EthicsWalk addresses
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Subprimes: A Financial Opiate
Financial health for many patients is as fragile as physical, psychological, emotional and spiritual well being. All are linked. The latter four are addressed daily by spiritual and other health care providers. The first is among the American Discussion Taboos. This column confronts an epidemic ravaging the financial health of many Americans: sub prime mortgages. Disproportionately damaging to populations whose vulnerability is heightened by illness, age, disability, and racial or ethnic minority status, regulation of subprimes is a justice issue for people of faith.
Home ownership remains the strongest opportunity for American families to build wealth, establish economic security and enter or remain in the economic middle class.[1] As home values rose in 2000, subprime lenders began providing mortgage loans for people with impaired or limited credit histories. Predatory lending practices soon emerged, blemishing the industry. Today, more people are losing homes than acquiring them through their involvement in the subprime market. [2]
The majority of subprime loans are taken out to refinance property. Refinancing represents the greatest danger to home ownership. Its usual impetus is securing funds for health care, compensation for job loss, or paying for education. Equally pernicious is the desire to “cash out” a portion of rising home equity to consolidate debt, buy a car, or just take a vacation.
Subprimes are usually marketed by mortgage brokers who make their money “placing” mortgages with a “lender.” Unlike similar professionals, brokers acknowledge no fiduciary duty to the consumer-client and are unregulated in many states. They push subprimes with seductive, temporary two or three year “teaser” rates, frequently fail to escrow taxes and insurance, and often don’t disclose loan origination and prepayment fees until the closing, at which time emotional involvement and practical considerations block most buyers from backing out. “Informed consent” is absent in abusive subprime sales.
Borrowers may be approved, with minimal screening, based on the value of the property, not their ability to pay. During the “teaser” period, almost anyone feels capable of meeting the loan terms. Thereafter, the rate rises every six months based on a complex formula. In short order, payments outstrip what the borrower can afford and exceed the rates of conventional mortgages.
Subprime borrowers become self-defining. Once perceived (by self and lenders) as less worthy of conventional financing, and caught in the cycle of excessive fees and charges, families find it difficult to escape. The result is an accelerating succession of ‘flipped’ subprime loans, culminating in foreclosure and Chapter 7 bankruptcy.[3]
Predatory lenders claim that their product permits low income and credit challenged borrowers to enter the American wealth stream. The assertion is false. The majority of subprimes are used to refinance existing mortgages, not to acquire new property.[4] And, most people obtaining subprime loans could qualify for conventional or government insured mortgages were not unscrupulous mortgage brokers soliciting and steering vulnerable populations to the sub-prime market.[5]
Owning a home is the American Dream and home equity is the strongest predictor of economic security. Subprimes promise the dream but are the financial equivalent of prescribing opiates to patients. Occasionally after non-narcotic drugs have been tried, the opiate is necessary. But its use is closely monitored and patients are weaned to conventional treatments as soon as possible. Vulnerable people deserve the same carefully controlled processes for their financial healing. Justice here demands knowledgeable advocacy.[6]
Footnotes:
[1] Center for Responsible Lending (www.responsiblelending.org). Data and analysis on subprime mortgages obtained from materials provided at this site and in testimony by the center’s president, Michael D. Calhoun before the U.S. House Committee on Financial Services, Subcommittee on Financial Institutions and Consumer Credit, March 27, 2007.
[2] From 1998 -2006, subprime loans have led or will lead to a net loss of homeownership for almost one million families. Net homeownership loss occurred in subprime loans made in every one of the past nine years.
[3] Lehman Brothers projects that “cumulative defaults may run as high as 30%” on sub-primes made in 2006.
[4] Estimates are that since 1998, only 9% of subprime loans have gone to first-time homebuyers and hence led to increased homeownership. CRL Issue Paper, No. 14, March 27, 2007.
[5] Subprimes are disproportionately made in communities of color. They constitute 52% of mortgages in African American communities and 40% in Latino. For white communities, they are 19%. Appendix B, Michael D. Calhoun testimony.
[6] On March 8, 2007, federal financial regulators issued the Proposed Statement on Sub-prime Mortgage Lending, a strong national anti-predatory lending recommendation currently before Congress. It advocates requiring an evaluation of the borrower’s ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortized repayment schedule, rather than basing the loan on the value of the borrower’s property at the time the sub-prime is made as well as full disclosure of fees and costs. Similar measures are before a number of state legislatures. More information at www.responsiblelending.org.
Anne Underwood has an undergraduate
degree in religious studies, a
master’s degree in rural sociology
and a mid-life law degree obtained
after working over a decade as
a college administrator. She has
mediated for the Maine family courts
since 1983. Currently she serves
as an advisor to the ethics commissions
of ACPE, APC, the CCAR (Central
Conference of American Rabbis),
and NAJC, and consults with a variety
of Protestant faith communities
on issues of power, fair process,
and congregational conflict management.
Her articles on mediation and restorative
justice have appeared in the ACPE
News, The APC News and on the ACPE
web site. Articles on clergy accountability
and judicatory processes are published
by the Alban Institute and The
Journal on Religion and Abuse.
A
chapter, “Clergy Sexual Misconduct:
A Justice Issue,” appears in Body
and Soul: Rethinking Sexuality
as Justice-Love
, Marvin Ellison
and Sylvia Thorson-Smith, editors,
The Pilgrim Press, 2003.
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