House committee gets earful about predatory lending

Rep. Frank says he's holding about a dozen hearings around the country to gather evidence about the rising national rate of foreclosures.

The burgeoning problem is tied to the collapse of the subprime mortgage market, which catered to people who, in many instances, could ill-afford the loans they took on.

Minnesota's foreclosure problem is small by comparison to other states. In the first half of this year, Minnesota had about 5,500 foreclosures -- whereas Florida had 102,000, according to data from RealtyTrac.

Nevertheless, the Twin Cities has some dense patches of foreclosures. U.S. Rep. Keith Ellison, DFL-Minnesota and a member of the financial services committee, began the hearing pointing to a map of Minneapolis on a big white placard. A thick cluster of red dots marked foreclosed homes on the north side.

"The sheer number and concentration of these foreclosures is still shocking to me, even though I've viewed this slide numerous times. I live in Minneapolis, and you're looking at my neighborhood," said Ellison.

Minneapolis City Council President Barb Johnson told the hearing the city had 320 foreclosures in the first quarter of 2006, compared to 678 in the same quarter this year. She said those foreclosures are bad for the whole city, but they especially cause trouble for people in lower income neighborhoods.

"North Mineapolis people have no big stock portfolios, nor cushy retirement systems. They have their home," said Johnson. "And when foreclosure happens to them, it devalues the value of that valuable asset they have. So it's a big hit for people on the margins."

Despite the rising tide of foreclosures in north Minneapolis, the hearing featured testimony from only a handful of homeowners affected by predatory lending practices.

Golden Valley resident Sharon Glover said she was hit hard when she refinanced her mortgage thinking it would cut her payments. She ended up paying more. Her troubles worsened when her mortgage was handed over to a new mortgage servicer.

"They increased my payments by $400 a month," said Glover. "So now I've gone from $1,200 to $1,500 to $1,945."

Glover said the mortgage lender told her she could avoid foreclosure if she just paid $24,000.

The president of the Minnesota Mortgage Association, Wade Abed, said he's appalled by some of the lending practices that have gotten homeowners into trouble.

"We are absolutely, and always have been, against predatory lending," said Abed. "It makes me sick to get some of the phone calls I get -- not just about north Minneapolis, but about my own neighborhood."

Abed asked for a federal licensing requirement for all loan originators so they're held to specific standards.

But he also defended some lending practices, like prepayment penalties. Those penalties can effectively lock subprime mortgage holders into high interest rates. And that drew a pointed question from Rep. Ellison.

"Is there ever any good reason to have a prepayment penalty on an adjustable rate mortgage? ... Other than just getting money?"

Abed says the penalties are useful for giving guarantees to investors that mortgages will stay on those investors' books for a specific amount of time.

"And in doing so with that guarantee, we are able to offer a lower rate, and we can pass that on to the consumer," said Abed.

Rep. Frank says he'd like to see two pieces of legislation go forward. He wants tighter restrictions on the practices of loan originators, and he'd like other measures designed to hold down the payments of subprime borrowers.

A number of Democratic presidential candidates are also proposing legislation that would range from banning prepayment charges to penalizing mortgage professionals found guilty of fraud.

But President Bush has expressed little appetite for such proposals.

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