MORTGAGE WOES HIT HOME

Ads that promise home loans despite bad credit sound enticing, and millions of people, some who borrowed more than they could afford and others who got loans they shouldn’t have qualified for, have what are called subprime mortgages. With rising interest rates and falling housing prices, many consumers can no longer make their payments, sending ripples through financial markets.

Not much can be done about loans that are already written except insuring that financiers, not the public through a bailout, bear the massive losses. As for the future, better disclosure and stricter regulations will help.

Coastal Enterprises Inc., a Wiscasset group that studied predatory lending for a 2006 report, found that between 2000 and 2004, Maine’s subprime market grew more than fourfold in terms of dollar value, to more than $1 billion.

Subprime mortgage loans, which typically have higher interest rates, are meant to serve borrowers who don’t qualify for traditional loans because of credit problems. The market is dominated by nonbank lenders and mortgage brokers.

According to the Mortgage Bankers Association, subprime mortgages account for 60 percent of foreclosures, although they make up only 13 percent of all outstanding loans. The Center for Responsible Lending predicts one-fifth of subprime loans written in the last two years will end in foreclosure. The percentages are about the same for Maine.

The high foreclosure rates are so troubling that the country’s two largest buyers of home mortgages, Fannie Mae and Freddie Mac, recently announced they would stop buying some types of subprime loans.

Eighty-nine percent of the subprime lenders and brokers are already regulated by the state. This highlights the need for better regulation.

The Maine Office of Consumer Credit Regulation has recommended that lawmakers adopt federal disclosure rules known as Real Estate Settlement Procedures Act (RESPA). Better would be to amend Truth in Lending laws to require disclosure of what mortgage payments will be under different, realistic, interest rate scenarios, which is especially important with discount payment adjustable-rate mortgages where payments increase substantially after an initial low-interest period.

The office has also recommended that the definition of “high-rate, high-fee mortgages” be expanded. Existing laws require more disclosure for these loans.

A bill by House Speaker Glenn Cummings includes some of the consumer credit recommendations but goes much further by prohibiting loan flipping, the practice of companies encouraging lenders to frequently refinance their loans regardless of whether the borrower gets better terms. Such refinancing can lead to huge profits for brokers but lock borrowers into loan repayments that far exceed the value of their home. Speaker Cummings’ Homeowner Protection Act would also restrict prepayment penalties and interest-rate increases when a loan is in default and require credit counseling for consumers applying for high-rate, high-fee mortgages.

General Motors Corp., the world’s largest automaker, may charge off almost $1 billion to cover bad mortgage loans made by its former home-lending unit and analysts blame the recent drop in the U.S. and Asian stock markets on concerns about the mortgage market.

While helping as many qualified buyers as possible get homes is laudable, burdening them with debts they can’t pay is not. Tougher regulations, coupled with the market’s hesitancy to take on more of these loans, will help restore the balance.