RSSPredatory Lending Fix Threatens Mortgage Market
A Suffolk county (Boston) superior court judge has given the Massachusetts Attorney General authority to review and stop foreclosure proceedings on as many as 2,200 mortgages held or serviced by Fremont Investment and Loan. Fremont is a California subprime lender that was ordered by the FDIC to clean up its underwriting a year ago and later ordered to stop making subprime loans.
The state asked the court to prevent Fremont from foreclosing any mortgages in Massachusetts but the court only ordered a 90 day halt on foreclosures to permit the Attorney General to identify and stop foreclosure on individual loans with no downpayment, at least a three percentage point reset and a monthly payment at least 50% of the borrowers’ income at the fully indexed interest rate.
The risk to the conforming mortgage market is that stopping predatory lending will ignore predatory borrowing. This could happen if the courts force lenders to grant repayment concessions, permitting some low income households to remain the owners of homes that they can only afford with a subsidy from their lenders. In turn, the lenders will raise interest rates in the conforming market to cover their costs. Just as threatening is the possibility that court ordered concessions will creep up the income scale to the much larger conforming mortgage market.
Lenders will have to increase the risk premium they add to their cost of funds if they believe that they can nor rely on the courts to enforce repayment terms agreed to by borrowers. This is what lenders do when they lend in foreign countries with courts that have a history of favoring local citizens in disputes with foreign companies.
The Attorney General is right that the worst of the subprime loans were designed to fail, often within months, permitting the lender to recoup any equity built up by the borrower as well as claim other assets held by the borrower and assess huge fees as part of the foreclosure process.
This is wrong and should be stopped. But the process of stopping unethical lenders should not include awarding discounted houses to predatory borrowers who signed a mortgage contract that they knew they could not meet. Borrowers who took these no downpayment loans made a dumb mistake. They should lose their equity, typically a few thousand dollars at most, and move out. We should not establish a precedent that buying homes and defaulting is cheaper than rent.
The resolution is more complicated for people who took subprime refinancing loans. Typically, they have much more equity and other assets as well as more income. But they were also in a better position to know that they could not meet the monthly payments. Some never intended to carry the mortgage but simply wanted cash for some other purpose. These borrowers should be protected from the excessive legal fees assessed by their unethical lenders but should be at risk to lose their equity.
Member Comments
Jim Haughey will be relieved to know that judge specifically forbids the outcome that Mr. Haughey warns against. The judge’s written decision says on page 28, “this Court emphasizes that borrowers who have received presumptively unfair loans from Fremont should not interpret this preliminary injunction to mean that they have been released from their obligation to repay these loans. They have not been given any such release. The spirit of this decision is simply that Fremont, having helped borrowers get into this mess, now must take reasonable steps to help them get out of it.”
That decision is a …
