Wall Street Journal weighs in on foreclosure crisis

The Wall Street Journal weighs in on the what they call the "subprime mortgage crisis." Their analysis of the situation makes Sen. Norm Coleman's HOME Act look even more like what it really is, a bail-out for the banks who now own these subprime mortgages. Norm's bill would allow homeowners facing foreclosure to raid their retirement accounts for up to $100K to deal with their problems. Many people, including me, thought that most of these folks may not have 401Ks. If these homeowners went into bankruptcy, the banks would not be able to go after their retirement assets. Norm's bill allows them to get that money.

An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.

In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm's analysis found.
(WSJ)

Norm's bill fails to address the usury of the banks that issued the loans. Many of the loan officers got bonuses if they got the home buyer to pay a higher rate. The WSJ details the unethical if not illegal behavior.

The subprime sales pitch sometimes was fueled with faxes and emails from lenders to brokers touting easier qualification for borrowers and attractive payouts for mortgage brokers who brought in business. One of the biggest weapons: a compensation structure that rewarded brokers for persuading borrowers to take a loan with an interest rate higher than the borrower might have qualified for.
...
For instance, according to a March 2007 "rate sheet" distributed by New Century Financial Corp., now in bankruptcy-court protection and no longer making subprime loans, brokers could earn a "yield spread premium" equal to 2% of the loan amount -- or $8,000 on a $400,000 loan -- if a borrower's interest rate was an extra 1.25 percentage points higher than the Irvine, Calif., lender's listed rates.

Borrowers weren't supposed to see the information. Tiny print at the bottom of the document warned: "For wholesale use only. Not for distribution to the general public."

On average, U.S. mortgage brokers collected 1.88% of the loan amount for originating a subprime loan, compared with 1.48% for conforming loans, according to Wholesale Access, a mortgage research firm. Payouts for subprime loans have traditionally been higher, in part because these loans sometimes took more work and the approval rate could be lower. Brokers have sometimes used the money to help the borrower complete the loan, by reducing closing costs. But there is "a lot of play in the system," says A.W. Pickel III, a past president of the National Association of Mortgage Brokers, and president and chief executive of LeaderOne Financial Corp., a mortgage lender and broker in Overland Park, Kan. "You have to operate with an ethical basis."
(WSJ)

The subprime mortgage industry took advantage of many home buyers who might have even qualified for normal, lower risk financing. But the loan officers made more money off them, talked a convincing spiel about the promise of a never-ending inflation of housing prices and enough buyers got confused and went along with the loan officer. Salespeople are good at that.

A study done in 2004 and 2005 by the Federal Trade Commission found that many borrowers were confused by current mortgage cost disclosures and "did not understand important costs and terms of their own recently obtained mortgages. Many had loans that were significantly more costly than they believed, or contained significant restrictions, such as prepayment penalties, of which they were unaware."

Lending advocates have long alleged that minority and poor borrowers are often steered into subprime loans that carry excessively high interest rates and steep prepayment penalties. But the growing use of subprime loans by people with higher credit scores suggests that such problems exist among a much wider swath of borrowers than previously thought and may have little to do with the ethnicity of borrowers.
...
Tom Pool, an assistant commissioner for the California Department of Real Estate, says his office has seen a number of cases involving "totally ignorant and unsophisticated borrowers who had good credit, but were duped into loans they had no hope of repaying." But experienced borrowers with high credit scores are often too casual about the loan process.

A study published last year in the Journal of Consumer Affairs concluded that some borrowers pay higher rates than they should because they don't shop around enough. An earlier survey by the Mortgage Bankers Association of borrowers who had bought a house within the previous 12 months found that half couldn't recall the terms of their mortgage, says the association's Mr. Duncan.

Often such loans involve fraud, says Peter Fredman, a California attorney who has two clients who wound up with loans with high interest rates despite good credit scores. "Because these people had decent credit scores, the lenders said they would do a 100% no-documentation loan and that opened the door for mortgage brokers to do whatever they wanted to do," he says.

Mr. Fredman is representing a couple in their sixties with a monthly income of less than $2,500 but mortgage payments of roughly $3,400, not including taxes and insurance. The husband and wife, first-time home buyers with credit scores of 680 and 667, expected payments of $1,500 a month. They tried refinancing to lower the cost, to little effect. They haven't made a mortgage payment since January.
(WSJ)

What does this tell us about Norm's HOME Act. First, since the HOME Act does not address the unethical if not criminal activity inherent in this crisis and has clear benefit for the banks that now own these subprime mortgages.

Next if you consider that for homeowners that raid their retirement accounts then fail to pay back that money within three years, they face government liens on their property plus all the withdrawal penalties that would have been waved with timely repayment, many homeowners would just be exchanging their frying pan for the fire as they'd now have smaller or no retirement assets.

Furthermore, Norm's bill fails to take into account people without retirement assets. The have nothing the banks want, so Norm doesn't consider them.