As The Fed Snoozes, States Step Into The Subprime Breach

States are beginning to enact protections for subprime borrowers, reacting to the absence of a national solution from Washington. North Carolina last week became one of one of several states to clamp down on the adjustable-rate mortgages that have fueled the subprime meltdown.

From the New York Times:

Lawmakers in a handful of states — including Maine, Minnesota and Ohio — have passed measures to tighten restrictions on subprime lending. Illinois, New York and Massachusetts have formed task forces and held meetings involving members of the mortgage industry, lenders and consumer representatives to figure out ways to rework problem loans. Minnesota is acquiring some foreclosed properties to resell to low-income people.

Several states are considering laws and regulations to make mortgage brokers accountable for allowing borrowers to take on debts they cannot repay.

In all, legislators in more than 30 states have introduced close to 100 bills intended to stem deceptive-lending practices and foreclosure, some by stiffening criminal penalties.

It is doubtful that any legislative solution from any level of government can help people currently caught up in the subprime meltdown, though several states are trying. Massachusetts is working with Fannie Mae to pony up $250 million to refinance the loans of about 1,000 homeowners, while a similar $100 million program from New York will help 500 homeowners.

A national solution is required to combat predatory lending. The housing market, long considered local, and immune from national declines, is about to suffer the first national slide; fifty state solutions cannot guarantee the uniformity of protection afforded only by an act of Congress.

States Begin Action on Subprime Lending [NYT]
(AP Photo/Paul Sakuma)

Comments

Edit Your Comment

  1. y2julio says:

    “Several states are considering laws and regulations to make mortgage brokers accountable for allowing borrowers to take on debts they cannot repay.” This is how it should be nationwide.

  2. skrom says:

    How about they hold people accountable who took out mortgages they couldnt pay back. Im sick and tired of nobody taking personal responsibility. Just forclose the houses and move on instead of bailing out all these stupid people that did something they shouldt have. Why should I as a taxpayer be paying other people’s mortgages. This money could be put to much better use like buying armor for our troops in Iraq

  3. NickRB says:

    We have to be careful about this “national solution”. It seems good in theory right? What we have to understand is that the majority of subprime loan recipients are paying their mortgage on time. A solution that holds a mortage broker criminally accountable for the BORROWERS failure to pay back the loan will result in less loans for people that can and would pay the loans back. What broker in their right mind would lend to anyone the least bit risky? That will surely cause an even bigger crash in the housing market and drive the economy into recession is knee jerk traders start dumping stock. I HOPE legislation like this does not pass, as it will do far more harm than good.

  4. NickRB says:

    @skrom:

    I agree whole heartedly! Our government is already far too involved in our every day lives and businesses. They may only take 45% out of my check as taxes, but in reality we pay closer to 60% when you consider all the hidden taxes on things like cell phones, gasoline and crop subsidies.

  5. ARP says:

    I think the borrowers have a majority of the blame (except the cases of fraud, etc.). But, lenders have some responsibility as well. If a homeless guy walks up to you and asks to borrow $1,000 and you lend it to him, who’s to blame when he doesn’t pay you back? The homeless guy? Sure. But don’t you share some of the blame as well for taking such a risky move? Now if this only happens in 2% or so of the mortgages, that would be regretable, but OK. What makes this a national issue is the shear volume of these loans. That many lenders being that dumb, impact the economy.

  6. hypnotik_jello says:

    @NickRB: I think there is a difference between lending to someone who is at risk (but a loan they could afford), vs. qualifying an at-risk lender for a mortgage that they couldn’t realistically afford. For example, qualifying someone for a 100k loan vs. a 250k loan.

  7. Rusted says:

    They are holding them accountable. Foreclosure means taking the house and selling it to recoup their losses. The borrower is still liable for the balance of the loan if the house is “upside down”, ie, worth less then the loan. if they can’t pay back the balance, it means bankruptcy which has gotten a whole lot nastier now.

    If there are too many foreclosures, it has a very negative affect on the markets, financial and otherwise. Just look at what happened last week on the stock markets. I’ll be back at par soon but it was a wild ride.

    The gist of the article is that the states are trying to regulate subprime mortgages so this doesn’t happen again and will only help a few existing mortgage holders.

    Yeah, I actually read the story…..

  8. SudsMN says:

    $250 million to rescue 1,000 homeowners in Massachusetts = $250,000 per home. I wish I would have overextended myself and gotten a toxic loan so I could get a free quarter million dollar handout from the government.

  9. JohnMc says:

    I am with SKROM on this one. Carrey you seem to think that ‘woe the poor borrower’ requires some governmental solution. It does not. My first challenge to you is — do you own an home and do you remember your escrow closing? There are laws already on the books that require disclosure of the rate, terms, payment schedule, etc. WAY before closing. And in many States there is a summary memorandum in big bold print laying it all out again the borrower must sign. The borrower is an adult. They can read. They knew what they were in for the day they signed for the note. Like a lawyer fiend of mind reminds me all the time — “The fine print is there for your edification whether you read it or not.”

    Now lets say you get your way. States and courts and willy-nilly ‘bail out’ borrowers by modifying contracts, or protracted abetments. First thing yo have to understand Carrey, is the money lent is not the bank’s money either. They get their funds from depositors who expected a given rate for lending their funds. So when the banks can’t earn their rates, they can’t pay their depositors either. So the mom and pop’s lose their returns if not portions of their capital.

    Pretty soon two things are happening. The banking system clams up totally lending NO MONEY to ANYONE as they cannot be guaranteed their rates as the politicians are meddling in contract law. Since no one has the money to pay cash for a house the real estate market goes into total collapse. $100k homes now go for $50k or less. Now even prudent borrowers are at risk as they now are paying on a negative asset. So they turn in the keys as well. It spirals down to nothing.

    All for a want to ‘help’ a few folks. Carrey, the road to ruin is paved with good intentions.

  10. JohnMc says:

    Rusted. It does not take even that level of action by the States. It takes borrowers with their brains engaged. Nor does it take that much to figure out either. Rule of thumb is no more than 1/3rd of your net income for housing and a minimum of 20% down. Don’t have the money save for it.

  11. zolielo says:

    @skrom: Like most of the others I am with you Skrom. Personal responsibility and financial prudence are key to personal freedom, free from what should be nanny state government aid.

  12. bricko says:

    For these NINJA (No Income No Job or Assets) loans, both the loan approver and recipient should have Criminal charges brought against them for theft and or fraud.

    Do a few frog marches of these mortgage folks along with the family in handcuffs would go a long way to putting the fear in these folks.

    I would also make these loan approvers PERSONALLY liable for the repayment of each loan that does not have the proper paperwork and due diligence.

    No loan would ever be approved without 20% down and a job of at least 5 years. This would also help maintain the stability of the home prices. No up and down like now due to speculators etc.

  13. badgeman46 says:

    This is rediculous. Hold the borrower responsible. No bailout. Period. This is just subsidizing risk, and next time instead of 3 percent defaults it would be 10 percent. Just look at the airlines! The government bails them out all the time, yet they still are always in bankrupcy. This is because they can just turn to uncle sam. The same thing would happen to the mortgage industry.

  14. Keegan99 says:

    More federal nanny-statism is not the solution. The role of the federal government is not to protect stupid people from themselves.

  15. RossMcD says:

    @skrom:

    IMHO, it’s just as bad to bail out the lenders as to bail out the borrowers. Both cases encourages fiscal irresponsibility. It seems like the fed already has given lenders (and those who invested in them) a helping hand by lowering interest rates.

    In light of that I’m okay with a little help to people whose mortgages are in trouble. You can’t just bail out big business or just bail out consumers.

  16. SOhp101 says:

    Let the foreclosures begin! Screw government handouts… that’s one thing that Bush was smart on, and that’s a rare occurrence.

    We need home prices to go back to reality. There should be NO government handouts to the problems we’re having. It’s because of the dumb subprime loan boom that the median house price here in Los Angeles is $500,000 (and that money will only get you a home in South Central).

  17. NeoteriX says:

    It’s called predatory lending for a reason.

    And yes, it might shock some of you, but some of the lenders have high incentives to close the deal, not adhere to all of the requirements of the Truth in Lending Act, package bad mortgages together, and make it someone else’s problem. I mean really, these are people’s homes and lives here.

    The discussion about solutions to the subprime crisis deserves a little more nuance than reducing the issue down to “a bail out”

  18. Crazytree says:

    I’m a real estate attorney and I’ve had TONS of people come into my office with these bad loans that the brokers have “forced” on them… going back to at least 2004.

    My response is to look at the paperwork and ask them: “is this your signature on this loan document where you fraudulently overstated your income on a Federally-related loan?”

    Yes? Have a nice life.

  19. ChrisC1234 says:

    When I bought my home (in 2002), I remember seeing some homes that had been foreclosed upon by the bank. They were utterly TRASHED. Some had large burn piles in the backyard because the inhabitants were to cheap to pay for garbage service. EVERYTHING that wasn’t bolted down (and some appliances that were) were removed and the place was nasty.

    I actually happened to talk to my loan officer about those houses and how those people are able to get the loans, just to foreclose on them. She said that some of them “buy” a house without any intention of ever paying a note. She also said that even though the loan officers could tell the types of people that they were dealing with, they couldn’t deny them the loan based on thinking that. Apparently, some of the anti-discrimination laws make it difficult to deny someone based on your gut feeling if all of the numbers say they should be approved.

    So, this makes me wonder how many of the mortgage brokers themselves couldn’t have stopped this fiasco. These NINJA loans, if the buyer said the right stuff and wrote the right numbers on the form, could the loan officer have stopped the loan because they had a feeling that the buyer was lying?

  20. SloppyChris says:

    Why don’t we pass a congressional measure baring idiocy? If people make dumb decisions they find any policeman who enforces their new unalienable right to “take-backsies”.

  21. FLConsumer says:

    Why do we need laws for this? Let the lenders take the fall! It’s THEIR money on the line, not the borrowers’. Let the free market decide what should happen, and it will.

    I like Crazytree’s idea… if they overstated their income to get the loan, let’s prosecute the borrower as well as the mortgage broker. Do this enough times in each state and this whole mess will resolve itself in a matter of months for new loans. For the old loans? Well, it’s a tough lesson, but it comes back to what I’ve said in many threads. “Don’t buy shit you can’t afford!”

  22. SBR249 says:

    @FLConsumer: It’s not actually the lender’s money on the line as much as the investors. A lot of these subprime loans were packaged and sold as investments to hedge funds, mutual funds, banks, and other investment entities. It’s really those organizations’ money that keeps the industry afloat. Without the cashflow from the investors the lenders often do not have enough assets to continue make loans hence the meltdown in which lenders shut down their lending operations.

  23. Squeezer99 says:

    @skrom:

    i completely agree with you.

  24. Kickbacker says:

    Here are the Top 10 Mistakes Mortgage Borrowers Make:

    1. Not knowing which mortgage fees the borrower can — and cannot — negotiate.

    2. Choosing and trusting the first loan officer the borrower interviews.

    3. Using an interest-only or “payment option” adjustable-rate loan primarily to qualify for a more expensive house than you could normally afford.

    4. Thinking the interest rate is always the main thing.

    5. Not comparing the final fees listed on the closing documents to the up-front estimates to avoid the lender packing the loan with added-on fees without the borrower’s knowledge.

    6. Not knowing if the mortgage has a pre-payment penalty – until it’s too late.

    7. Thinking that renting is always just throwing money away.

    8. The borrower does not know if he or she is paying a back-end yield spread or Service Release Premium.
    9. Paying for mortgage life insurance, credit insurance or other expensive lender add-ons to increase the amount of kickbacks the lender can receive from various vendors.

    10. Paying hundreds of dollars to have a company set up a biweekly mortgage payment plan, something the borrower can generally do for herself or himself — for free.

    Kickback: Confessions of a Mortgage Salesman, one of the best-selling books on mortgages on Amazon.com.

  25. MENDOZA!!!!! says:

    so wait, states are actually taking legislative action before the federal government?
    (swoons)
    wow, I better go pat my state senator on the back.

  26. hi says:

    quote:
    More federal nanny-statism is not the solution. The role of the federal government is not to protect stupid people from themselves.

    “The Fed” = Federal Reserve which is not a part of the U.S. government. It is a corporation that loans the money it ‘creates’ to the U.S. government with interest.

    The stupid people are the ones who think the ‘fed’ is a government agency. Do your research.

  27. FLConsumer says:

    @SBR249: That’s why the various money managers are required to have insurance. If something goes wrong, they’re going to have angry investors (and their attorneys) looking for blood.

    There is no “100% safe” investment. Stocks & mutual funds can go down, banks can fail. Sure, the first $100k is guaranteed by FDIC/NCUA, but that still depends upon the US government being solvent. Even burying money in your back yard has some risk associated with it. Are some of these events unlikely? Sure. Generally, the safer the investment, the lower the interest/return/dividends paid.

    Will some individuals lose large amounts of money because of this? Absolutely. Do people lose money on investments? Every single day, regardless of the sub-prime lending. Whether it be from scams, non-performance, or other mishap, people lose money all the time with their investments. Even the best people in the industry lose money on investments. As long as you make more gains than losses, it’s all good.

  28. MyCokesBiggerThanYours says:

    Is the consumer ever responsible for their mistakes? Or is it always the corporation?

  29. BenMitchell says:

    I have to agree with the group on this one. Why are we bailing out anyone? Let the banks foreclose – if the banks lose money then that is their fault for loaning the money to people who cannot afford it.

    Simple and Already available.

  30. sr71pav says:

    Yet another agreement from me. Both the borrower and the lender should have to face the free market consequences of their actions. Both took risks and both failed. Such is life. No sympathy from me.

  31. Ausoleil says:

    Here in North Carolina, we really do not have the housing meltdown that is happening all over the country. In fact, in the two largest markets, Charlotte and Raleigh, housing prices are appreciating still and the slowdowns we’re feeling is probably due to other parts of the country and not because of what’s happening in the local economies. Unemployment remains very low, and the woes affecting other areas are just not as severe here.

    The state is simply enacting protections from predatory lending. Some of you may believe that this does not exist, or that somehow consumers are supposed be able to decode deliberately complicated and misleading contracts, but then again, you probably think a brain cancer patient should be able to understand the nuances of surgery that his neurologist is preparing to perform too.

    I think it’s preventing a problem so it won’t damage our economy by ensuring that aggressive lenders don’t violate the law and if they do then the consumer has some recourse.

  32. beyond says:

    So…where did Mass get their $250 million to help these homeowners refinance?

    Maybe I should stop paying my mortgage so all the taxpayers can pay my closing costs, too! And maybe knock down my balance so I can have plenty of equity. Thanks hard working Americans!

  33. kimsama says:

    Great! Let’s have a tax-payer financed bailout and lots of penalization of lenders! Then lots of good things will happen:

    1. Credit squeeze – it’s already happening. Nobody wants to lend anymore if they’re going to be held accountable!
    2. Recession – because making tax payers bail out insolvents is always a fantastic idea! Why, it’s ever so smart to take money from those who earn it and give it to those who waste it! That’ll keep the economy running well in the long-term. What? We don’t think about the long-term anymore?
    3. Inflation – the only way that housing prices will go down (and they will) if there are tons of bailouts is that the rest of the economy will experience inflation, making the housing market worth less while simultaneously screwing us all in every other aspect of our daily lives. That $500,000 house will sure seem cheap again when a car is $140,000 and a package of toilet paper is $25.

    Thanks subprime borrowers and lenders! Now even with my perfect credit, I won’t be able to buy a house for 10 years. I love being responsible and not relying on tax payers to give me everything — it sure has paid off (voice dripping with sarcasm).

  34. quagmire0 says:

    I’m sorry, but if people would do five minutes of homework or even go to a local library or somewhere else where there is FREE internet, they could educate themselves before just agreeing to the first mortgage deal that comes around. You can’t fix lazy. Are these companies sleezy? Hell yeah. But it took millions of uneducated (or maybe just priority challenged) consumers to help cause this mess. They got caught off guard by not knowing what ‘adjustible’ means…or maybe not thinking about the fact that you have to pay tax on a home and that it actually goes up every year. The fact of the matter is that the system will break itself. Soon classes that require first time homebuyers to learn the ropes will become like those ‘traffic safety’ classes you go to after you get a speeding ticket. The guy tells you a few stories, then you leave early. At some point we have to hold the people accountible – not for being gullible, for being lazy and not doing any research and not ensuring that they could afford their home if distaster strikes.

  35. paperairplane says:

    Have you noticed the trend in car advertising – particularly in used cars – where they ask you what payment you want, not what price you can pay. This is the exact same thing.
    People want to buy a $300K house, but can only afford $175K. So a mortgage banker (who works on commission) offers them an ARM or interest only loan that yields the necessary monthly payment. The borrower is so anxious to get their house that they’ll sign anything.
    Unfortunately, when you have a very low interest ARM and then a few years go by and the housing market slows to a crawl and interest goes up, you have 1.no equity and 2.higher monthly payments.
    I am in favor of monitoring lenders in stricter fashion, I am not in favor of forgiving people for over-extending their credit and income.

  36. RagManX says:

    I agree with the fact that more people need to take responsibility for their actions and decisions. However, I think just writing off all the folks facing foreclosure now could do a serious number on the economy. We certainly need legislation to make our current situation improbable in the future, but I’m not too sure we can deal with where we are now by just telling folks to suck it up. It’s a tough spot, really, because *more* federal government is never a good thing. Still, without something happening at the federal level, we’ll have to go through this again in the future.

    Sigh. Large-scale economic impacts FTL.

  37. Sudonum says:

    @paperairplane:
    Yeah, good point. But it works the other way too. Broker or Real Estate agent tells home buyer that they can “afford” a much larger house because with these “wonderful new loan products” their payment for the more expensive house will be the same as what they figured to pay on the smaller one. And many people, call them unsophisticated, uninformed, or yes, stupid or greedy, went for it hook, line and sinker.

    I am not in favor of a “bailout”. But I agree with @RagManX: about finding some kind of a solution to keep this thing from imploding the economy.

  38. BenMitchell says:

    @Sudonum: If you are foolish enough to take the bait, then you should be dinner for a hungry fisherman. I’m defending the banks – God knows they are evil incarnate. But personal responsibility is something people in this country are too quickly forgetting. I is not hard to see how much you can actually afford. The truth hurts but it is there fault.

    If we want to bail someone out – how about all these people who can longer afford to survive due to extensive medical debt because of our current health care providers. How about we help the sick and forget about the stupid!