Subprime Lenders Keep Churning Out Bad Loans

As home foreclosures continue to rise and homeowners struggle to pay abusive subprime mortgages, subprime lenders and some policymakers keep assuring us that the market will correct itself—in other words, that skyrocketing foreclosures and poor loan performance will be enough to make subprime lenders stop marketing and approving risky loans.

We wish.  The truth is, subprime brokers and lenders continue to advertise and approve loans with abusive terms that are known to significantly increase the chances of foreclosure.

This week, the Center for Responsible Lending examined subprime loans included in recent mortgage-backed securities (subprime loans that are bundled together and sold as investments on Wall Street).  We found these securities—consisting overwhelmingly of mortgages made in 2007—contained a high share of subprime loans with terms that have been key drivers in the current epidemic of foreclosures.

On average, 77% of the loans included in these subprime securities came with adjustable-interest rates, and nearly all of these -- 94% -- were dangerous "exploding" mortgages with large scheduled interest rate increases.  The securities also included a high share of subprime loans with prepayment penalties and loans that were made without fully verifying the borrower's income. 

It's clear that unscrupulous lenders will continue to prey on vulnerable consumers until someone stops them. The Federal Reserve has the authority to crack down on dangerous loans products and risky underwriting, but so far they have refused to make hard-and-fast rules. 

In Congress, Senators Charles Schumer, Bob Casey and Sherrod Brown have introduced legislation with strong provisions would help rein in predatory and abusive lending in the subprime market.  The Schumer-Casey-Brown bill, S1299, would require:

Mike Calhoun, President of CRL, was among those testifying at a Senate hearing held yesterday to air views on this legislation.  For more details on the persistence of abusive subprime loans and solutions for cleaning up the subprime market, read his testimony.


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