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In Cooling Market, Subprime Lenders Feeling The Heat

By Mark Huffman
ConsumerAffairs.com

March 6, 2007

Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Mortgage Delinquencies Still Climbing • Realtors See Signs Of Housing Turnaround • Zillow.com: Fewer 'Underwater' Homeowners In Third Quarter • Distressed Homeowners May Be Able To Rent Their Homes • Should You Walk Away From Your Underwater Mortgage? • Home Prices Rise Four Months In A Row • Consumer Credit Plunges In August • Study: Action By Feds Made Housing Crisis Worse • Mortgage Lender's Collapse Leaves Borrowers Adrift • Bank of America, Wells Fargo Hit With Class Action • Bank Sees Dim Future For Homeowners • Ohio Sues Mortgage Servicer Over Lack Of Modifications --- • More ...

As the once-hot housing market cools, subprime lenders are feeling a frigid breeze.

Consumers who could only qualify for a home purchase by getting a risky, "creative" mortgage are finding they can't make their payments and can't find a ready buyer in the current market.

The result is an increasing number of home foreclosures. The Boston Globe reports that in February, 2,207 Massachusetts homeowners lost their homes through foreclosure, nearly double the number from a year ago.

Much of the blame is falling on subprime lenders, whose loose lending standards often resulted in unqualified consumers buying more house than they could actually afford. Those who once embraced these new standards -- or looked the other way -- are now running for cover as the housing market continues its slide.

Freddie Mac, one of the nation's largest buyers of home mortgages, last week took the first step to distance itself from subprime lending, announcing a series of tough new standards for the loans it purchases. It makes it clear it plans to pass on a number of riskier types of loans that have been linked to increased default rates.

This week, a House Financial Services subcommittee will hold hearings to looking into charges of predatory lending practices by some lenders who cater to the subprime market -- consumers with impaired credit.

"The trend of increased foreclosures is certainly troubling, and it is important to understand the potential root causes," said Rep. Carolyn Maloney (D-NY), the subcommittee chair.

While Congress begins the search for root causes of foreclosure, some states are taking steps to stop predatory lending. Iowa officials have drafted legislation to curb predatory lending, taking special aim at the subprime lending industry.

"Predatory lending exploits consumers," Iowa Attorney General Tom Miller said. "We are trying to outlaw some questionable practices that cause consumers to pay too much and get trapped in high-cost loans. In the worst cases, consumers can't make their loan payments, and they lose their homes."

Miller said he was concerned by increasing foreclosure rates in Iowa and around the nation. Foreclosures in Iowa were up 64% in 2006 compared to 2005.

"This bill is about conduct -- about reining-in bad practices we have seen. It will help root out the ‘bad actors' who have harmed consumers and have unfairly gained market share at the expense of honest lenders. It will not ban any products, and it will not restrict consumers' access to credit," Miller said.

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