Sub prime lenders are subhuman

Jim Hightower

One of the most dramatic stories from the New Testament is of the time that Jesus encountered money changers in the temple. Enraged by their usury and sacrilege, he went on a tear -- overturning their tables, physically driving them out and chastising them for converting the temple into a "den of robbers." The Bible doesn't say where these bloodsucking lenders went, but now we know: They have re-emerged in recent years to set up their tables right here in America, working a dark alley of homeowner financing called the "subprime mortgage market." The what? Don't be deterred by the finance industry's jargon (which is intended to numb your brain and keep regular folks from even trying to figure out what's going on). At its core, this is a classically simple story of banker greed and outright sleaze. And the astonishing part is that nearly all of the rank injustice perpetrated by today's money changers is considered legal and is practiced by supposedly reputable financial firms.

The loans are doozies, filled with numerous and nasty provisions that set unwitting borrowers up for failure. These are tucked into 20-page loan agreements written in legal gibberish. A friendly, reassuring, always smiling loan agent flips through the pages saying, "It's simple, just sign here ... and here ... and here." Among the nasties are:

•TEASERS. Subprime interest rates are loudly advertised to be only 7 percent or so, with only small-type notice that these are "adjustable rate mortgages" (ARMs). This means that the interest rate will explode to 11 percent or more after a couple of years, causing the families' monthly payments to jump by half or more. Over 90 percent of subprime loans contain ARMs.

•BLOATED APPRAISALS. Subprime lenders are notorious for pressuring appraisers to inflate the value of a house, thus causing the borrower to take out a bigger loan than the house is worth.

•HIDE-THE-ESCROW. In conventional loans, the borrower's property taxes and mortgage insurance premiums are figured directly into the monthly loan payments, with these monies set aside in an escrow account. For subprime loans, however, lenders often don't include these costly items in the mortgage, thus making the loans appear more affordable than they really are. This leads to borrower shock (and sometimes default) when the tax and insurance bills arriveseparately in the mailbox. At this point, ever-helpful lenders offer to refinance the loan, thus collecting additional fees.
•EXCESSIVE FEES. On conventional mortgages, various lender fees typically total less than 1 percent of the loan amount. By contrast, subprime borrowers commonly are hit with fees (hidden in mortgage payments) totaling more than 5 percent.

•PREPAYMENT PENALTIES. Obviously, it's in a borrower's interest to get out of an abusive subprime loan as soon as possible and to refinance on better terms. But --Gotcha! -- more than 70 percent of these loans carry a penalty fee of several thousand dollars for paying off the loan early. In the prime market, only about 2 percent of loans contain such punishment.

•WALL STREET. None of the above would be happening (and certainly not on such a massive scale) if the fast-and-easy money crowd on Wall Street hadn't seen a chance to make a killing on lowly subprimers. Lured by the flow of sky-high interest rates being charged to these borrowers (and abetted by the lack of government regulation in this market), Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and other giants lumbered into the action.

This abuse of vulnerable families and the resulting economic mess would not have happened without the hands-off regulatory ideology that has infected our government. There are no less than five financial agencies at the federal level that could have protected people, yet the subprime surge was allowed to proceed on the fantasy that the financial players would police themselves. The Federal Reserve Board, for example, has direct authority under the Home Ownership and Equity Protection Act to "prohibit acts or practices in connection with mortgage loans that the board finds to be unfair, deceptive or ... associated with abusive lending practices, or that are otherwise not in the interest of the borrower." The Fed simply ignored this law.

Finally, with the entire subprime system crashing around them, the regulators issued "guidelines" on June 29 requiring banks to stop some of the worst abuses, including prepayment penalties. But the new rules still allow many of the predatory practices and -- worst of all -- do not apply to the nonbank lenders that make a large share of subprime loans. In addition, the guidelines do not directly address the role of Wall Street in pushing such loans.

The subprime industry disingenuously asserts that any attempt to regulate it only hurts the poor people who receive these mortgages, for they have nowhere else to turn for homeowner financing. What self-serving hogwash! There could be subprime loans -- from public, if not private, sources -- structured and administered without deceit. Rather than target lower-income families as suckers to be had, packaging their dreams into investment playthings for speculators and tax dodgers, let's view these folks as assets to the larger community and realize that homes for them are investments in the common good. And while we're at it, let's recognize that the need for "subprime" mortgages is driven by our low-wage/no-benefit economy and by our country's growing scarcity of affordable housing. It's not merely a low-income mortgage system that must be fixed -- our leaders' pursuit of a low-income America must be stopped.

From "The Hightower Lowdown," edited by Jim Hightower and Phillip Frazer, Aug. 2007. Jim Hightower is a national radio commentator, writer, public speaker and author of Thieves In High Places: They've Stolen Our Country And It's Time to Take It Back.