Class Actions Loom For Subprime Lenders

Soon, the piper may have to pay the piper: class actions against sub-prime lenders could be just around the corner.

Fair-lending laws mandate that loans only be made when there is a high likelihood of repayment, one of the reasons it can be so hard to get a loan.

A slew of lenders rode the housing wave by creatively granting risky loans to under-qualified candidates.

One of the driving force in the numbers on yesterday’s big sexy graph, “Graph: States Hit Hardest By Foreclosure Spree” came from a great scams perpetuated on the American public: marketing option-ARM mortgages to people who shouldn’t have them.

Reports the NYT,

    “Payment-option ARMs are perhaps the best example. Such loans allow borrowers to choose whatever monthly payment they wish, even if it means paying back less than the loan’s nominal interest rate. In such cases, the loan amount actually grows until a certain point, at which time the loan shifts to a mandated monthly payment, often at much higher interest rates.”

    “Payment-option ARMs had historically been the province of those who could depend on big annual bonuses to pay down loans they neglected most of the year. But more recently such mortgages have grown popular with borrowers who could not afford to buy a house unless they cut corners on the initial payments.

    Many of these borrowers essentially bet that the value of their houses would climb quickly enough that they could use the accumulated equity to refinance with a more affordable loan. The recent housing slowdown has curbed such plans….

    …Jean Constantine-Davis, a senior lawyer at the AARP Foundation, said that lenders sometimes qualify borrowers based on their ability to pay the lowest rate on an adjustable loan, not the maximum rate, while other lenders do not require adequate evidence that a borrower can repay. Such situations, she said, can serve as grounds for a lawsuit.”


Storm Clouds Over Risky Loans [NYT]


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  1. Keter says:

    The borrowers should have known what they could and could not afford to repay. Caveat emptor already.

    I was qualified for an astronomical amount five years ago at the height of the frenzy. I looked at that payment and about soiled myself. I took half of that amount, because it would cover the cost of a suitable property (not a mansion, but who wants to pay the upkeep and taxes on that?) and I knew I could pay it even if I made only half of my current earnings in years to come. Guess what? Two of the five years, I made less than half of what I had previously made due to layoffs. It ate my savings, but I was able to keep my house.

    The two things I couldn’t forecast that are hurting me terribly are huge increases in taxes and insurance. We need legislation controlling those two things. A taxpayer shouldn’t have to pay the equivalent of 4 (almost 5) months of mortgage payments in taxes every year because of out-of-control assessments and a combative assessors’ office.

    Insurance should be based on quality of construction and history of claims by the CURRENT owner (after a year or two of ownership if they don’t have a prior track record). Mold claims in my area have doubled my insurance costs, and I have a completely mold-proof (and fire-proof) house (all concrete; nothing to grow mold or burn!). And those of us who don’t live in areas prone to natural disasters should not have to “cover” the costs incurred by the fools who choose to live there — anyone who chooses to live in an area that blows away, floods, or burns every year or so should bear the cost of the KNOWN risk!

  2. Hawkins says:

    Mr. Keter is wrong: these poor people were suckered in by the greedy lenders, and now that their gamble hasn’t panned out, they should sue! How dare those lenders make loans like these to adults!

    When we’re done here, we should go on to sue the casinos in Las Vegas: I lost over $50 in the slot machines there, repeatedly betting that the machines would hit the big progressive win… and they didn’t. I’m suing!

    I might suggest that Mr. Keter shop around more aggressively for insurance, which is a highly competitive industry. There are lots of hungry insurers out there.

  3. B Borrman says:

    I am a bit familiar with the subprime world, having worked briefly for a subprime autolender. Caveat emptor indeed.

    That said, a huge chunk of these loans were made to the elderly, those with less education and recent immigrants. The immigrant issue was a particularly rampant one in the Denver area where I lived.

    Certainly not all, but a large portion of these loans where sold to people using sales techniques, pressure and slight of hand that would shame a used car salesman.

  4. bndocksnt says:

    The fact is, for those who hold these loans fall under the auspices of caveat emptor, there are many people out in these United States who are not as highly educated as you. The companies who “creatively” finance these loans do so with techniques designed to take advantage of these people. I worked for a lending company that was a horrible offender in these areas, and the housing boom and subsequent onslaught of questionable loans made to people who could not possible afford them caused me to leave the industry. I still remember one of my co-workers giving the hard-sell “sign here or you’re an idiot” approach to an older couple while trying (succesfully) to refi them on an unadvisable ARM and extending a home equity LOC that equaled a quarter of their inflated equity. I can only imagine that when the market cooled off, they lost their house. Sit in your lofty perch, assholes, just remember that you’re one of the lucky, and although you’re not required to show compassion and understanding, you might someday wish for the same