Congress takes aim at predatory lending as foreclosures hit Minneapolis, other cities

A stretch along Penn Avenue in Minneapolis has come to represent the city's growing problem of home foreclosures.

"We're here in part of north Minneapolis that unfortunately has seen the largest number of foreclosures in our city and it's one of the reasons why foreclosure is the number one housing issue in the city right now," said Minneapolis Mayor, R.T. Rybak.

Rybak has come to this neighborhood to talk about the issue against the backdrop of boarded-up houses and for sale signs.

There were more than 3,000 home foreclosures in 2006 in Hennepin County, according to the sheriff's department. That number is up more than 80 percent from 2005 and represents a nearly 350 percent increase from 10 years ago.

Mayor Rybak and others, predict the foreclosure situation will worsen this year.

"On some levels (we) are seeing the underside of the re-financing boom of a few years ago," Rybak said. "All of us looked at equity in our house to be able to do some things that we wanted to do and that's fine. But when it gets people into a risky situation, then it winds up in a situation that we're only frankly beginning to see."

University of Minnesota Associate Law Professor, Prentiss Cox says homeowners across the demographic spectrum who have adjustable-interest rate mortgages, are running into trouble as rates increase and property values level off.

"It's a potentially huge problem," Cox says. "This is a problem that I have been screaming about for five years or more."

Cox, who specializes in predatory lending, says those being hit hardest are homeowners with so-called sub-prime mortgages. Sub-prime lenders often sell home loans to relatively high risk borrowers who pay a considerable premium in fees and interest rates relative to what people with conventional mortgages pay.

Cox says not long ago these so-called "high-cost," lenders accounted for a relatively small percentage of the home mortgage market. Not anymore.

"When you think about the sub-prime mortgage industry you think, that's just a few people," Cox says. "The sub-prime mortgage industry has exploded and now upwards of a quarter of all loans are sub-prime."

One of the most popular sub-prime loans is a 30 year mortgage, with fixed payments for the first two years, according to Cox. Over the remaining 28 years of the loan payments can increase dramatically.

Cox says these complicated mortgages have been oversold and, in some cases, aggressively marketed in a predatory way that's taken advantage of borrowers.

"With the spike in foreclosures we are seeing the beginning of the consequence of the failure to reign in a decade or so of imprudent lending," Cox says.

A "2-28" is exactly the type of mortgage June Walker says she refinanced to a couple of years ago.

"I saw the ad on television, so I called them," she says.

Walker says she refinanced to payoff considerable credit card debt.

"And it worked, for a while," she says.

Walker says she started off with an interest rate of about six percent. She's not exactly sure what the rate is now, only that it's well into the double digits, probably 12% to 14%.

Walker says she knew she was getting an adjustable rate mortgage. But she says she never would have signed the papers had she known it could go up as high as it went.

Moving boxes are scattered about the living room of her modest east St. Paul home. She's 11 months behind in house payments and facing foreclosure.

Not all sub-prime lending is predatory, but almost all predatory lending falls into the sub-prime, high-cost category. Consumer advocates maintain many people are ending up with risky home loans and consequences they do not understand. These advocates are hopeful the new Congress will act on calls for consumer protection legislation.

"Well I think it's ripe, but it's been ripe before," says Rep. Mel Watt, D-North Carolina, a member of the House Financial Services Committee.

For two years, Watt has pushed for federal lending standards. While he's optimistic something might happen this year, he cautions addressing predatory lending is complicated and can not be done without including the mortgage industry.

"We've been having a series of discussions with all of the interest groups and trying to move the various groups toward a common area and we haven't gotten there yet. But I think the fact that we're now in the majority may improve the chances of getting there and hopefully we'll be able to get some federal legislation," Watt says.

Watt and other lawmakers have proposed modeling federal legislation after North Carolina's predatory lending law. North Carolina requires sub-prime lenders to considering a borrower's ability to repay a mortgage. The state also bans balloon payments and requires counseling for high-cost home loan borrowers.

But North Carolina's rules became law in 1999, long before many of the complicated hybrid mortgages became popular.

"North Carolina is a good bill is and was a good but the market has changed dramatically since the North Carolina bill was enacted," says Brenda Muniz, legislative director for ACORN, the non-profit social justice community organization.

From her office in Washington, Muniz said perhaps the biggest single thing that could be done would be to make mortgage brokers accountable for the loans they write in the same way that stock brokers are barred from selling equities that are not suitable for certain buyers. Mortgage brokers should be prohibited from selling home loans they know are not in the best interest of their clients, according to Muniz.

"(For) a securities broker, there are legal repercussions if they sell you a product that is unsuitable. Likewise we're talking about a mortgage's huge cost or huge financial burden on a family and therefore a broker should be subject to that same legal scrutiny. They should be required to sell you a product that is suitable," Muniz says.

But Kurt Pfotenhauer, the Senior Vice President for Government Affairs at the Mortgage Bankers Association disagrees.

"We think it's bad idea and it's one that would ultimately dry up credit for consumers and ironically the people whom it was most intended to help," says Pfotenhauer.

Pfotenhauer says a 'suitability requirement' essentially under-estimates the intelligence of American consumers. He says it would leave brokers making judgment calls about who's likely to be able to handle a particular mortgage and who is not qualified.

To help shoppers make better decisions Pfotenhauer says the mortgage bankers would support requiring brokers to provide clearer disclosure about loan terms and risks under various interest rate-change scenarios.

"We are there as an industry to do that and we'll be offering as much constructive advice about how to make our industry work for borrowers as we possibly can," Pfotenhauer says.

But consumer advocates say segments of the home loan industry, especially those that market to low-income Americans, have demonstrated much more interest in closing deals than carefully matching consumers to the best loans.

June Walker, who's facing loss of her St.Paul home, thinks a suitability requirement makes a lot of sense.

"I hope somebody can do something about it and if it takes our Congress, and then go for it," she says.

She says requiring more disclosure could still leave people like herself vulnerable.

"You can not possibly know exactly what's in those papers unless if you had all night to sit and read those which you don't have," Walker says.

After she is forced out of her home, Walker plans to move back to Ohio. She'll start over there and move into the home where parents lived.

In Minnesota, a group appointed by the Minnesota Attorney General is proposing several changes in state law including criminal penalities for companies or brokers who knowingly sell grossly unsuitable home loans.

Wednesday's Senate hearing is characterized as a step that could lead to a bill. The House of Representatives predatory lending bill could be introduced as early as next month.

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