The turmoil engulfing subprime lending for homeowners has caused a lot of broken hearts across the nation, with foreclosures skyrocketing and many people losing their homes.
Last week, the CEOs of Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, told a House panel that they would help delinquent subprime borrowers refinance into more affordable mortgages and avoid foreclosure.
Separately, the Federal Deposit Insurance Corp. and other federal bank regulators last week issued a statement to banks urging them to find more affordable alternatives for borrowers struggling to keep up with payments on their adjustable-rate mortgages.
The FDIC, the Federal Reserve Board and other U.S. regulators also proposed subprime mortgage lending guidelines on March 2 that would direct banks to offer clearer information to borrowers and ensure they can repay their loans.
Rhode Island has not so far seen the level of foreclosures reported in other states, including Massachusetts, where the crisis began to make headlines last year.
But three subprime lenders that have either gone out of business or are currently in serious financial trouble had operated in Rhode Island: Ameriquest Mortgage Co., New Century Mortgage Corp., and Fremont General Corp., according to the R.I. Department of Business Regulation.
The pain is also being felt by consumers. Brenda Clement, executive director of the Housing Network of Rhode Island, a nonprofit that helps people buy and maintain homes, said this state has been a “hotbed” for subprime lenders.
One indicator of the extent of the subprime market's implosion in the state is the activity in the Housing Network's foreclosure counseling program. In 2004, the program had 140 people enrolled, Clement said. As of last year, 600 people participated, and this year's number is already close to 600.
In a recent study conducted by the Center for Responsible Lending titled “Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners,” the nonprofit, nonpartisan organization analyzed the performance of 6 million subprime mortgages that were made from 1998 to 2006, taking housing price changes into account.
According to the study, foreclosure risk has “escalated in recent years, and is likely to grow even worse in many areas.” It found 2.2 million recent subprime loans had already failed or would end in foreclosure, and it predicted those foreclosures would cost homeowners as much as $164 billion.
One in five subprime mortgages started in the last two years, the nonprofit predicted, will end in foreclosure. And while subprime lending used to be a small niche, the group added, it is now “a major economic force” comprising one quarter of U.S. home loans.
Clement said Rhode Island is a big target for subprime lenders for a number of reasons, including a hot real estate market, high property values, the high cost of living here, and the diversity of the population. However, she said that subprime lenders are not the problem – it's predatory lenders.
Campbell, from Rhode Island Housing, agreed that not all subprime lenders are looking to take advantage of consumers. Yet predatory lenders have caused problems in Providence, he said, though it is difficult to quantify how much.
Campbell defined predatory lenders as those who understand a person's financial status but do not act in his or her best financial interest. For example, these lenders give a customer an adjustable rate that would increase to a certain level at which the customer would have trouble paying later. This could result in the predatory lender eventually ending up with a person's house, which would be put right back on the market for a higher value.
Last year, Gov. Donald L. Carcieri signed a new law, the Home Loan Protection Act, that aimed to protect consumers from predatory lenders, making Rhode Island the 32nd state to put a predatory-lender law on the books. At the time, Carcieri said unfair lending cost the state about $65 million per year.
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