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Posted December 16, 2007
Lots of blame to go around in subprime mortgage crisis  
By Hema Easley, The Journal News

For months Marie Chantale Joseph and her husband, Daniel, have been unsuccessfully trying to refinance their home before their interest rate spikes in April.

Already, Daniel, a taxi driver, is working 18 hours a day and on weekends to pay the approximately $4,800 a month they owe, and Marie, a babysitter, works as many hours as she can. Banks they have approached say they cannot better the terms of their two adjustable mortgages: one at 11 percent and another at 8 percent that total $520,000.

Marie Chantale says she and her husband didn't know the financial implications of their mortgage when they bought their home in Elmsford. Their mortgage broker gave them very few details, she said, and they didn't ask many questions. Their only home-buying experience was in their native Haiti.

"In my country it is different. No one can come and take your home away from you," said Marie Chantale, who must pay about $8,000 a month beginning in April, or lose her home to foreclosure. "Here, if they know you don't know what you are doing, they take advantage of you."

The Josephs' case is not too unusual. In public hearings on subprime lending, financially undereducated homeowners from across the region have testified that they didn't understand the complicated nature of their mortgages, and their mortgage brokers didn't apprise them of the risks.

A record number of homeowners across the nation are facing foreclosure as a result of subprime lending, where first-time homeowners with poor credit were able to buy homes with loans that had a low introductory rate. These rates rose later to a level that was beyond the borrowers' ability to repay.

This has led to a nationwide crisis in the credit industry and repercussions beyond individual borrowers. It has depressed real estate prices, big lending institutions have closed, bonds and hedge funds have reported heavy losses from bad investments in subprime loans, and economists say a recession may be around the corner.

There has been enough evidence of irresponsible lending by mortgage brokers that consumer advocates and lawmakers are calling for more government oversight and a disclosure protocol that would require lenders to give a one-page explanation of loan terms to prospective borrowers, among other measures.

"Let's be honest. The recent development of mortgage products in the few last years requires a certain level of sophistication to understand," said Edna Rivera, executive director of HOGAR, or Housing Opportunities for Growth, Advancement and Revitalization, a not-for-profit community-based housing service. "Earlier, only conventional mortgages were available. Then you had subprime mortgages. Now you have negative amortization, interest only mortgages, balloon payments, and all the ramifications that come with it. These mortgages were meant for the seasoned investors. First-time homebuyers don't understand the risk. They are setting themselves up for failure."

While lawmakers and the public are calling to rein in mortgage brokers, some mortgage experts say borrowers are at least as much to blame as the lenders.

Keith Gumbinger of HSH Associates, a New Jersey-based publisher of consumer loan information, said borrowers should have informed themselves about the biggest financial investment they are likely to make in their lives.

"It's not that the mortgage broker held a gun to someone's head to lend the money," Gumbinger said.

"Brokers don't have a fiduciary responsibility. It's the borrower's responsibility. You can say no and challenge. You can hire a lawyer."

The environment in which subprime lending flourished gives a glimpse into why it lent itself to abuse.

The mid-2000s was a time of plentiful credit, low interest rates and lenders eager to loan money. Lenders began offering loans to borrowers with less than perfect credit and little money to put down.

As part of the hardsell, lenders advertised mortgages like car salesmen advertise cars - in monthly payments. Borrowers responded enthusiastically because it brought their dream of homeownership within reach. Blast advertising on television, radio and the Internet reiterated the ideals of home ownership.

With initial payments low, subprime borrowers felt that they could afford their mortgages. Most thought their financial conditions would improve by the time their rates adjusted, or if they couldn't make their payments, they could sell their homes for a profit. Few took into consideration the contingency that housing prices would fall or they wouldn't be able to refinance.

"When people are closing, they are in such a euphoria," said Vedeta Hanley, executive director of community action program of Rockland, a housing service and referral agency.

A lot of people go on faith, and they believe that when I get to the fork in the road, there will be answers."

Low-income first-time homeowners were not the only ones swept up by the real-estate mania. Comfortable middle- and upper-class people who had saved for retirement or who had investment money also wanted to take advantage of the spiraling real estate prices and used subprime loans.

Beth Blecker, a financial planner, says she had to dissuade clients from pulling their money out of investment portfolios and putting it all in real estate. It was a difficult job, she said, considering the rapidly rising prices of homes in the Hudson Valley and the low interest rates. Even conservative savings programs like IRAs were allowing people to withdraw money to invest in the housing market, she said.

"It's not just greed, it's human nature," Blecker said. "Sometimes it's just getting caught in the motion. You think you must be stupid if you don't do this."

Tobie Stanger, a senior editor at Consumer Reports, agrees. She recalls how real-estate expos around the country attracted potential investors wishing to make a quick buck. Nobody was immune to the lure, she said, and not enough effort was put into understanding the risks.

"Don't just blame the borrowers," said Stanger. "People at the top of the food chain, too, didn't know."

Financial businesses lost money in the subprime fiasco, said Stanger, pointing to bonds and hedge funds. Citibank's CEO Charles Prince resigned because of unprecedented losses, and Bank of America admitted they will lose money because they did not understand the investment vehicles they were investing in. Credit rating agencies also didn't assign the mortgage products the proper risk, she said.

Reach Hema Easley at heasley@lohud.com or 845-578-2442.

Copyright 2007 The Journal News, a Gannett Co. Inc.

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