least as these mortgages play out. And that’s deeply concerning. These are families who, in many instances, this house is their primary asset. It’s how they’re holding their wealth. It’s their nest egg for retirement. And those homes are a just tremendous jeopardy right now, and largely this is because of the shoddy underwriting that’s taken place in the subprime market in recent years and these so-called mortgage resets, where a borrower’s interest rate could go from 8 percent to as high as 12 percent just two years into their mortgage. And this results in a payment increase of 30 to 40 percent on their mortgage. Families who are just sort of struggling to get by day to day are faced with this just insurmountable hurdle two years into the mortgage. And, you know, what they’re finding now is that foreclosure may be the only option for them.
AMY GOODMAN: Keith Ernst, can you explain the difference between a prime and a subprime loan?
KEITH ERNST: Of course. You know, for years, borrowers in this country could only get a mortgage if they met fairly narrow underwriting criteria. You know, they had to put 20 percent down on their home. They had to have stable incomes. And, you know, they had to have a relatively blemish-free credit record.
Over the last 10 or so years, what’s happened in this nation is that lenders have gotten more flexible in who they’re willing to lend to. And in principle, this is a good thing, because it means that families who need to tap into their wealth, whether it’s to send a child to college, to pay for a medical procedure, or, you know, for other purposes, can do that. And that, in principle, is a good thing. But what’s happened in the subprime market is that lenders have gotten overly aggressive, made loans that borrowers simply can’t afford, and that’s sort of the story today.
JUAN GONZALEZ: Could you talk about the role of major banks in this whole process? I did a story in the New York Daily News last week about the role of Credit Suisse First Boston in repackaging these loans in the securities industry, and they actually had a whole division called their NINA department — "No Income, No Asset" loans that they were repackaging.
KEITH ERNST: Right. One of the interesting stories here underneath all of this is how these mortgages came about in the first place. You know, we like to think, or I think most Americans think, that mortgages are made by banks and depository institutions, but especially in the subprime market that’s not the case. They’re largely made through state-chartered finance companies that don’t have any bank deposits, and so they don’t have any bank regulators.
Where do they go for their money? They go to Wall Street. So Wall Street will supply them the money to make the loans, will buy the loans from these lenders, and then will repackage them into securities and sell them to investors. Now, again, in principle, that’s fine. It can make low-cost capital available to families who need mortgages. The problem comes when the insatiable appetite builds for more and more mortgages and lenders get reckless with regard to the quality of the mortgages they’re originating.
AMY GOODMAN: Keith Ernst, what kind of regulation, federal regulation, is there of this, and also local regulation?
KEITH ERNST: Right. You know, Amy, the regulators are really — they’re just scrambling to catch up now. What we’ve seen is the federal regulators just this spring have come out with proposed subprime lending guidance that would require lenders to insure that borrowers can afford their mortgage when those payments jump up, so not at the initial introductory rate, which is only going to be in effect for two short years, but at the fully indexed rate, the rate that’s going to apply after the introductory period is over. And we think that’s a tremendous step forward.
But it’s coming too late for many families. Many families are finding that their mortgages are resetting and are in trouble now. You know, that’s at the federal level. We’ve got that regulatory action. Congress is looking into bills to protect borrowers from these sorts of practices and also from other sorts of predatory lending practices, like putting borrowers in loans with abusive back-end prepayment penalties that can cost thousands of dollars if they try to refinance, you know, the month before these payments reset, while they can still — while they’re still current and can afford their mortgage, and other similar abuses. And in the states, they’re starting to take a look and ask, "How can we really help protect the borrowers in our backyard?"
AMY GOODMAN: Juan, you’ve been doing a series of pieces in the New York Daily News, and you’ve been profiling families. Tell us about some of them.
JUAN GONZALEZ: Yeah, and I’d like to ask Keith Ernst about that. For instance, there was one woman that I profiled, Sandra Barkley, who’s part of a whole lawsuit now against a big developer in Brooklyn. Here was a woman who was working for the New York City Housing Authority, was barely making about $24,000 a year, and these predatory lenders got her into a home where her mortgage payments, monthly mortgage payments, were higher than her total gross income. There was a lawyer that they supplied to her, who sat at the closing for this home and actually told her to sign these papers, and because — what I’m finding is that the appraisers, to some degree, are involved in over-appraising these houses. There are crooked lawyers that are in cahoots with some of these lenders that are allowing their "clients" to sign these mortgages that they could not possibly pay.
And you were mentioning the interest rates. Well, I have a story in today’s Daily News about an elderly couple who was basically forced out of their home — they weren’t even in the market for a home — and put into two mortgages totaling about $600,000. One of them, the interest rate can go up to 18 percent on one of the mortgages, and the other is an interest-only mortgage. They are guaranteed not to be able to pay the $4,000 payment that they had, when before they were paying $1,200 a month.
So where are the regulators in this situation, where these lawyers, the appraisers and the brokers are being able to manipulate and bamboozle folks into these kinds of loans?
KEITH ERNST: Right, well, first let me just say that, you know, those family stories you’re recounting are not at all unusual. And it goes back largely to what are the incentives in place to originate these mortgages. If we think, you know — I think we should recognize that there are powerful incentives, that brokers and loan originators make thousands of dollars on each mortgage and, in fact, make more on larger mortgages, and so there’s incredible incentives to provide borrowers with the largest mortgage they’re willing to take out.
Now, as that demand has grown in recent years, we have seen skyrocketing rates in mortgages with less than full income documentation. Some are these so-called liar loans, where the income is just put down on the application. Many times, borrowers have told us, when we showed them their paperwork, that they had no idea that income was reported. Now, their signature was on the bottom of the paper, but that signature was put on there at the blizzard of closing, where they were told to initial here, sign here, sign there, initial here, about 1,500 times. And so, you know, what’s happened is these mortgages — there are tremendous incentives to originate them. Borrowers are looking to the person opposite the table from them as an expert who can help provide them with some guidance, and the person on the other side of the table just doesn’t have their best interest at heart.
Now, "Where have the regulators been through all this?" is a good question. I think the federal regulators are scrambling to catch up now. State regulators are likewise following suit. And Congress is taking a look. You know, unfortunately, I think the reality is that it often takes a crisis like this to provoke us to take action to protect people.
AMY GOODMAN: Keith, we have to break, but we’re going to come back to this discussion. Keith Ernst is an attorney, senior policy counsel for the Center for Responsible Lending, speaking to us from Durham, North Carolina. And when we come back, we’ll also be joined by Danny Schechter, "the News Dissector." His latest documentary that’s opening tonight in New York is called In Debt We Trust.
AMY GOODMAN: We’re talking to Keith Ernst, senior policy counsel for the Center for Responsible Lending in Durham, North Carolina. We’re also joined in studio by filmmaker and journalist Danny Schechter, who has a new film called In Debt We Trust. Your response to the subprime lending and this unprecedented number of foreclosures in the country?
DANNY SCHECHTER: You know, Amy, when we talk about this, I think of a phrase we used to use back at ABC when I worked there, it’s called "MEGO," and that refers to "my eyes glaze over." Whenever people hear about economic issues, they sort of tune out, because it sounds very complicated. What this reduces itself to is a crime. We’re talking about a crime — CSI, crime scene — and we’re part of this crime scene. We’re talking about a cesspool of corruption implicating some of the biggest banks and financial institutions in the country, inattention by the regulators. Fifty-two percent of the agencies making these loans are not even regulatable, because they’re not federally regulated organizations. We’re talking about millions of Americans who can’t make their bills, who are squeezed beyond belief.
And this is not just an issue for regulators. This is an issue for progressives to respond to. We need a movement here to try to take up these issues of economic justice in America, because we’re not paying attention to it. And this cuts across racial lines. It cuts across ethnic lines. It cuts across also political lines. We’ve set up Americans for Debt Relief Now, an organization like Bono does in Africa for debt relief. We need it in America. We have a website stopthesqueeze.org, as a way to fight back, as a way for people who are in debt to stop being demonized by the media, which is what’s happening now, and to be recognized as the victims they are.
AMY GOODMAN: Danny, we’re going to lose our satellite in Durham, North Carolina, and I just wanted to ask our guest there, Keith Ernst, about the federal laws — for example, the possibility of a reintroduction of the Prohibit Predatory Lending Act that was introduced, I think, two years ago.
KEITH ERNST: I think it’s clear that legislation will be introduced in Congress, and we’re hopeful that it will move forward this time. You know, it’s been talked about for years now. And we’re hopeful that this year can be the year that legislation can move forward and help borrowers, because, you know, as your guest there is saying, it’s sorely needed now.
JUAN GONZALEZ: And, Keith, could you talk — because one of the things — those of us who have a little bit of a historical memory on the housing crises in America recall that this country goes through periodic crises on speculation and abuse in housing from the HUD crises of the 1960s, the savings and loans crisis of the '80s, and now we're confronted now in this decade with this huge crisis, and it seems like many of these characters just reappear with new companies and new banks or new lending procedures, but the same kind of scams. What can be done on a more consistent level, as Danny is raising, to be able to protect people who do not necessarily know all of their rights in terms of lending, especially when it comes to homes?
KEITH ERNST: Right, well, I think you’re right that, you know, we’ve seen many episodes in, you know, not-too-distant memory, where mortgage lenders have essentially been betting people’s houses, you know, so that they can make profits. And that’s what ties all of these cycles together, is the mortgage lender says, "Hey! You know, take a loan from me. Don’t worry about it. In two years, if you need to refinance, we’ll be able to get you out of this loan." And, you know, eventually that house of cards comes crashing down.
Now, moving forward, what can be done? I think, you know, the law should recognize the reality. Borrowers look to the person sitting opposite them at the table — most, usually nowadays, in subprime market, a mortgage broker — as an expert, as someone who’s helping them pick out their best mortgage. Sadly, this often could be — you know, could not be further from the truth. And so, what the law should do is recognize what borrowers expect and need, which is that the person who’s helping provide them a mortgage actually do just that: help provide them a mortgage that meets their needs.
AMY GOODMAN: Keith Ernst, we’re going to leave it there. I want to thank you for being with us. We’ll link to your website at the Center for Responsible Lending, speaking to us from Durham, North Carolina.