A local study of "Lending Industry Practices" was approved at the League of Women Voters of Milwaukee County annual meeting in May 2006. The first part was a study of "convenient lending" which means: payday lending, car title lending and Refund Anticipation loans. The materials for that part of the study can be reached by clicking HERE . The second part of the local study is a study of "predatory lending". For the purpose of this study, "predatory lending" is used to mean the large loans which use the borrower's home as security for the loan ( or collateral).

Documents, Articles and other Study Materials

This article, dated January 15, 2008, Mortgage Migraine written especially for this web site by League member, Michele Derus, is an excellent summary of where we are now in the sub-prime market and foreclousure crisis. Read this before you read anything else on this page.

For the League study, we are not just looking at foreclosures but at lending industry practices which include the subprime market. The legislation being proposed and introduced at the state and federal levels address one or more aspects of the foreclosure problem but does not address the market forces that led to the present difficulties. In this study we must look at the lending industry as well as at the outcome (foreclosures) of a particular kind of lending choice by lenders and investors..

Before an item is posted it is read for content relevancy and timeliness. The is used for items that are newly listed here no matter what the original date.

Want to understand more about why the subprime market crashed and housing prices dropped precipitously? Watch this cartoon presentation, The Subprime Primer . Just click on the arrows at the bottom left of the screen to move to the next scene.

Sections

1. The World Economy
2. Introduction - What is Predatory Lending ?
   
3. What is the subprime market and why does it matter?
   
4. Foreclosures & their impact on families and communities
   
5. Pre-foreclosure scams
   
6. Credit Scores and How They are Used
   
7. Glossary of Terms
   
8. Draft Consensus Questions
   
9. Proposed Fixes Including Proposed Legislation
   

The opinions expressed in the articles and study documents are the author's and do not represent a position of the League of Women Voters of Milwaukee County.

The World Economy

1. The March 19, 2008 edition of The New York TImes contained an article that addresses the frustration many people feel about understanding how mortgages could possibly cause so much trouble: Can't Grasp credit Crisis? Join the Club

   
   

2. The US economy and the world economy have been seriously hurt by the subprime market collapse. The BBC Worldwide radio carried an audio article on March 17, 2008, about the Lehman Brothers purchase of Bear Stearns for the "fire sale" price of $2.00/share. . This action caused serious drops in the stock markets world-wide. The collapse of Bear Stearns is one more reaction to several factors, among them the crash of the subprime market. There are many useful links from this BBC link.

   
   This article from the BBC Worldwide ( March 14, 2008) explains how the collapse of the subprime market contributed heavily to the crash of Bear Stearns

   
   

3. "The most powerful economic force in the world right now is what bankers called deleveraging. What is meant by that is explained in the article from the BBC Worldwide Banks Squeeze Out High-Risk Customers

   
   

4. The BBC Worldwide has an article from last November (2007) about "how the subprime problems evolved to threaten the financial system." The story displays some difficult concepts clearly. USA Subprime in Graphics is an excellent summary.

   
   

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Credit Scores and How They are Used




1. Why You Have Different Credit Scores is a very brief explanation of how the three credit rating agencies differ in their methodology. Unlike what is stated in the article, it is not necessary to purchase your report from each of the three agencies.

   
   

2. You can get your 3 credit reports for free. There is no need to pay for them. How to Order Free Credit Reports & Get FICO Scores includes the URL to obtain your credit reports every 12 months: http://www.annualcreditreport.com. The article also includes what to avoid. There is a good summary of what the FICO (credit scores) mean.

   
   
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Introduction - What is Predatory Lending

1. Cedarburg family wins class action lawsuit involving Chevy ChaseBank on Tuesday, April 8, 2008. The lawsuit is now before the 7th Circuit Court of Appeals. Click Here The description of what happened to the Andrews contains several red flags but the degree of fraud reported is substantial and would not necessarily raise red flags.

   
   

2. Reverse morgages (available to people over age 62) have not necessarily been considered a vehicle for predatory loans. However, the number and value of reverse mortgages has been increasing and so have complaints of strong-arm tactics Some Seniors Victimized in Reverse Mortgage Boom a National Public Radio story on March 9, 2008

   
   

3. The Center for Responsible Lending has an excellent list and explanation of the 7 signs of a predatory loan. We found defining predatory loans to be the most difficult part of deciding what to do about them (STOPP Coalition). This article covers the 7 major "red flags".

   
   

4. This is a 2 page informational sheet from the Center for Responsible Lendring (CRL) on mortgages today. It is in pdf format. Click Here

   
   

5. The January/February 2008 issue of The American Bankers Association magazine contains an article, Fair Lending Risk Assessment Primer to advise full-service banks on making judgements about their bank's fair lending practices including "abusive or predatory" lending. It is a set of general guidelines for all types of lending and credit-related activities. (7 pages PDF)

   
   

6. Housing advocates have long argued that there were racial disparities in lending. This article from the WashingtonPost.com, Disparities Found in Sub-Prime Lending contains data newly required by federal banking regulators. Advocates argued for years that the data should be collected. Now that it is, it's possible to study the information.

   
   

7. The Center for Responsible Lending has preared a short paper on Mortgage Lending as a Moral Issue . This is not something that the League would normally address in this way. It seems there are some connections to the League's adopted positions on social issues.

   
   

8. This article from the local daily newspaper is about the increase in foreclosures in November, 2007 in MIlwaukee County.

   
   

9. The National Community Reinvestment Corporation (NCRC) and the Woodstock Institute collaborated on a study release September 2006 entitled, A Lifetime of Assets is an explanation of how people build assets, why they are important, predatory consumer loans, subprime and non-traditional loans and includes case studies. The paper concludes with a description of an innovative program of the NCRC -- Consumer Rescue Fund (CRF) -- to assist homeowners with predatory loans keep their homes.

   
   

10. In August 2000, a very short report was prepared about predatory lending discussing the lack of action on the part of federal regulatory agencies Click here to read . Senator Phil Gramm, then the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, sent a letter to each of the federal regulatory agencies asking what they were doing about predatory lending. At the start of the report are a list of conclusions.
    
    This is presented to show how quickly this problem has mushroomed. The responses in 2000 show a disappointing lack of action or even plans of action by federal regulators..

    
    

11. The American Bankers Association has, for the benefit of their memebers, a page devoted to an explanation of predatory lending and suggestions that banks become part of the solution. There are resources for banks on that page. Remember that banks were not involved in making subprime loans. There were/are some banks that began to move into partnerships with mortgage brokers and other financial institutions that were/are making subprime loans.

    
    

12. The American Bankers Association has several documents online that address subprime lending and "predatory" lending. This paper, A Prudent Approach to Preventing Predatory Lending by Robert E. Litan, Vice President and Director, Economic Studies program, The Brookings Institution, was issued in February 2001. You will note that defining predatory lending was an issue for the author as it was for all of us in 2001. The data changed drastically after this paper was released but there are some useful concepts based on what was known at the time. (17 pages PDF)

    
    

13. The immediate focus on foreclosures and on plans to prevent or mitigate the impact of them is becauss the collapse of the subprime market got the attention of Wall Street.

    
    

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What is the Subprime Market and why does it matter?

1. The National Community Reinvestment Coalition has filed a complaint with the SEC calling for an investigation of the ratings agencies. The filing is an attempt to "obtain relief for consumers and communities harmed by the agencies’ negligent and culpable behavior leading up to the downfall of the mortgage and credit markets -- one of the biggest economic disasters in the nation’s history."

   
   

2. Timeline: Sub-prime Losses is an excellent summary of the crash of the subprime market dating from February 2007. The best parts are that it contains information about the situation in the UK and it has links to every story for every date in the timeline. There is also a sidebar with articles about subprime lending. This may be the definitive source for information.

   
   

3. A blog called "Rain City Guide" from Seattle Washington contains a very good article in its March 20, 2007 issue about the history of the subprime market from a real estate professional's viewpoint. Winds of Change; The Rise and Fall of the Subprime Market is the first part of a short series. This is worth reading for a real estate professional's take on who loses, who wins and why .

   
   

4. The impact of this kind of lending on Milwaukee is documented well by researchers at UWM. Milwaukee's Housing Crisis: Subprime Mortgages, Foreclosures, Evictions, and Affordability is the result of research by UWM. There are links at the end of the short article to other good resource materials and articles.

   
   It is difficult to find factual information on the need to keep doing business as usual. The increase in foreclosures nationally is just one negative consequence of the misuse of the subprime mortgage lending market.

   
   

5. In 1999, BankersOnline.com provided good advice to lenders on responsibly using the subprime market.. Notice that the author specifically says that the borrower should be considered for a prime market loan first.

   
   

6. This December 2004 article from USA Today Subprime Market Grpws Despite Troubles explains how the subprime market worked before the crash. There are useful sidebars along with the article with advice to consumer and the "pros and cons" of subprime lending.

   
   

7. A BBC News article from September 2007, Fed blamed for sub-prime lending explains some of the criticism of federal inaction while housing advocates warned of potential and real problems of subprime lending.

   
   

8. Countrywide is a name that pops up whenever people talk about "exotic loans". This article shows how the sub-prime crash has affected Countrywide's conduct of business. HOUSING; Lender Seeks To Shed Loans; Countrywide Pushes Customers With Exotic Mortgages To Refinance To Traditional Ones That Are Easier To Sell Off.

   
   

9. The impact of the sub-prime market crash has affected all aspects of our economy. Here is an article about the ratings services and how they seemed to know less than housing and consumer advocates. Subpar Ratings For The Ratings Agencies

   
   

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Subprime Lending, Foreclosures and their impact on Families and Communities

1. Muslim Law prohibits charging interest or paying interest. The alternative used by Muslims is interesting. It keeps Muslim families who use it out of the problems created by resetting adjustable rate mortgages (ARMs) and the crash of the subprime market. Muslim familes who use it do not face foreclosure. Guidance Residential is one company that uses non-interest methods to assist Muslims buy homes. One thing we can learn is their method of valuing property by the rental value rather than the market value.

   
   

2. The Coalition for Responsible Lending released this report Quantifying the Economic Cost of Predatory Lending in October, 2001. In this report is quantified the cost of several predatory lending practices to American homeowners. Using the best data available it is estimated that U.S. borrowers lose $9.1 billion annually to predatory lending practices. For the most part, these practices are entirely legal under existing law; only changes to federal and state laws and regulations will significantly reduce this figure. Further, the magnitude of the problem, we believe, demonstrates that the most important lending issue today is no longer the denial of credit, but rather the terms of credit.

   
   

3. The online edition of The Boston Globe addresses the advertising of national lending companies. Mortgage Ads Show No Sign of Credit Woes. The article was originally published in the Washington Post in August 2007.

   
   

4. Just as in Milwaukee, Baltimore Finds Subprime Crisis Snags Women . This Janurary 15, 2008 article from the New York Times helps understand the longer term implications for asset-building for women, especially single-parent women.

   
   

5. The most recent report from UWM is Milwaukee's Housing Crisis: Housing Affordability and Mortgage Lending Practices by John Pawasarat. It was released in October 2007 and is a pdf file 29 pages long. a quick summary of the study, written by Lois Quinnn of the Employment and Training Institute at UWM follows:
   
   "Housing costs (rent and utilities) relative to income have jumped dramatically, with 31% of Milwaukee renters spending half or more of their income on housing in 2006, up from 21% in 2000. According to the American Community Survey data, this places Milwaukee near the top of major Midwest cities for renters paying this large share of their income on housing. The 2006 HMDA data, also recently released, showed a decline in use of subprime lending in Milwaukee County but a dramatic increase (35% in one year) in high-interest rate loans from non-subprime lenders."

   
   

6. United for a Fair Economy is an organization that tackles many different economic issues in the US. They have just released a new report Foreclosed: State of the Dream 2008 . It is an overview of how the crash of the sub-prime market and the foreclosures associated with it affects people of color.

   
   

7. The extent of the situation nationally is outlined in this article from RealtyTrac, the largest company in the US that tracks foreclosure filings for investors More than 1.2 Million Foreclosure Filings Reported in 2006 This is the very problem that housing advocates have been warning about for several years. When the 2007 data is available this will be updated or see Michele Derus' article at the top of this page marked with "New".

   
   

8. NCRC's proposal on mitigating the effect of foreclosures click here before Congressional Subcommittee on Commercial and Administrative Law

   
   

9. The Homeownership Preservation Foundation in Minneapolis released this report, Collateral Damage: The Municipal Impact of Today's Mortgage Foreclosure Boom dated May 11, 2005, prepared. The study's authors, William C. Apgar and Mark Duda, both have extensive background in housing and mortgage issues. Both are now professors at Harvard. The study uses the City of Chicago to look at the costs to municipalities of lender foreclosures. This is the short version of the study.

   
   

10. Click here for a map compiled by staff of the Milwaukee Journal/Sentinel from Sheriff foreclosure data for 2007. Look at the patterns of the lender forelcosures (not tax foreclosures) throughout the county. If, as suspected, these foreclosures are the resuilt of "predatory lending" then the pattern of "problem" lending is also apparent.

    
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Pre-Foreclosure Scams

1. Pre-foreclosure assistance is the most recent big advertiser to hit the market. The same dubious lenders who created the problem in the sub-prine market are now offering to profit from helping borrowers survive foreclosure. Just as one of the red flags for a predatory loan is unusual fees or unusually high fees, the pre-foreclosure businceses are doing the same thing. Here is an article from the New York Times November 6, 2007 about recent research in Iowa. It is important to know that the foreclosure assistance business is practically unregulated.

   
   

2. This article by the daily newspaper's Michele Derus explores the reasons behind legislation proposed by Senator Sullivan (Wauwatosa) and Representative Richards (Milwaukee). There is a good explanation of "foreclosure conveyance contracts" that are often part of "rescue" scams October 9 2007.

   
   

3. The Madison Capital Times newspaper ran an article about the Seanate Hearing held on Tuesday November 13, 2007 about "pre-foreclosure" scams. The article gives a specific example from the situation of one of the client of the Legal Aid Society which is handling the case and many others like it. There were bankers at the hearing who registered in favor of the bill, SB 298, but did not speak on it. Housing advocates form MIlwaukee and Madison spoke in favor of the bill. Bill Perkins, Wisconsin Partners for Housing Development spoke about the 20 years spent accumulating public and private dollars to create affordable housing. He testified that he is too old to spend another 20 years replacing the funds lost in the crash.

   
   

4. The City of MIlwaukee took the somewhat unusual step of warning homeowners of "pre-foreclosure scams". These are tactics by unlicensed, unegulated hustlers which rob homeowners of all the equity in their homes and then evicts them despite promises that the owners can lease their homes until they can get a new loan. Even the attorney from Legal Aid Society uses terms like "scams", "scammers", "con artists" to describe the people who engage in these "pre-foreclosure" scams.

   
   

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Glossary of Terms

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Draft of Consensus Questions

This is a draft. It is an excellent example of how the League makes decisions about issues. The League of Women Voters does not vote an issue up or down. Instead, the League uses a more sophisticated way of looking at issues. QUestions like these are discussed by the members. After discussion, the members draw up a list of policy recommendations. There are currently 3 units meeting in different parts of Milwaukee County. The policy recommendations are combined and then presented at the annual meeting in May. There is further discussion and questions. The result is a set of recommendations for policymakers that reflects the League process of examining all sides of an issue.




CONSENSUS QUESTIONS

1. In the past, regulated institutions (banks, etc.) were the primary originators of home mortgages. Now there has been significant growth in independent mortgage companies as well as the use of mortgage brokers in the home loan business.

   
   A) Do you agree or disagree that there is a need for greater regulation of this industry?
   B) If in agreement, what regulations are needed?
   

2. Should mortgage purchasers and securitizers be liable for the actions of mortgage originators?

   
   

3. Is there a need to foster consumer responsibility when dealing with home mortgages and/or financing? Yes or No?
   
4. If yes, what areas need to be addressed?

   
   

5. Which of the following elements are necessary for a mortgage that benefits both sellers and buyers of home mortgages?

   
   A) Verification of borrowers income
   B) Complete information on the cost of mortgage (monthly, lifetime)
   C) Terms appropriate to the borrowers ability to repay
   D) Mortgage does not exceed current market value of home
   E) No prepayment penalties
   F) Escrow for property tax and insurance
   . G) Other?
   

Feel free to contact us info@lwvmilwaukee.org or call Barb 351-0819 with your comments or suggestions.


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Proposed Fixes to the Subprime Crash and the Increasing Number of Foreclosures Including Proposed Legislation

1. Presidential Candidates' Plans for Housing . Both Democratic candidates are listed because the outcome of the Democratic convention is uncertain at this date.

   
   

2. The Mortgage Bankers Association released a report January 17, 2008 about efforts of the private sector to deal with the fallout of the crash of the sub-prime market Industry Initiated More Than 235,000 Loan Modifications and Repayment Plans in 3rd Quarter . This is another industry response to the crisis. If you want to see the entire report Click Here

   
   

3. The Community Investment Network has issued good news about legitimate programs to help out homeowners. Help is On It's Way

   
   

4. The Center for Responsible Lending issued it's response to the proposed new Federal Reserve rules released December 18, 2007. The Center testified that it is full of loopholes and does not adequately address three major predatory lending tactics:
   
   • prepayment penalties
   • yield-spread premiums
   • ability to repay

   
   

5. The Center for Responsible Lending has developed a short list of the most important goals of legislation to curb predatory lending.

   
   

6. RealtyTrac is a company that produces an online newsaletter for buyers of and investors in foreclosed properties. One of their recent issues has a provcative article for those of us concerned about workable solutions to the huge number of foreclosures. Fires vs Foreclosures: Should there be a Difference?

   
   

7. Here is an explanation of a lender-initiated plan to help out those hit by the ARM reset and who may be facing foreclosure: Mortgage Relief Fund . This news comes from the Community Investment Network which is intended to be global sharing of financing options and more. It is provided by the National Community Reinvestment Coalition. (League member, Bethany Sanchez, Metro Milwaukee Fair Housing Council) is a board member of the National Community Reinvestment Coalition).

   
   

8. MORTGAGE HELP; A New Lease On Buying; Continental Home Loans Uses A Federal Loophole To Put Qualified Buyers In Homes. "The FHA has for decades allowed nonprofits to give buyers down payment gifts, but didn't intend such agencies to be the conduits for sellers to help buyers get around the minimum down payment requirement. Many lenders avoided FHA loans because of all the paperwork, and it was only after the subprime problems that federally backed loans and programs became hugely popular again." This article published 1/17/08 includes a wealth of information about one tool that may help borrowers caught in the sub-prime market.

   
   

9. The National Community Reinvestment Coalition presented a plan to honestly rescue homeowners from foreclosure HELP Now Policy Recommendation was presetned to the US Senate Committee on Banking, Housing and Urban Affairs on January 31, 2008. The initial reaction from large banks, other financial institutions and insurers was positive. The paper is a pdf (4 pp)

   
   

10. The American Bankers Association (ABA) has some brief comments on several important current actions including President Bush's plan: Subprime Mortgages and Foreclosures and proposed legislation. Click on their links and be prepared to use your "back" button or to close the new window -- depending on how you have your browser configured.

    
    

11. The National Association of Mortgage Brokers (NAMB) has ideas on what needs to be done in the lending industry. In a press release last fall NAMB commented on legislation introduced in Congress by Representatives Frank (D-MA), Miller and Watt (D-NC). Mortgage brokers in Wisconsin are licensed but unregulated. The license process is submission of an application to the State. Some mortgage brokers in Wisconsin are responsible, ethical intermediaries between borrowers and lenders.

    
    

12. This is a flyer from HopeNow. HopeNow is a "cooperative effort between counselors, investors and lenders to maximize outreach efforts to homeowners in distress". There is a list of participants at the bottom of the flyer. This is from the American Bankers Association web site.

    
    

13. Minnesota is considered by many to currently have the best law in the county to protect borrowers from predatory lending. Victory for the Consumer is an article, from the University of Minnesota News about the law.

    
    

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