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NAACP Financial Freedom Campaign Fair Lending and Predatory Lending. NAACP Economic Department. Agenda. Our Current Financial Picture Mortgage Lending (Basics and History) What is Predatory Lending? History of Predatory Mortgage Lending Impact of Predatory Lending in our Communities
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NAACP Financial Freedom CampaignFair Lending andPredatory Lending NAACP Economic Department
Agenda • Our Current Financial Picture • Mortgage Lending (Basics and History) • What is Predatory Lending? • History of Predatory Mortgage Lending • Impact of Predatory Lending in our Communities • The Current Foreclosure Crisis • Use of High-Cost, Alternative Financial Services (Payday Lending, Car Title Lending, Check Cashing Services, Rent-to-Own, Prepaid Cards etc.) • What does the Future of Consumer Financial Services look like? • What can We do to Change and Improve Our Financial Futures?
Households on the edge of the financial cliff • 43% of American households spend more than they earn each year. • 52% of employees live paycheck to paycheck. • Nearly 42% of all American households do not have enough in liquid financial assets to support themselves for at least three months. • 46% of American households have less than $5,000 in liquid assets, including IRAs.
1940s and 1950sHousing and the GI Bill • The GI Bill also included provisions for low-cost mortgages to veterans so they could purchase houses. This created a housing boom. • This boom and the increased earning capacity, coupled with pent-up demand for consumer goods, resulted in the prosperity of the 1950 and 1960s.
Redlining & Community Reinvestment Act of 1977 • CRA: Requires banking institutions to meet the credit needs of their local communities, including low and moderate income neighborhoods • Redlining: Illegal practice where banking institutions refused to do business with target communities—low income, communities of color, female headed households, and rural residents
Source: The Atlanta Journal Constitution, The Color of Money: Home mortgage lending practices discriminate against blacks, May 1988
1980s Deregulation • Depository Institutions Deregulatory and Monetary Control Act (DIDMCA) of 1980 eliminated state mortgage usury ceilings • Alternative Mortgage Transactions Parity Act of 1982 provided new exotic mortgages such as adjustable rate mortgages, balloon payment mortgages, interest only payment mortgages, option ARMs
1980s Deregulation Continued • These laws opened the door for the development of a subprime market, but subprime lending would not become a viable large-scale lending alternative until the Tax Reform Act of 1986 (TRA). • The TRA increased the demand for mortgage debt because it prohibited the deduction of interest on consumer loans, yet allowed interest deductions on mortgages for a primary residence as well as one additional home. • This made even high-cost mortgage debt cheaper than consumer debt for many homeowners
Growth of Mortgage Backed Securities (MBS) and Low-Cost Access To Equity • Subprime lending rapidly grew only after 1995, when MBS with subprime-loan collateral become more attractive to investors. • During the late 1990s, house prices increased and interest rates dropped to some of the lowest rates in 40 years, thus providing low-cost access to the equity in homes. • Of the total number of subprime loans originated, just over one-half were for cash-out refinancing, whereas more than one-third were for a home purchase.
Beginnings of Predatory Lending Mid to Late 1990s • Unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. • “The practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against.” • “Imposing unfair and abusive loan terms on borrowers”
Why Predatory Lending?MONEY $$$$$$ Financial Incentive Structure • Brokers are paid to originate loans, not to ensure they perform • Lenders sell loans after origination so are not concerned about performance • Servicers don’t originate loans so have no input into who gets a loan • Private companies who buy loans do not always monitor underwriting policies
Impact of Predatory Lending • Strips savings, equity earnings from families who have little wealth to start with. • Can push families into damaged credit, bankruptcy, eviction, vehicle repossession, and foreclosure. • Has broader negative impact on communities, local and state municipalities, and U.S. economy.
Targets of Predatory Lending Practices • Low / moderate income households • African-American, Latinos, and Other People of Color • Elderly and/or Disabled Homeowners • Women • Non-English speakers, New immigrants • Persons in a financial or housing crisis, may be equity-rich but cash-poor • Persons who lack information they need to choose the best product • Persons who do not perceive themselves as having financial options • Persons who are unfamiliar with the lending process and who fail to comparison shop
Why did Borrowers become Victims of Predatory Lending? • Fraud—Lenders lied about loan terms • Confusion—borrowers believed they are being given one loan, when really they are given another • Ignorance—most borrowers did not know or understand the loans they were being offered • Fear—homeowners in financial trouble believed they had no other options
Abusive Marketing Practices • Use of fraud, lies or other deceptive tactics to get borrowers into a loan they cannot afford. • Aggressive sales tactics (calling all the time to pressure the borrower). • Lender or broker recommended paying off a low-rate mortgage with a high-rate mortgage. • Lender suggested rolling credit card debt into mortgage debt. • The amount borrowed was more than the value of the property (at the time of the loan). • Lender or broker encouraged borrower to get a loan for more than needed to buy the house. • Loans made to borrowers who cannot afford to pay them back.
Predatory Lending Practices During Late 1990s, equity stripping practices (getting homeowners to refinance and take out cash) by unregulated financial institutions targeted borrowers who were house rich but cash poor. Other Practices included: • Targeting • Steering • Loan Flipping • Prepayment Penalties • Yield Spread Premiums • Single Premium Credit Insurance
Home Improvement Scams • Home improvement scams • Some predatory lenders were affiliated with home improvement companies • Borrowers signed documents without understanding they are taking out a loan on their property • Work was often shoddy or homeowner was overcharged • Contractors not registered with the state
2nd Wave of Abuses • Defective Products (Hybrid Adjustable Rate Mortgages-2/28s and 3/27s) • Failure to Escrow for Taxes and Insurance • Stated Income Loans • Failure to determine whether the borrower had the ability to repay the loan • Lack of due diligence of brokers
Predatory Lending Exposed • It was not until the mid-to late 1990s that the strong growth of the subprime mortgage market gained national attention. • Immergluck and Wiles (1999) reported that more than half of subprime refinances originated in predominately African-American census tracts, whereas only one tenth of prime refinances originated in predominately African-American census tracts.
Use of Subprime Loans as Predatory Loans • Subprime Loans contained predatory features and terms and contained greater risk. • Adjustable Rate Mortgages had 72% greater risk of foreclosure than Fixed Rate Mortgages. • Balloon Loans had 36% greater risk. • Prepayment penalties associated with 52% greater risk. • Low/no doc loans with 29% greater risk.
Other Subprime Loan Features • Roughly 90% of subprime mortgages made from 2004 to 2006 came with “exploding” adjustable interest rates. • Roughly 45% of subprime mortgages approved without fully documented income. • Roughly 75% of subprime mortgages have no escrow for taxes and insurance. • Roughly 70% of subprime mortgages have prepayment penalties.
Top Ten B&C Originators, Selected Years Rank 1996 • 1 Associates First Capital, TX • 2 The Money Store, CA • 3 ContiMortgage Corp, PA • 4 Beneficial Mortgage Corp, NJ • 5 Household Financial Services, IL • 6 United Companies, LA • 7 Long Beach Mortgage, CA • 8 EquiCredit, FL • 9 Aames Capital Corp., CA • 10 AMRESCO Residential Credit, NJ
Top Ten B&C Originators, Selected Years Rank 2000 • 1 CitiFinancial Credit Co, MO • 2 Household Financial Services, IL • 3 Washington Mutual, WA • 4 Bank of America Home Equity Group, NC • 5 GMAC-RFC, MN • 6 Option One Mortgage, CA • 7 Countrywide Financial, CA • 8 Conseco Finance Corp. (Green Tree), MN • 9 First Franklin, CA • 10 New Century, CA
Top Ten B&C Originators, Selected Years Rank2001 • 1 Household Finance, IL • 2 CitiFinancial, NY • 3 Washington Mutual, WA • 4 Option One Mortgage, CA • 5 GMAC-RFN, MN • 6 Countrywide Financial, CA • 7 First Franklin Financial Corp, CA • 8 New Century, CA • 9 Ameriquest Mortgage, CA • 10 Bank of America, NC
Top Ten B&C Originators, Selected Years Rank 2002 • 1 Household Finance IL • 2 CitiFinancial, NY • 3 Washington Mutual, WA • 4 New Century, CA • 5 Option One Mortgage, CA • 6 Ameriquest Mortgage, DE • 7 GMAC-RFN, MN • 8 Countrywide Financial, CA • 9 First Franklin Financial Corp, CA • 10 Wells Fargo Home Mortgage, IA
Top Ten B&C Originators, Selected Years Rank 2003 • 1 Ameriquest Mortgage, CA • 2 New Century, CA • 3 CitiFinancial, NY • 4 Household Finance, IL • 5 Option One Mortgage, CA • 6 First Franklin Financial Corp, CA • 7 Washington Mutual, WA • 8 Countrywide Financial, CA • 9 Wells Fargo Home Mortgage, IA • 10 GMAC-RFC, MN
CRL Losing Ground ReportDecember 2006 • One in eight (12.5%) subprime loans made in 2000 had foreclosed by May 2005. • Predicted Foreclosure rate for Subprime mortgages originated from 1998 – 2006 was approximately 1 in 5 mortgages (20%) will end in completed foreclosure (i.e., loss of home) • Other predictions included over 1/3 of Subprime borrowers losing their homes • That’s over 2.2 million homeowners losing their homes • $164 billion in lost equity
Rise of Racial Wealth Gap White households $113,149(↓16% 05-09) African American Households $5,677 (↓ 53% ) Hispanic Households $6,325 (↓ 66%) Source: Pew Research Center, Twenty-to-One: Wealth Gaps Rise to Record Highs Between Whites, Blacks and Hispanics (July 26, 2011) “Plummeting house values the principal cause”
“Negative Equity” • Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgages than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both. • 11.1 million, or 23.1 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. The small increase reflects the price declines that occurred during the fourth quarter and led to lower values. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. • Together, negative equity and near-negative equity mortgages accounted for 27.9% of all residential properties with a mortgage nationwide.
Negative Equity Facts • Nevada had the highest negative equity percentage with 63% of all mortgaged properties, followed by Arizona (50%), Florida (46%), Michigan (36%) and California (31%). • 38% of borrowers with home equity loans were in a negative equity position. • The average negative equity borrower was upside down by $65,000.
