Youth Surviving Subprime: Shady Lending Hits Home
March 17, 2008
When I heard about the subprime mortgage crisis, it sounded eerily similar to the shady credit card lending practices found on most college campuses. I imagined yet another financial bubble floating down from Wall Street, filled with the gelatinous slime of adjustable interest rates; one that would inevitably pop somewhere over Poor People, U.S.A., blanketing the unsuspecting citizens below.
I knew the country's economic situation was bad, and as usual, the poor would suffer the most. However, I did not foresee the trickle-down effect of the subprime fiasco where even my peers--recent college graduates and first time homeowners--would feel the sting from predatory lenders.
"They go after young adults because they know we have to start building our credit and that we need money," says 25-year-old Vanessa Valenzuela from Norwalk, California. She and her husband went bankrupt after dealing with predatory lenders.
College Loan Connection
But Vanessa and her husband aren't alone. Predatory subprime lenders prey on the ignorance of inexperienced homeowners, especially young couples, who know little about the dangers of adjustable interest rates.
Andrew Lockwood and Peter Ratzan are co-owners of College Planning Specialists in Florida, and post debt-related advice on their website, College Planning Advice. They instruct families on how they can send the kids to school without the family going broke, and are also deeply aware of the connection between the subprime crisis and student debt.
"Unfortunately, most parents and college-bound students do not realize that student borrowers are not-so-distant cousins to headline-making borrowers with subprime mortgages," Lockwood (pictured right) points out. "In fact, many experts believe that the student loan market is poised to experience the devastation currently affecting the subprime mortgage industry."
This consensus comes after bond-rating agencies noticed an increase in defaults on private educational loans, and the U.S. Department of Education reported that nearly 12 percent of all federal loans due in 2001 are already in default. Experts worry that millions of college grads have borrowed too much in loans, which creates parallels to the subprime crisis when students, like homeowners, inevitably default on overwhelming debt.
"The main culprit behind the subprime crisis are adjustable-rate mortgages (ARM) resetting to high interest rates," Lockwood writes. Inexperienced borrowers, like Vanessa and other young people, are particularly vulnerable to ARMs because they don't understand that their interest rate can wildly fluctuate throughout their contract. High interest rates prevent families from making payments on time and result in defaults, foreclosures, and ruined credit.
Like credit card companies, mortgage companies tempt clients with low starter rates. However, when the ARMs shoot upward, families begin to struggle to pay their monthly bills.
With terms like ARMs, subprime, and housing bubble, it's easy to forget that there's a human price paid in the mortgage fiasco. Predatory lenders are taking advantage of real families.
Planning Pays Off
NeighborWorks America, an organization that creates opportunities for people to live in affordable homes, posts testimonials on their website from families who have experienced foreclosure because of the subprime crisis. One such story is about Denise and Lenwood Shaver, a young couple from Columbus, Ohio.
The Shavers were thrilled to have bought their first home, a perfect place for the young couple to start their life together. Denise, a financial services tax specialist for BMW corporate headquarters, also taught history at a local community college in between working to complete her Master's thesis. Her husband, Lenwood, cared for developmentally disabled adults.
Denise gave birth to their first child within months of moving into their new home, and then a second child 11 months later. "We don't have a strong support system," Denise told NeighborWorks. "No parents nearby. For the first child, I was able to work around our schedules because Lenwood worked second shift. He would watch the baby during the day, and I'd watch the baby during the evening. When I was pregnant again, they weren't as flexible with my schedule. They wouldn't allow me to leave early enough for Lenwood to get to work on time."
A tight budget and busy work schedule caused a lot of stress in their home. At first, they fell only a little behind on their bills, but their debt accumulated over time. "Without the additional $1,300 a month in take-home pay," Denise says, "we were hit hard."
What Denise did next was the smartest avenue for anyone worried about the possibility of foreclosure: she recognized her pattern of debt and sought assistance. Lockwood and Ratzen emphasize how important it is to act preemptively like Denise: "Plan early so you can avoid the consequences."
In Denise's case, asking for help possibly saved her family from bankruptcy. The Shavers contacted the Columbus Housing Partnership, a NeighborWorks organization, and a counselor helped them create a spending budget. Some careful planning helped the Shavers scrape by so they could make their monthly payments until Denise could get back to work after her pregnancy. While the Shavers were able to keep their home, not all families are so lucky.
Poor Evicted More
Foreclosure is a difficult time for any family, but it's particularly hard in communities of color. Two NeighborWorks studies (PDF): Mortgage Foreclosures in Atlanta: Patterns and Policy Issues and Mortgage Foreclosure Trends in Los Angeles show that foreclosures are most likely to happen in neighborhoods consisting primarily of minorities. The subprime crisis not only affects homeowners, but also renters in houses whose owners default on their mortgages.
One such renter, Adriana Diharce, 29, first learned of her foreclosure when she found an envelope taped to her front door. Adriana, her husband and their two young children would have to immediately move out of their California home. She tried to call their landlady, but the phone had been disconnected. Homeless, and unable to reclaim their deposit, she was understandably upset. "As a tenant, we have no rights, no deposit and nowhere to go."
Adriana's story is one of thousands of American families who lose their homes without ever missing a rent payment. They have few rights even though the homeowner is the one who defaulted on a payment, not the renters themselves.
Their situation is typical of the crisis' impact on communities of color where, according to an ACORN study, African American and Latino homeowners are more than three times as likely as whites to have a high-cost loan.
Once evicted, former tenants find they have few rights. Unless they live in a city with rent control and are covered by eviction regulations, they are at the mercy of state laws, which give evicted tenants limited recourse. And the laws don't look like they'll change any time soon.
Bills and Remedies
In late January, the California State Senate defeated a bill sponsored by Senator Don Perata (D) (pictured right) of Oakland that would have required banks to give 60 days notice to tenants in foreclosed properties. The bill would have also required lenders to provide homeowners with four months' notice before mortgage payments increase by 10 percent or more.
"For folks who have been paying their rent on a regular basis, to simply be evicted without cause because the owner has been unable to maintain their mortgage payment is a real problem," said Paul Leonard, director of the California office in Oakland for the Center for Responsible Lending."In an already flagging market, the idea that foreclosures displace renters without adequate notice creates a level of upheaval and distress that could be mitigated with more reasonable notice provisions."
In a classic example of adding insult to injury, the floundering Congressional bills offered as solutions to evicted families fuss with superficial details like the date of their eviction rather than bailouts. That's like asking a prisoner if he prefers being executed on Tuesday or Friday.
"Young couples are losing their first homes because they can't pay the mortgage. Parents are pulling their children out of college because they can't pay the bills," Senator Edward Kennedy wrote to President Bush in an open letter. "We need a simple, effective plan to stimulate the economy and also put money back in workers' pockets and give them the support they need to weather the storm."
But Kennedy and other Democrats have failed to introduce a detailed, comprehensive plan for what that support to "weather the storm" entails. Surely, it must be more than the $600 rebate check Bush is planning to mail to taxpayers.
Waiting for Solutions
The government needs to do more than issuing frivolous rebates to reverse what NYU professor Noureil Roubini calls "the worst housing bust ever." A good start would be to pass legislation that protects bankrupt tenants, even during foreclosure. I'm not talking about irresponsible borrowers. I'm talking about people that were deliberately misled by predatory lenders who offered wildly excessive ARMs, ones that low-income families have no chance of repaying.
And those pesky ARMs are definitely demon babies that need to be tossed out with the bathwater. Even the bureaucratic drones over at the House Financial Services Committee agree, and they've all managed to nod their heads in the same direction when asked if it was a good time to help maneuver borrowers out of their adjustable-rate mortgages.
Unfortunately, this agreement came in April 2007, and little has been done since then to help individuals facing eviction. Unless, of course, you count Barack Obama and Hillary Clinton squabbling over if it's fair to evict families from their homes after 90 days.
So if you are looking for deeper solutions, don't look to Washington. Politicians have been scrambling to protect the loan dealers rather than the victims of predatory lending. The government's big, shiny solution comes in the form of "Project Lifeline," a program that asks the mortgage lenders to (pretty, pretty please) wait 30 days to foreclose on houses.
Really? This is the best we can do? In a great country like America, no con artist, even one who happens to be a banker, should have the right to trick citizens into a scheme like predatory lending. Thirty days' notice isn't fair. In the case of the subprime mortgage crisis, the government must stop protecting the banks and Wall Street and start protecting American citizens.