Editorial: Massachusetts Mortgage Lending Must Be Reformed

The following editorial on mortgage lending was written by Thomas Callahan, the executive director of the Massachusetts Affordable Housing Alliance. It appeared in the March 27 edition of the Boston Globe …

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Now that everyone is paying attention, let’s review how we got here:

Subprime [bad credit mortgage loans] became the flavor of the day several years ago. The worst kind of lenders preyed on the universal yearning for the American Dream - home ownership - often targeting African-Americans and Latinos with alluring, affordable, and ultimately deceptive sales pitches:

“Your bank says no, we say yes.”

“If your rate is higher than 1.5 percent, then you need to call us now.”

“Bad credit, no problem!”

In Boston in 2005, 70 percent of higher-income African-American and Latino borrowers received a high-cost Massachusetts home loan. That’s a shocking 70 percent of those earning more than $100,000 per year.

Subprime Massachusetts mortgage lending spilled over into the suburbs as well with towns like Weymouth, Holbrook, Dedham, Milford, and others reporting more than 1 in 10 homeowners getting high-cost loans.

These are not just run-of-the-mill high cost loans. Subprime lenders keep coming up with new products and new gimmicks. That is why there has been a proliferation of “stated income” loans and interest-only mortgages.

These products have been around awhile but they had a limited use until mortgage brokers and mortgage companies started selling them to average consumers who didn’t have a realistic chance of paying the mortgage.

No surprise, delinquency rates on these products started rising. One recent report puts subprime delinquencies at more than 14 percent. Investors got nervous and put the squeeze on subprime companies to buy the loans back and, in some cases, cut off the bad credit mortgage funding stream.

It is a recipe for a crisis. And as in any crisis, there is no shortage of proposed solutions. Increased education for borrowers is a starting place that everyone can agree on. Education could inoculate consumers against the persuasive, but deceptive, advertising that fueled the current situation.

Beyond education, legal and legislative remedies have surfaced.

Can the attorney general go after subprime companies or perhaps the Wall Street investors? How about legislation? Debate will now probably focus on proposals to crack down on unfair and deceptive advertising, license loan origination providers, and help consumers caught in the foreclosure process.

Continue reading in the Boston Globe …