MORTGAGE PROTECTION

Subprime loans – those that often go to borrowers with credit risks – made up only 15 percent of total loans during the first quarter of last year in Maine but accounted for 60 percent of the foreclosures. That unhappy outcome, from the Mortgage Bankers Association, is one example of a rapid increase in predatory lending practices that have hit here and nationwide. A new study by Coastal Enterprises Inc. in Wiscasset provides much-needed insight into this problem and some useful suggestions for fixing it.

Subprime mortgages, often when a customer is refinancing or obtaining a home equity loan, are offered at generally higher rates than a typical prime mortgages, usually to people who have credit problems. It is important to note that most subprime lenders are legitimate businesses. But the study points to a growing number of problems with some, mostly from out of state, that include, for example, excessive fees and high prepayment penalties. These lenders are said to push unnecessary products on customers or steer them into subprime mortgages when they likely would qualify for lower rates.

The number of subprime mortgages has risen in Maine from 2,328 in 2000 to more than 7,100 by 2003, increasing in value from $193 million in 2000 to more than $1 billion by ’04. Most of the mortgages were for refinancing but the use of these mortgages for home purchase also increased substantially during the last five years. Use of subprime mortgages is disproportionally high in rural areas.

CEI, which conducted its work with the Center for Responsible Lending, had several recommendations for strengthening the laws that govern these loans. Adequate consumer protection is important, because even when subsequent lawsuits are settled, borrowers still can lose out. In 2003, for instance, more than Maine 2,000 borrowers qualified for a nationwide settlement based on a settlement with the parent company of Household and Beneficial finance companies, one of the country’s largest lenders in the subprime mortgage market, but got back only a fraction of their losses.

Preventative steps to avoid the need for suits, according to the study, include expanding the definition for “high-cost loans” to capture points and fees at 5 percent or higher of the loan amount. The study also suggests prohibiting prepayment penalties for high-cost loans and ensuring borrowers have their day in court by blocking mandatory arbitration. It would further require that refinancing a home show a net tangible benefit to the homeowner.

Maine’s high rate of homeownership, its rising value of homes coupled with relatively low incomes, make this state particularly vulnerable to predatory lenders. Legislation to curb these abuses would be difficult this late in the session, though the governor’s office could introduce the idea. Added consumer protection would likely find a welcome audience in the House and Senate.