Predatory lenders look to stretch the debt-to-income ratio to a point where, it is not considered responsible lending (Smith 3). Another example of predatory practice is attaching a balloon payment to the loan. Balloon payments are typically seen in prime paperwork used when the borrower is upwardly mobile in their profession. Meaning simply, they will be making more money in the future and able to pay a large compounded payment years from origination. A balloon payment helps maximize the amount borrowed for a higher end property.
Another practice made by these lenders is to put the borrower under distress or fear of non-approval if they sop around but also to present different facts during the home-buying process and then show up at the Closing with different paperwork than discussed prior. Smith argues, "in a study of 255 very high-cost loans in Dayton, Ohio, 75% were found to have prepayment penalties and 24% had balloon payments" (4). To further suspicion, more than twice as many borrowers of these loans were acquired through mortgage brokers and were encouraged to refinance numerous times within in the first two years of the loan. Unfortunately a lot of this behavior confuses the borrower and leaves them not only dissatisfied but also uneducated. A predatory lender will use one of these practices and others as well when approving a loan to just the loan and make a dollar. This is wrong and as a result, many people end up with loans they cannot afford or pay back. This leads to foreclosure and losses for all parties involved.
Countrywide Home Loan's FBRM Training Manual describes foreclosure as "a legal procedure in which a mortgaged property is sold to pay the outstanding debt in case of default" (11). Briefly, there are two types of foreclosure processes: judicial and non-judicial. Judicial is a longer process because it goes through the court system. How a foreclosure gets this distinction has to do with the state in which the property is located. The amount of time the process takes also varies from state to state depending on this distinction. For example, many states on the East Coast such as New York, New Jersey and Pennsylvania are judicial states and the process can take anywhere from six months to a year (Countrywide FBRM 12) while states in the West like Texas and California are non-judicial states where the process can take one to three months to finalize. This type of action on the part of the lender can be very scary and intimidating for the borrower. Foreclosure not only result in the borrower losing their home but can also have long-lasting and far-reaching consequences for them financially but also for the economy at larger. Foreclosure also serves as a loss for the lender should the property not be sold at auction. The property then becomes Real Estate Owned by the lender (Countrywide FBRM 37). This puts the responsibility of maintaining and improving the property for independent sale on the shoulders of the lender. This incurs further costs for them that will not be recouped upon sale of the property because the lender can only ask a fair market value. Generally, a lot of times, the property has been abandoned by the borrower or is damaged by the borrower and those repairs must be made. Foreclosure should be avoided at all costs as it is a terrible experience.
Statistics and Data
The reason behind President Bush's call for the Homeownership Challenge is not only to break down barriers but also to change how home loans are approved in this country. He believes by revamping the process will curb predatory lending because borrowers will be educated and informed. By knocking down barriers to homeownership, one being blemished credit will change how lenders view potential customers and the President thinks will allow an underserved population to finally have a presence in this market (America's Home Ownership Challenge, par. 3-4). The current administration stands by the notion that homeownership is a fundamental American right. It is good for communities because homeowners "work to maintain the value of their investment, which translates into a greater concern for neighborhoods. When citizens become homeowners, they become stakeholders as well. By increasing the ranks of stakeholders, communities not only enjoy increased stability but also benefit from a new spirit of revitalization" (Background, par. 4). Then how does one explain the disparity of minority homeowners when compared with that of white homeowner? Clearly, the white population of the country has the means for barriers not to be an issue when it comes to home purchase. They also do not suffer the same economic burden that will be explored below. Still recent years due to the factors of new home loan products and low interest rates have stimulated the minority segment. "Homeownership has in fact increased, Hispanics and African-Americans still lag behind the homeownership rate of non-Hispanic whites by more than 25 percentage points, and Asian-Americans by more than 20 percentage points. Table 1 illustrates this fact.
Demographic Percentage of Homeownership
Asian-American (and other races)
Table1: Homeownership Rates Among Minorities. (Background, par. 7)
Much of President Bush's attention to homeownership derives from a HUD study conducted under the Home Mortgage Disclosure Act or (HMDA). Data collected from an analysis of nearly one million mortgages demonstrates the emergence of the subprime loan during the 1990s and the practice of lending these loans to low and very low-income families. The analysis offers a clear picture of the operation of predatory lending in America and also "a first look at the most recent nationwide data on subprime lending broken down by the income and racial characteristics of neighborhoods" (Subprime Lending Report, 2). From this four critical conclusions can be reached about the state and consequences of subprime lending in America as follows:
From 1993 to 1998, the number of subprime loans increased ten-fold.
Subprime loans are three times more likely in low-income neighborhoods than in high-income neighborhoods
Subprime loans are five times more likely in black neighborhoods than in white neighborhoods.
Homeowners in high-income black neighborhoods are twice as likely as homeowners in low-income white neighborhoods.
This illustrates the growing divide between white and non-whites, high-income and low-income with regards to homeownership. It proves that existing barriers outlined by HUD such as the following have an active role in homeownership:
Lack of understanding the home buying process.
Lack of access to affordable mortgage credit and down payment.
Weak credit histories.
Lack of available homeownership counseling programs.
Still what the data truly determines is the enormity of subprime lending. Table2 illustrates the popularity of this practice.
Year of Origination Number of Subprime Loans
For 1993: Class of Income
Percentage of Subprime Loans
For 1998: Class of Income
Percentage of Subprime Loans
For 1993: Race
Percentage of Subprime Loans
For 1998: Race
Percentage of Subprime Loans
Table 2: Number of Subprime Loans Increased Categorized by Income and Race. (Subprime Lending Report, 3)
This rate of lending subprime loans resulted in a dollar volume from $20 billion dollars to $150 billion dollars. A shocking conclusion from the data is upper-income African-Americans in predominantly Black neighborhoods were given more than twice the rate of subprime loans than white homeowners in low-income white neighborhoods at a rate of 18% (Subprime Lending Report, 3). This mean subprime loans are five times more likely in black neighborhoods than in white neighborhoods while only three times more likely in low-income neighborhoods than in high-income neighborhoods. These numbers paint a pretty bleak picture for the underserved population President Bush wants to target within the next five years. Doe this mean that in order to reach the administration's goal, that further flexible loan products will be introduced into the market, giving lenders more possibilities to act abusive toward such borrowers? Gregory Wilcox maintains, "this is another example of how divided our country has become. Different markets mean some families are treated fairly while other families continue to get ripped off" (1). Fannie Mae contends, "that 30% to 50% of subprime loans are made to borrowers who could have qualified for prime loans" (Wilcox, 2). This proves that race and income are indeed factors in lending practices. It is wrong that the color of skin creates a prejudice in this country. Still is also the nature of the competitive market that has created "seventeen percent of the nation's estimated $1.03 trillion in total purchase loans" (Lepage, 1) as subprime at a rate of 11%. It is competition that drives mortgage companies to practice unfair lending processes.
With this in mind, there are two schools of thought regarding why subprime loans have a more likely rate of foreclosure. It is important to juxtapose both views side by side to have a better understanding of how subprime loans perform.
One way of looking at the relationship between the subprime loan and the…