Combating Subprime Mortgage Fraud
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The New York State Commission of Investigations reported that the state's mortgage borrowers need more regulatory protection from predatory lenders, according to CNNMoney.com. Predatory mortgage brokers were able to take advantage of loopholes in New York State lending laws, a state that has fairly adequate lending laws, and defraud several thousand homeowners who should not have been given a loan or placed in the subprime loan they borrowed. States like California and Florida were hit even harder by mortgage fraud and both states have two of the highest foreclosure rates in the country.
The commission gave many examples as to the rampant problem of predatory lending, but one story in particular seems to be the most egregious of predatory lending practices.
A woman, Suzette Francis, who was working a $10/hr. job and living in a homeless shelter, along with her two kids, obtained a $470,000 mortgage that, according to the Commission's report, "exhibited [. . .] every characteristic and feature associated with dangerous subprime loans."
The subprime loan she was issued was an ARM loan, its interest rate starting at 10.8% and capped at 16.5%. Her monthly mortgage payment was over $4,400, which would have required her to work a 100 hours a week, just to pay the mortgage payment alone.
The Commission's report also warns of minorities being heavily targeted. In the State of New York, African-American and Hispanic borrowers were twice as likely to have subprime loans as whites, the Commission found. The report said that, "Customers in minority communities eligible for prime loans have been pushed into taking out high-risk subprime loans by shady mortgage brokers."
This problem was not represented or addressed in the Housing Bill that President Bush signed yesterday. There are many minority borrowers whom lenders targeted that will be left to deal with their troubled mortgage situation alone, and what's even more unfortunate is that if a responsible lender inspected their financial situation -- not being able to afford the loan they were taking out in thousands of instances -- many families would have been able to avoid the financial distresses they've been feeling for the last year in regards to their housing situations.
The Commission issued several recommendations to avoid future problems, however, federal regulations take precedence over state laws, nullifying any attempt to protect consumers by the State of New York. The State will have to work with federal regulators to protect its consumers and curb mortgage scams.
-Instituting standardized regulations governing the industry which apply to all the professionals -- real estate agents, mortgage brokers and loan officers, attorneys and appraisers. All must be licensed and fulfill educational requirements.
-Banning the practice of brokers taking on dual rolls. The report stated, "The potential for conflict of interest and outright criminality is so great [when one] individual acts as both real estate/agent and mortgage broker [. . .] in a single [. . .] transaction [it] should be prohibited.
-Improving borrower education and outreach efforts to draw more borrowers into financial literacy programs. The state should consider mandating pre-purchase financial counseling for all subprime borrowers.