Sub-Prime Lenders Created Their Own Problems

Federal Reserve Chairman Ben Bernanke said “Proposed changes to mortgage lending rules are intended to protect borrowers from market abuses and boost market competition”. My bone of contention regarding the subprime fiasco, is that rules were in place to help protect consumers.

Home Owners Equity Protection Act (HOEPA) states that in order to refinance there has to be a tangible benefit to the borrower. The monthly payment on the house or overall expenses must be reduced. The points and fees were capped to help streamline and reduce closing costs. In many cases the point based fees were improperly identified and redistributed into non-regulated costs of refinancing.

Mortgage loans were being touted as fixed rate for a period of 3, 6, 12, 24 months, with the emphasis being FIXED RATE. I was contacted about refinancing by a mortgage broker when my mortgage was one year old. The product offered had excessive hidden costs, was identified as fixed rate, below market rates. It was answers to my questions that finally disclosed the mortgage as negative amortization, timeline of actual interest rate changes, and how the fees were calculated. Excuse me, if the lenders and brokers do not correctly identify the product as a variable rate mortgage loan, then who is responsible?

Second mortgages for down payments were promoted to avoid mortgage premium insurance. The risk of mortgage of insurance was retained by the lender because lenders could charge borrowers for the premiums, insuring their own product, and kept the risk “In House”, all for a premium fee, of course.

Everything seemed to be “stated this” and “stated that.” Home values were set by the seller or person doing the refinancing. Appraisers were no longer required to inspect, measure a house, evaluate the condition, or actually compare to recent sales. Many areas do not require comprehensive appraisals. Drive by appraisals and computer-driven models were used and they failed miserably. Borrower income was stated and the potential for job improvement was calculated. Low or documentation streamlined the process.

Everything in the mortgage industry moved like a well-oiled machine with no brakes. It then became a runaway train or a Frankenstein of good intentions. As soon as new regulations are proposed or published the lenders, brokers, investment banks hire a team of lobbyists and lawyers to circumvent all the safeguards.