Snared! by subprime mortgage
Today, we had an excellent package of stories on mortgage rescue fraud, which is on the rise. Sandra tells the stories of two women who were snared and are fighting back; reports on a study that has found women increasingly are paying more than they should for their mortgages; reports on legislative solutions that are pending in Illinois; and offers suggestions for help if you find yourself in a bad situation.
Snared! Study finds that women more likely to have subprime mortgages By Sandra GuyA disproportionate number of women are getting tripped up by predatory lending practices.
Women are 32 percent more likely than men to have subprime mortgages, according to a study released last December by the Consumer Federation of America, a Washington-based consumer research and advocacy group.
Despite their creditworthiness, women take out mortgages with interest rates far above the prime mortgage rate, the study found.
That's often a symptom that predatory lending is at work.
Predatory lenders are those who don't properly explain a mortgage to borrowers, don't try to match a borrower with an appropriate type of mortgage, or who charge excessive fees. Unlike a home buyer 30 years ago -- when there were only a few types of mortgages to choose from -- a home buyer today faces a dizzying array of more than 200 distinctive mortgage products.
All this variety and flexibility breeds complexity. Predatory lenders emphasize the positive aspects of a product and minimize the negatives. The clauses might not be "hidden," but they aren't always fully disclosed.
This had led to a disproportionate number of women unwittingly taking out subprime loans, which lenders usually market to high-risk borrowers whose credit scores are lower than 660.
Nearly one-third (32 percent) of female borrowers receive subprime mortgage loans of all types, compared with about a quarter (24.2 percent) of male borrowers, the study found.
Women with higher income and women of color reflect the extremes of the disparity. Women earning double the median income were 46.4 percent more likely to receive subprime mortgages than men with similar incomes. And women of color were the most likely to receive subprime loans at every income level.
For example, upper-income African-American women are nearly five times more likely to receive subprime mortgages than upper-income white men, the study showed. Upper-income Latinas were nearly four times more likely to receive subprime loans than upper-income white men. The term "upper income" applied to those who earned twice the median income of the metropolitan statistical area in which they lived.
The study examined 4.4. million mortgage originations nationwide and focused on subprime loans -- loans that lenders usually market to high-risk
borrowers whose credit scores are lower than 660. The study was based on 2005 mortgage lending reports required by the federal Home Mortgage Disclosure Act.
To understand the extra expense of a subprime mortgage, consider the interest rates on mortgages in 2005.
The interest rate on prime mortgage loans averaged 5.87 percent, compared with 7.66 for subprime loans and more than 9.66 percent for the highest-cost subprime loans.
The study omitted mortgage recipients' credit scores and debt-to-income ratios, but those numbers could not have accounted for the wide disparities, said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.
Fishbein said one cause could be women's inexperience and lack of assertiveness when negotiating mortgages, making them less likely to shop for the best rate or counter a lender's offer.
"The results seem to suggest that women may not be negotiating in the same way as men," Fishbein said.
Mark Fleming, chief economist with CoreLogic, a Sacramento, Calif.-based company that provides risk analysis to lenders, disagreed with the study's outcome. He said many factors determine a person's eligibility for certain types of mortgages, and most loans are figured by automatic underwriting engines that factor in nothing about gender or ethnicity.
"Lenders are not allowed to use those gender and ethnicity variables," Fleming said. "They use credit characteristics and information from the loan application."
Regardless, the housing boom that started in 2000 and the
waning influence of government-approved mortgage-loan companies such as Fannie Mae and Freddie Mac brought about a surge in new kinds of high-cost loans.
These mortgages include "option" adjustable-rate mortgages that allow borrowers to make very low monthly payments at the start of the loan; interest-only mortgages in which borrowers pay only interest in the first five to 10 years of the loan, and piggyback loans, in which a second mortgage is "piggybacked" onto the original mortgage so the borrower can make a 20 percent down payment and avoid private mortgage insurance charges.
When the adjustable-rate mortgages reach their adjustable period, the interest rate can suddenly skyrocket. A subset of these loans, which start with interest-only payments, are known as exotic loans and can create extreme sticker shock when the interest rate jumps.
"If I have an option ARM loan with a $1,500 a month payment, it can all of a sudden jump to $2,100 a month," Fleming said. "If you're in a market where there hasn't been much house-price appreciation or you're borrowing above the true value of the property, the house is worth less than the outstanding mortgage. That's a classic example of when a default occurs."
Making matters worse, homeowners who want to refinance into a new, more affordable loan are finding it more difficult to do so. Many who took out option ARMs must pay prepayment penalties in the thousands of dollars if they refinance in the first few years of the loan, while those with little equity in markets where housing prices have stayed flat are finding that lenders have tightened their standards.
Indeed, as interest rates on the loans climb, foreclosures skyrocket. Interest rates are set to climb for $1 trillion to $1.5 trillion in ARMs this year.
Women who make the leap to home ownership and take the necessary precautions are proving that single women can attain one of the best methods of creating wealth. Single women made up 22 percent of the nation's home buyers in 2006, the latest data available, compared with 14 percent in 1995, according to the National Association of Realtors.
The ability for women to own homes is especially important for baby boomers, those born between 1946 and 1964, because half don't have access to pensions or other retirement plans, according to a study by the Harvard Generations Policy Program, the Harvard Generations Policy Journal and the Global Generations Policy Institute. The study concluded that baby boomer women who are able to tap into their home equity will be at an economic advantage over their peers who rent.
sguy@suntimes.com
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