NYT: Juego Limpio: Préstamos Hipotecarios, una pesadilla que crece

April 8, 2007

FAIR GAME; Home Loans: A Nightmare Grows Darker

By GRETCHEN MORGENSON

SNAZZY and newfangled mortgage loans, like those with low initial rates of interest or extended terms of 40 or 50 years, helped to drive homeownership rates in the United States from around 64 percent two decades ago to a peak of almost 70 percent in recent years. Called ''affordability loans,'' these new kinds of mortgages have gone mostly to first-time home buyers and borrowers with tarnished credit or spotty employment histories.

Now, however, with home foreclosures and mortgage delinquencies soaring, it is becoming clear that the innovative loans that lenders championed -- in what the industry called the ''democratization of credit'' -- are turning the American dream of homeownership into a nightmare for many borrowers.
Even though these subprime mortgages account for only one-eighth of total mortgages outstanding, they represent 60 percent of foreclosures, according to the Center for Responsible Lending, a nonprofit and nonpartisan research organization in Durham, N.C. This is not surprising, since the features common to subprime mortgages actually increase the risk of foreclosure, mortgage experts say.

''The subprime market should be an additional and welcome opening of the credit markets for borrowers who have previously been shut out,'' said Michael D. Calhoun, president of the center. ''But it has been allowed and even encouraged to develop in a way that we think will result in a net loss of homeownership.''

For years, the homeownership rate in the United States ranged from 60 to 65 percent of the total population. But in 1995, President Bill Clinton directed Henry G. Cisneros, then the secretary of the Department of Housing and Urban Development, to work with the housing industry, nonprofit groups and other government officials to develop the National Homeownership Strategy, ''an unprecedented public-private partnership to increase homeownership to a record-high level over the next six years,'' as described in an Urban Policy Brief in August of that year.


Citing studies showing that high rates of homeownership generate financial wealth for borrowers, reduce crime and stimulate economic growth, the group agreed to a list of initiatives. One was to make financing arrangements for borrowers more affordable and flexible.

Lenders were off to the races. They created slick new mortgage products with low ''teaser'' interest rates that ratcheted up significantly after two years or so. They devised loans that required only the payment of interest, not principal as well. They extended mortgages to 50-year terms to reduce monthly payments.

The partnership succeeded. In 2004, the homeownership rate reached 69.2 percent, a record.
As recently as January, even as delinquencies among subprime mortgages had risen, the Mortgage Bankers Association, a lobbying group, praised the role that the loans played in bolstering homeownership. ''The availability of nontraditional mortgage products is a positive development because these products increase the financing choices available to borrowers,'' the group said in a report.

But according to experts on lending practices, the products devised to propel homeownership did so only as long as housing prices kept rising. Now that prices have started to fall, these products look instead like a transfer of wealth to mortgage lenders from those who can least afford it: subprime borrowers.

''It's not good to put somebody into a home if they can only afford it when home prices go up,'' said Thomas A. Lawler, founder of Lawler Economic and Housing Consulting Daily, a newsletter. ''Now that prices are falling, the folks who made enormous amounts of money lending in 2003, 2004 and 2005 are giving some of it back. But they aren't giving it back to the poor borrowers.''
Comparing prime and subprime loans shows how different the two types can be, Mr. Lawler said.

Loans made to borrowers with good credit histories, for example, rarely generate prepayment penalties when the loans are refinanced. But 70 percent of subprime loans have such penalties, he said. And they are hefty -- typically involving six months' worth of interest.

On a $250,000 loan with a current interest rate of around 8 percent, a prepayment penalty would be $10,000. Because many subprime borrowers do not have that kind of money lying around, lenders typically offer to roll the amount into the new loan offered in a refinancing. Tacking on such penalties to new loans makes it even harder for borrowers to pay them off.

Another characteristic of subprime loans, Mr. Lawler said, is that they rarely have escrow accounts. These accounts are established to collect money over long periods to cover real estate taxes and insurance.

''For the riskiest borrowers you take away a feature of a mortgage that is designed to force savings -- why?'' he asked.

CRITICS point to two possible reasons: without property taxes added to the mix, the mortgage payments look lower than they otherwise would. In addition, the absence of an escrow account in a subprime loan often means a big tax bill that cannot be paid unless the borrower undergoes another expensive financing, with all those fees attached.

Finally, subprime loans with low initial rates that reset at much higher rates almost force refinancings, generating fees for lenders but often putting borrowers in a hole. Now, for instance, subprime loans that reset after two years have interest rates based on the London Interbank Offered Rate of interest, or Libor, which now stands at about 5 percent, plus 6 percentage points.

It is almost impossible for subprime borrowers to get lower rates on their mortgages given such reset rates, Mr. Lawler said. ''A subprime A.R.M. borrower,'' he said, one with an adjustable-rate mortgage ''with an initial rate of 8 percent for the first two years would face an upward adjustment on her mortgage unless the Fed cut its short-term rate target to 2 percent.

''These loans are designed to make borrowers refinance and keep the loan production mill churning,'' Mr. Lawler said.

Mr. Calhoun of the Center for Responsible Lending said that few borrowers, subprime or not, would be able to survive a reset shock that increased their monthly payments by as much as 50 percent. Ditto for serial refinancing deals that generate fees of 6 to 10 percent of the total loan value each time.
''Probably the majority of homeowners who have been in their house for a while could not afford payments on those loans,'' he said.

While subprime borrowers try to climb out of the holes they fell into, those who sold and packaged the loans are laughing all the way to the bank. ''Folks who ran these companies are going to walk away not just unscathed but extraordinarily well rewarded,'' Mr. Calhoun said.

Josh Rosner, a managing director at Graham Fisher, an investment research firm in New York and an expert on mortgage securities, says he has watched with interest and exasperation as the same groups of people who pushed for higher homeownership rates now recommend ill-conceived bailouts. He also believes that the current system creates incentives for people to strip equity from their homes rather than use their mortgages as a forced savings device.

''If you're trying to do social engineering, it should be to put people in homes so they can build up equity as a cushion for economic shock,'' Mr. Rosner said. ''But unless they have significant equity, they are not homeowners; they are renters. We've created a society where we love the term homeownership, yet we can't allow people to understand that they are being taken advantage of by the term.''

Source:
http://query.nytimes.com/gst/fullpage.html?res=9D02E2D8173FF93BA35757C0A9619C8B63&pagewanted=print