Let the Litigation Begin

Andrew Cuomo
Andrew Cuomo

Continuing in the blame game … today we took a look at all the potential litigation, which will inevitably be the next bit of ooze in all this subprime seepage. Yesterday lawmakers on Capitol Hill were pointing fingers, then today, in New York City, Attorney General Andrew Cuomo, asked about the subprime market, jumps on the bandwagon, “We’re looking at that market as well.” Then in DC, at about the same time, Sen. Hillary Clinton says, “This market is clearly broken, and if we don’t fix it, it could threaten our entire housing market which in turn would threaten our entire economy.”

Here’s my question: When does aggressive lending turn into predatory lending, and when does it all become a crime?

“A predatory loan is one which is unsuitable to the borrower, one which the borrower can’t afford to repay, one which is not going to actually help that borrower – but put them in a worse position,” says Sarah Ludwig, Executive Director of Neighborhood Economic Development Advocacy Project.

Ok, well, I’m not sure I buy that. I realize that there are plenty, plenty of cases where people are duped by brokers, papers get switched, real criminal behavior takes place, but defining predatory as “unsuitable to the borrower,” doesn’t really cut it for me. I mean, who is to decide what is and is not unsuitable, especially if it’s what the borrower wants?

There we were in a real estate boom, with double-digit appreciation. Houses were flying off the market like cookies fly out of my kitchen. People were offered new loan products that promised no money down and low introductory interest rates, the assumption being that these same people could refinance before their loans reset, because their house would be worth so much more. And in some cases, that happened. Speculators, or “flippers” as we were so fond of calling them, made some serious coin.

So now the market goes bust, home prices stop shooting through the roof and settle to more normal rates of appreciation, and all of a sudden it’s predatory. I know mortgages are complicated; I will admit right here on this blog that I have not read every word of my own home loan. But just because the market turned, and the scenario didn’t pan out the way a lot of folks hoped it would, doesn’t mean that the borrower isn’t just as much at fault as the lender (and I’m talking about the lenders who didn’t falsify documents or hide the reality of the loan).

Many subprime borrowers simply saw an easy way to get a loan without paying for it, and now they’re paying the piper. Is that cruel of me to say? Well guess what? I would love to have one of those nice big houses in Chevy Chase, MD with the big back yard and the fancy high-end kitchen and master suite, and I’ve gotten plenty, plenty of offers in the mail for all kinds of cheap-o loans that promise me the chance to get said house. These are the same, adjustable rate, negative amortization loans that were offered to subprimers, and guess what again? I didn’t take any of them! Why? Because I know that when it comes time to actually pay for the loan on this imaginary house, I won’t have the very real cash. Sue me, I’m practical.

Keep the Government Out
It never ceases to amaze me how Monday morning quarterbacking by regulators, congress, and all those who have no equity in the situation are all of a sudden experts. Just a year or two ago, all these pundits were praising the benefits of affordable housing created by the mortgage lending world, for those who probably couldn’t begin to qualify under standard mortgage lending criteria. Now, in all their infinite wisdom they want to sue or bail out everyone who made or took out one of these loans. As is usually the case, most good deals move to extremes, then the pendulum swings the other way. Keep the government out, nothing good comes from Washington. Sam A.

Loans for Anyone and Everyone?
I wonder if the new bankruptcy laws made many lenders believe that borrowers are more than likely going to have to pay loans off no matter what, so they jumped with joy and sold loans to anyone and everyone? Just a thought. Dan H.

Blame Does Not Lie Strickly with Lenders
I read your article and I agree wholehardedly. I have been a mortgage loan officer for going on 30 years. I have worked with all type of loans. The subprime loans that I have put borrowers on were for the sole intent of giving them 12 months to be in the home, keeping their mortgage payments paid on time and working on other issues with their credit during that time so when it came time to refinance I could easily convert their loan to an FHA at approx 6 – 6.5%. What I am finding is that during that 12 month seasoning period, a lot of borrowers became late with their mortgage and or other debts so they COULDN’T refinance because their credit scores became worse than they were. I find it hard to believe that all this blame lies strictly with the (good) lenders out there. People know what happens when they fail to make mortgage payments on time. I know that there are “bad” lenders out there who prey on the desperate people trying to get into a home;. I have not nor ever will work for one of those companies either. Kathy M.

Don't Underestimate the Positive Impact of "Available" Financing
We must be careful not to underestimate the positive impact of “available” financing on property values, especially for neighborhoods that have traditionally struggled economically. Tightening credit quality standards could have a devastating effect on residential collateral values on a wide scale, even for prime mortgage portfolios. For homeowners, reduced equity means your home is no longer your ATM, and certainly not your source for retirement wealth. It seems that many of us will be suffering from “E.D.” (equity dysfunction)-- if only there were a little blue pill for that. Jay S.

These Problems Shouldn't be a Surprise
It may be true that some of these sub-prime loans never should have been made, but in some cases it really helps people buy or refinance a house when no one else would help them.

However, for those people who really didn’t qualify for these loans, it’s not as bad as the politicians make it out to be since sub-prime is a small segment of the overall mortgage market. All that will happen is that they end up giving the house back to the bank and it ends up about the same as if they were just renting. True it hurts their credit, but their credit was bad anyway. True it hurts the mortgage bank, but they factored in the risk to their total lending portfolio, so they should be able to absorb it, unless they’re complete idiots. So, in the long run, it gave these people the impression that they owned a house, when in reality some of them were just renting, and most of them actually make it and do become real home owners.

These problems shouldn’t be a surprise to anyone. I worked at a large national bank for 6 years and we loved to help “good credit” customers refinance themselves to the max in order to finance their excessive lifestyles. The bigger concerns for all of us may be these customers who comprise a much larger portion of the mortgage market. If rates were to rise due to all the excess liquidity and inflation, while at the same time housing prices and appraisals dropped, these people would be caught between a rock and a hard spot, and then you’d see a much bigger problem. John C.

Questions? Comments? RealtyCheck@cnbc.com