It’s time to recall subprime loans
Recent reports on the rate of foreclosure are staggering. With the
numbers rising so quickly, one has to ask why.
Certainly the problem appears to be systemic. It may help to think
about how the mortgage industry and process has changed in recent years.
One shift has to do with the emergence of the Internet and computer
programs. Applicants used to go to local banks and lending institutions
to apply in person for loans, an often lengthy and cumbersome process
where they had to provide pay stubs, W2s, tax returns, credit reports
and proof of savings. Now, applications are handled largely via
computer or phone in a fraction of the time.
As home values rose, some began to view real estate as a way to get
rich quick. New loan products were developed, application processes
streamlined and traditional requirements waived. The general perception
was that home values could only go up.
With this perception came the belief that you couldn’t go wrong
investing in real estate, and that even if it was a stretch, people
should try to own a home — it would pay off in the end.
Requirements like a down payment and savings came to be seen as
stumbling blocks. Subprime lenders balanced their risk by charging
higher fees and interest.
Mortgage brokers were compensated for generating business for the
subprime market. Potential homeowners were urged to move quickly in the
“red hot market,” and existing homeowners were bombarded with offers to
People in communities of color were targeted for abusive high cost
subprime loans. Those questioning the loans’ terms were told not to
worry; they could simply refinance before the interest rate rose. These
same people and communities now face the persistent and continued
threat of foreclosure.
Now, the bubble has burst, and the party is over. Housing values have
dropped, the market is slumping, and we confront sober realities.
Far too many people were approved for loans they could never afford.
Far too many loans were made without determining homeowners’ ability to pay.
Far too many loans were based on inflated income.
Far too many loans were made with terms that had no sustainable
features, such as interest only, adjustable rates, balloon payments and
Far too many homeowners got loans with terms they did not understand.
If a car maker puts out a new model with faulty features, do we blame
the consumer? No — the industry is responsible for making repairs, and
the vehicles are recalled. The owner gets a notice to go to the dealer
for the repair.
It’s time for the investors and the lenders to have national recalls on
subprime loans. Let’s repair the loans, rather than punish the