States now trying to protect subprime borrowers
Some states now trying to protect subprime borrowers
States are now scrambling to pass laws to limit damage from subprime lending, but many state officials concede the provisions may be too late. Citing a slow response from the federal government to address the issue, about 12 states are considering legislation that would protect subprime borrowers and potentially stave off a future crisis like the one now rocking financial markets. "I should have watched this closer; all of us should have on the state level," said North Carolina Gov. Michael F. Easley.
Belatedly, Some States Move to Limit Damage From Subprime Lending
By CLIFFORD KRAUSS
Gov. Michael F. Easley of North Carolina signed legislation last week that would limit the ability of mortgage brokers to charge customers above-market rates and prepayment penalties and would protect subprime borrowers from highly risky adjustable-rate mortgages.
Calling the mortgage meltdown a “wake-up call,” Mr. Easley said, “If Washington isn’t going to act, the states are.”
But amid his call for action was regret that if only officials in his and other states had acted a couple of years sooner, some of the mortgage problems that have roiled the financial markets and hurt homeowners might have been avoided.
“I should have watched this closer; all of us should have on the state level,” he said in an interview after the signing ceremony in Raleigh. “We should have looked at our laws closer and made some changes.”
North Carolina is one of about a dozen states that are beginning to make legislative and regulatory changes to protect people who resort to subprime financing. But economists and housing specialists say the actions come too late to benefit most of those at risk of losing their houses.
With foreclosures expected to rise as adjustable-rate mortgages are reset and the borrowers face higher monthly payments, economists said the steps that states like North Carolina were taking would do more to protect future borrowers than help people already in trouble.
The Mortgage Bankers Association reports that 550,000 homeowners with subprime loans began a foreclosure process over the last year, and specialists say that the number could double in the next couple of years.
In North Carolina, the number of foreclosure filings increased 6 percent in 2006 from 2005 and that is expected to climb to 10 percent this year, said Christopher Kukla, director of state legislative affairs at the Center for Responsible Lending in Durham. “We think the worst of it is still yet to come,” Mr. Kukla said, “because there are still thousands of adjustable-rate loans out there that still will reset in the next six months to a year.”
State governments have ample legal powers over the subprime market, but governors, legislators and regulators have been reluctant to intervene. They have limited staffs and financial resources to regulate the large, fragmented market, and they fear doing more harm than good — like stamping down home-lending money for working-class people or moving it to other states.
In some states, officials were hesitant to help bail out people who had made bad decisions for fear this would only encourage more risky borrowing. “You know that people are not as financially literate as they ought to be,” Governor Easley said as he signed the new law.
State governments are beginning to take modest action in part because the federal response has been slow.
In Washington, the Federal Reserve recently began urging lenders to toughen subprime loan standards and last month started a pilot project with state regulators to collaborate on supervision and enforcement with subprime lenders.
The Senate Banking Committee chairman, Christopher J. Dodd of Connecticut, and other Congressional Democrats are pressing the Bush administration to allow Fannie Mae and Freddie Mac to buy more home loans and have promised to hold hearings to consider action to prevent predatory lending.
Lawmakers in a handful of states — including Maine, Minnesota and Ohio — have passed measures to tighten restrictions on subprime lending. Illinois, New York and Massachusetts have formed task forces and held meetings involving members of the mortgage industry, lenders and consumer representatives to figure out ways to rework problem loans. Minnesota is acquiring some foreclosed properties to resell to low-income people.
Several states are considering laws and regulations to make mortgage brokers accountable for allowing borrowers to take on debts they cannot repay.
In all, legislators in more than 30 states have introduced close to 100 bills intended to stem deceptive-lending practices and foreclosure, some by stiffening criminal penalties.
Maryland, Massachusetts, New Jersey, New York, Ohio and Pennsylvania have rolled out mortgage programs intended to refinance loans by homeowners at risk, using the proceeds from state bond issues and money from federal lending agencies. Together, the programs amount to about $500 million but are expected to help a relatively small number of people.
A $250 million effort by Massachusetts with Fannie Mae, for example, is expected to benefit about 1,000 delinquent borrowers. New York’s $100 million program would help an estimated 500 homeowners.
Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard, said: “Some states are looking at bond issues and trying to craft programs that involve no direct out-of-pocket costs for the taxpayers. But that’s predicated on the premise that the borrower of new loans” can repay.
Ohio initially planned to sell $100 million in taxable municipal bonds in a mortgage-refinancing program intended to help property owners get fixed-rate mortgages on which they could make the payments. But the state cut the program back to $25 million because so many people were already in foreclosure or not eligible for the loans.
Mr. Kukla said Ohio had had a degree of success with a law passed last year requiring lenders in subprime deals to document and verify their borrowers’ ability to repay. But Ohio remains a subprime-mortgage disaster zone, with the country’s highest foreclosure rates after California and Florida.
The state’s Foreclosure Prevention Task Force recently recommended that officials cajole mortgage lenders to help borrowers refinance or readjust their adjustable-rate loans. It called for $50 million in grants to help cities redevelop neighborhoods hardest hit by foreclosures and blighted by abandoned houses.
Regulators from several states agreed to tighten the underwriting standards on adjustable-rate mortgages last month, directing lenders in the subprime market to verify a borrower’s income, inform them of prepayment charges and stop underwriting loans at initial teaser rates.
Their action, coinciding with guidelines announced by the Federal Reserve, attracted little fanfare before the global financial markets’ recent sharp fall in the spreading mortgage crisis. Nine states have adopted the rules, and about 20 more pledge to follow suit quickly. But for some borrowers already in trouble, the new guidelines are coming too late and may even hurt.
“Tightening underwriting now while these loans are resettling could expedite some foreclosures,” said John Ryan, executive vice president of the Conference of State Bank Supervisors, a leader in developing the new guidance. “It helps more future customers.”
Some state governments reacted to predatory lending practices effectively in the late ’90s with new regulations, but the rules spurred lenders to design adjustable-rate mortgage plans that came to dominate the subprime market after 2003.
Most states were left flat-footed until the spring, when foreclosures began to mount as the interest on adjustable-rate mortgages rose three or more percentage points.
Economists and mortgage specialists say they think that states will take more action in the fall when legislators return to work, but they predict that progress will continue to be mixed.
“You have 50 state regulators, 50 state agencies, 50 state governors looking at a massive market and deciding to tweak it around the edges to make it more fair,” said Karl E. Case, a Wellesley College economist specializing in real estate. “That’s a very difficult task, particularly in a fragmented market.”
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