Lynne Dearborn is a professor of architecture and urban planning at Illinois. Her research focus is on social and cultural aspects of community design, including the effects of questionable real estate transactions and mortgage-lending practices in neighborhoods and communities with large minority populations. She was interviewed by News Bureau Arts Editor Melissa Mitchell.
Mortgage foreclosures are at an all-time high, causing repercussions that recently rocked world financial markets. Analysts report that the heart of the problem is a higher-than-average rate of delinquency and foreclosures among homeowners with subprime loans. What exactly is a subprime loan?
Subprime mortgage lending allows high-risk borrowers to access credit for home purchase and refinance. A prime loan is made to creditworthy borrowers at prevailing interest rates. A subprime loan is made to borrowers with less than perfect credit, and there is a segment of the lending market that specializes in making subprime loans. These lenders are at the heart of the current Wall Street concern about poor mortgage performance in the subprime market.
Concentrated in low-income and minority areas, subprime lending grew from less than one percent of home purchases in 1993 to just fewer than 17 percent in 2004 and continued to grow in 2005 and 2006, so there are many subprime loans out there right now.
Is subprime lending the same thing as predatory lending?
Predatory lending is a subset of subprime lending, but not all subprime loans are predatory. Predatory lending normally occurs in the subprime market because the prime market offers borrowers greater homogeneity in loan terms, greater financial information, and extensive state and federal oversight.
In the prime market and among borrowers with high financial literacy, consumers have the ability to compare options (for example, choosing between paying more fees up front to get a lower mortgage interest rate or paying lower fees but borrowing at a higher interest rate). Information on consumer-borrowing costs is often obscured in the subprime market; thus, borrowers are more likely to find, after the purchase, that homeownership is an economic burden they cannot afford.
Are there particular individuals or groups being targeted by unscrupulous lenders?
Groups most often targeted include African Americans, Latinos, Native Americans, immigrants with limited financial literacy and/or limited language skills, and the elderly. Some researchers have also found that female heads of household are disproportionately represented among those with predatory loans.
It would seem that legislation or some other form of regulation within the banking and lending industries could have prevented much of the current foreclosure crisis. Why weren't controls set in place to curb risky loan practices?
This is a complicated question. There are some Federal regulations in place that are designed to protect borrowers such as the Homeowners Equity Protection Act (HOEPA). However, these protections are inadequate to address the type and scale of the predatory lending problems faced today. Enforcement of Federal regulations against predatory practices is not as rigorous as it could be. By mid-2004, 44 states and municipalities including Illinois had enacted anti-predatory lending laws that augmented protections provided by the 1995 Federal HOEPA Laws. Current research suggests that while these laws are controversial because they pit local and federal entities against each other in a bid to control lending practices, many are providing effective protection for homeowners against "classic" predatory lending and predatory servicing practices.
The other side of the argument suggests that anti-predatory lending regulations must be carefully crafted so not to cut off the supply of "legitimate" and much-needed subprime lending which has done much good in many minority and low-income communities. "Legitimate" subprime lending has opened up financing for purchase, renovation and repair in neighborhoods where it has long been unavailable and allowed a reversal of decay and disinvestment.
But the relative lack of federal regulation, when compared with that in the prime market, would suggest there is room for well-crafted regulation.
Do you think the present wake-up call will result in any changes?
There are already indications that the current reports of poor performance in the subprime market are causing lenders, regulators and stock market investors to change their practices. Some of the large subprime lenders are starting to self-regulate to some extent. The 240 point drop in the Dow on March 13 suggests that investors are concerned and taking action. The New Century Financial scandal demonstrates that regulators are taking notice.
I fear, based on my research in minority communities, that we are only seeing the tip of the iceberg. There are many, many borrowers in these communities who are on shaky financial ground. They are often paying much more than they can afford and more than their credit history warrants for the privilege of borrowing to buy or repair their home. Unless we address the problems of this large group of borrowers before they default or are foreclosed upon we are likely to see the numbers of subprime mortgage foreclosures rise in the next few years.
What can consumers do to make sure they don't fall for sales pitches and offers from unethical, profit-hungry lenders?
There are four things that consumers can do to ensure that they are getting the best possible terms for loans and are not being taken advantage of: protect their credit rating, shop around, educate themselves, and have their own lawyer (which they are paying and who is only representing them) present at real estate closings.
