Sub-Prime Loans - Blessing or Curse?
January 8, 2007
www.AngelReyesBlog.com
UPDATE:
Today’s
Dallas
Morning News front
page article about North Texas minorities overpaying
on home loans caught my eye. The DMN
found that a third of all Dallas-Ft. Worth
home mortgages taken out by minority applicants
in 2004-2005 involved high cost sub-prime mortgages
like the ones I described in my earlier post
of December 7th, 2006 (below).
Ann
Graham, a professor of law at
Texas
Tech University is
quoted as saying, "It's definitely a problem
because there are borrowers out there who are
ending up with loans that are inappropriate
for them." She
must be getting the same sinking feeling I'm
getting.
That feeling goes something like this:
If you are African American or Hispanic and
you finally got into the ranks of homeowners,
watch out; the rug may just get pulled out
from under you and if you weren't careful,
you'll also be stuck with a higher interest
rate than a non-minority borrower with equal
credit. Of further interest, the article points
out the sweeping demographic changes the Dallas-Ft.
Worth area is undergoing. In 1990, 17% of the
homeowners in the Dallas-Ft. Worth area were
minorities. In
2005, the minority home ownership numbers in the Dallas-Ft.
Worth area had climbed to 31% - an eye-popping gain in
fifteen short years.
ARTICLE UPDATE: The Los Angeles Times
recently published an
article about California home owner defaults and foreclosures.
Take a look, if you have time, at this informative article.
Over
the past decade, homeownership among minorities has steadily
increased. One reason for this increase has been the new
breed of high cost loans, or
subprime loans, as they're known in the industry.
December 7, 2006 Posting
The advent of "looser" credit standards during the past
decade coincided with a strong housing market to create the
Perfect
Storm. Ever
since I read
Sebastian
Junger's book, The Perfect Storm,
I just love using the title to describe impending doom. Who is doomed, you
may be asking? The minority residents of most urban areas where the vast majority
of subprime loans were made. Why are these new homeowners, some of whom are
the first person in their family to own a home ever, doomed? Financiers like
Countrywide,
Ameriquest, IndyMac,
Ditech and
Amerisave are
about to reset the subprime adjustable rate mortgages they gave out like candy.
Those loans were already 3 points higher than rates available to more creditworthy
borrowers. The industry stridently claims that subprime loans are a boon for folks who have dinged up credit. They've
been a boon alright, to the industry, where the percentage of subprime loans
went from 2.4% of all outstanding loans to 13.4% of of the total in just 6
years.
Mortgage companies make more profit on subprime loans than they do on conventional
loans. Hey, that's the American way, you might be saying. I don't disagree;
after all, businesses are in the business of making profits. However, even
the industry acknowledges that they shouldn't be in the business of putting
people in homes they cannot stay in. According to
Susan
Wachter, a professor at the
Wharton
School of the University of Pennsylvania,
subprime mortgage lending is concentrated in urban areas and is especially
high in minority communities. Think the Texas border, California, and Southern
cities with high minority populations. The hitch is whether or not the mortgage
companies, banks, and investors who pushed these subprime loans, offered the
same loans to all borrowers or, did they steer minority borrowers into subprime
loans only. When those rates reset, urban areas with concentrations of new
minority homeowners will be hit with the perfect storm of rising foreclosures.
Lawsuits will continue to fly. So who are these greedy ambulance chasing lawyers
doing the suing? One of the first lawyers to sue a subprime lender was none
other than
Elliott
Spitzer,
newly elected Governor for New York. As attorney general for the state
of New York, he discovered that the
Home
Mortgage Disclosure Act showed
that black and Hispanic borrowers were more likely to get subprime loans from
Countrywide. Countrywide agreed, with lots of pressure from the New York attorney
general, to adopt measures to prevent discriminatory pricing for minority borrowers.
The settlement agreement suggests that Countrywide was steering minority borrowers
into higher cost loans.
Countrywide is probably the tip of the iceberg. Let's
hope when the dust settles, the subprime market doesn't end up being written
about as another artful ploy to separate less wealthy folks from their hard
earned money.
©2007
Angel Reyes
Read more articles by Angel Reyes at
AngelReyesBlog.com.
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