Pushing homes out of reach?

Mortgage brokers fret that market conditions and new lending laws will shut subprime borrowers out of the home-buying market.

By Jackie Crosby, Star Tribune
June 23, 2007 – 3:12 PM

Mention the word "subprime," and images of homes in foreclosure and fly-by-night loan brokers may come to mind.

But in the face of record-high increases in foreclosures and delinquencies, there's growing concern among some bankers, brokers and economists that the subprime mortgage has become a scapegoat for all current ills in the real estate market.

In Minnesota, where stricter predatory lending laws will take effect Aug. 1, many brokers worry that a one-two punch of an already tightening credit market and fewer lending tools will make it difficult -- if not impossible -- for worthy subprime borrowers to buy a home or refinance loans.

"We've thrown the baby out with the bath water," said Kris Wilson, a loan officer with Summit Mortgage in Bloomington. "A lot of people got loans who shouldn't have gotten them. And now that's coming home to roost."

Subprime loans are those given to borrowers with high debt or weak credit histories. They were a small and relatively safe part of the overall mortgage market until lenders started lowering credit standards around 2001. In return for higher interest rates and prepayment penalties, less creditworthy borrowers got greater access to credit in the subprime market.

In 2001, subprime loans were about 8 percent of the national market, according to Inside Mortgage Finance, which tracks trends in residential mortgages. By 2006, the peak of the subprime boom, they were about 20 percent.

With the growth came abuses. People who were doing fine in conventional loans were coaxed by unethical brokers into refinancing with exotic new loans that may have started with low teaser rates but later adjusted to monthly payments that were two to three times higher. Other lenders lied about borrowers' income and assets when issuing "stated-income" loans, which don't require documentation, and pocketed the commissions.

Minnesota lawmakers made both of those types of loans illegal, and added a slew of restrictions on brokers aimed at preventing mortgage fraud.

But while brokers like Wilson say they applaud the effort to rid the business of bad loan officers, she worries that soon there will be "fewer arrows in my quiver" to help good borrowers with poor credit.

"There's still this subclass of people who are able to pull themselves up by their bootstraps," she said. "They're savable, but I can't save them. I might have been able to do something two years ago, but not now."

Advocates of tougher legislation don't give much credence to the current fears, or to the argument that state lawmakers went overboard in trying to root out criminal abuses.

"There's always been this argument that poor people or new immigrants won't be able to get access to credit if you pass predatory lending laws," said Minnesota Attorney General Lori Swanson. "That just hasn't proven to be true." Swanson told the Federal Reserve Board earlier this month that tough consumer regulations are needed to protect borrowers who are vulnerable to abuses in the complex home-buying process.

'Just giving up'

Dolly Amaya, a mortgage broker who specializes in loans to the Latino community, supports legislation to crack down on crooks. But she said immigrants and other minority borrowers already are being hit by the subprime clampdown. And she fears it will only get worse.

Earlier this year, she had 16 subprime loans in the pipeline when New Century filed for bankruptcy and Freemont General Corp. sold its subprime division. She was able to close on only a handful of them.

"If you want to make me cry, let's talk about that," she said. "I not only lost business, but I lost my credibility. And I had to watch people's dreams go down the drain."

Amaya, 35, knows first-hand how some soon-to-be illegal subprime loans can open doors. She moved to Minnesota from Colombia when she was 19. She bought her first home using a stated-income loan because she hadn't had steady employment.

In 2003, having gotten a stated-income mortgage on her next home, Amaya used that equity to buy the building where she now runs her own company, Real Financing and Investment.

"I've never gotten a conventional [home] loan. Ever," she said.

Many of Amaya's clients are typical of subprime borrowers. They work in construction or are self-employed professionals who have uneven income. Many are wary of credit cards and have operated on a cash basis, she said. Others have used their homes as collateral to open restaurants or veterinary clinics, and thus have what lenders call a poor debt-to-income ratio. Some are digging out of bankruptcy after a divorce, layoff or medical crisis but have demonstrated an ability to make payments.

"Now, I have fewer tools to help them make their dreams a reality," she said. "A lot of families, honestly, are just giving up."

Not all subprime is bad

Supporters of the free-market approach to lending boast that the surge in subprime loans helped a record number of Americans buy their own homes in recent years. But the nonprofit Center for Responsible Lending offers a sobering counterpoint.

The center, which tracks abusive lending practices, estimates that a million more people will lose their homes to foreclosure in the coming years than were added during the boom times.

Recent figures from the Mortgage Bankers Association show that among Minnesotans with adjustable-rate subprime loans, which have been the most troublesome type of loan, about 14 percent of homeowners were more than three months past due or in foreclosure.

Richard Todd of the Federal Reserve in Minneapolis said most of the problems with foreclosures and defaults in the subprime market are coming from adjustable-rate mortgages. Fixed-rate subprime loans are not having any real problems, he said.

"People are not going to do deals that they might have done two years ago. Is that good or bad? Probably neither one," he said. "Given that these deals were bets on housing appreciation, and those bets haven't gone well, indeed society has an interest in seeing that not too many people make risky bets on their mortgages."

Pamela Niska, a mortgage consultant with Citywide Mortgage in Edina, said the tighter lending environment has meant that someone with "dings in their credit" might need an extra year to establish a track record now.

But she's more hopeful than some of her peers that the market will shake out in due time and borrowers with less-than-stellar credentials still will be able to get loans.

"It's just going to make everybody roll up their sleeves and work a little harder to find the programs that are still out there to help people," she said.

Jackie Crosby • 612-673-7335 • jcrosby@startribune.com

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