Subprime mess

April 13, 2007

Maryland has not escaped the national deluge of foreclosures facing homeowners who bankrolled their piece of the American dream on risky subprime mortgages. A third more Marylanders with subprime loans had trouble keeping up with their payments last year than in 2005, the largest single-year increase since 1998; about one in eight was delinquent. But for all the public outcry over exorbitant interest rates and fees associated with subprime mortgages and the tactics of some brokers, not much is being done nationally to curtail these practices.

Plenty of people caught up in this downturn certainly should have known better; nonetheless, more should be done to police the subprime industry and educate consumers about these costly loans. There needs to be a balance because subprime loans have helped some people - about 9 percent of the subprime market, according to one study - buy their first home.

Remedies need to be considered for lenders and brokers, the salesmen who match consumers with lenders and benefit from fees and bonuses.

For starters, the Federal Reserve should make good on its pledge to impose guidelines on subprime lenders that would require them to consider a borrower's ability to pay the loan at its full interest rate, not just an introductory "teaser" rate. Sen. Christopher J. Dodd, chairman of the Banking Committee, has been the moving force on these standards, and rightly so. If such guidelines had been in place, fewer subprime borrowers would be in trouble today.

The subprime loans that have caused the most havoc among borrowers offer relatively low fixed-rate interest at the outset and then reset, in the 25th month, to an adjustable rate that increases every six months, with a cap of 12 percent.

The Center for Responsible Lending estimates that as many as 2.2 million families with subprime loans including Marylanders will lose their homes. Some probably never should have qualified for a subprime mortgage, but others could have qualified for a fixed-rate mortgage and didn't know it.

Resolving this problem isn't simply a matter of "buyer, beware." Maryland lawmakers this year considered reforming the state's antiquated foreclosure process to give homeowners more notice and time to contest a foreclosure filing. It's a good idea, but one that responds to the problem after the fact.

To complement federal guidelines on subprime lenders, states - including Maryland - should revise the fees and bonuses paid to brokers to remove any incentive to steer a borrower into a higher-cost loan.

Maryland took an important step two years ago when it required licensing of mortgage brokers to ensure better-educated, better-trained professionals. And the state licensing secretary, Thomas E. Perez, has an even better idea: flagging brokers with a disproportionate number of loans that end up in foreclosure as a way to keep tabs on their business practices.

At the same time, borrowers must recognize that taking on more debt than they can afford is a recipe for disaster. They have to seek counseling from housing aid organizations, look past the easy money, and read the fine print. In short, they must be responsible buyers.

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