"To make a living, you had to push a product you didn’t believe in. Nine out of ten times when these loans closed, we would sit there and say, ‘How long can they hold it together?’" –Aimee Quigley, a mortgage broker, as quoted in a recent L.A. Times story.
Amy Womble’s story is a sad one and unfortunately it is all too common. In fact, it has become so common that Congressional hearings have been convened because of it.
It began when her husband died unexpectedly and she was left alone to raise two young sons. Her husband was self-employed, and when he died, he left behind not only a family on the brink, but an unpaid bill related to his business in the amount of $10,000.
A judgment was later filed against Amy to recover the money. But it was money she didn’t have, and she became quite concerned about how exactly she was going to pay it back.
An internet pop-up ad for a debt consolidation loan seemed to be the answer she was looking for. The Wombles did at least own their home.
She contacted the company, which turned out to be a California mortgage broker, and was talked into refinancing her home.
The broker’s "good faith estimate" showed that her new payment would be a manageable $927.00 a month, her closing costs would be $8,250.00 and she would receive almost $26,000 at closing. The loan seemed like the answer to all of her problems.
Unfortunately, her problems had just begun. The closing documents she received at settlement were nothing like the good faith estimate she had seen earlier.
Her new payment was really $2,147! It wasn’t fixed, it didn’t include escrows, and it started at 10.4%. Additionally, her closing costs were 50% higher. Now they were $12,000.
But because she was under so much pressure, she signed anyway. Her loan officer told her not to worry about it.
He told her that she would only have to make one payment on the loan. His credit specialist, he said, would be able to fix everything and he would get her into a different loan that would carry the $927 payment that he had originally promised.
"The broker," Ms. Womble said, "was very nice and genuinely seemed concerned with helping me."
But that concern was short-lived. It ended the moment the loan was funded and he had received his commission. Ms. Womble spent the next five months calling him, but he was nowhere to be found. Apparently he had crawled back under his rock.
It was only later that she found out he had essentially cooked the figures of her stated income to close the deal.
Despite what she had told him, he stated $5,042 a month in gross income on the application when her real total was $2,751 in monthly survivor benefits. He made it look like she got nearly twice what she actually received.
Amazingly, her new loan, including escrows, now consumes 86% of her monthly income, leaving her with a meager $388 a month to live on – all because some immoral weasel gamed the system to earn a commission.
"I thought I was making a smart decision for my family," Ms Womble said, "but it has turned out to be a nightmare."
Unfortunately, Ms Womble is hardly alone. Thousands of other borrowers fell for the same lines. Her story was one of several heard during testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs.
Entitled "Preserving the American Dream: Predatory Lending Practices and Home Foreclosures," last week’s hearings were called to address what has become an epidemic of new foreclosures. Foreclosures that many contend are the direct result of aggressive and abusive lending practices.
It is an assessment that Martin Eakes, CEO of the Center for Responsible Lending, wholeheartedly agrees with. His organization’s own analysis predicts that some 2.2 million families will now lose their homes to foreclosure. He says this was, for the most part, predictable and could have been avoided entirely given more responsible lending practices.
"The sub-prime mortgage market today," Eakes testified, "is a quiet but devastating disaster. All indications are that sub-prime mortgage loans are headed towards the worst rate of foreclosures in modern mortgage market history," he added.
Eakes also told the committee that "sub-prime lenders have virtually guaranteed rampant foreclosures by approving risky loans for families while knowing that these families will not be able to pay the loans back."
Families, of course, just like Amy Womble’s.
For its part, the Mortgage Bankers Association merely took the defensive. Senior vice president Douglas G. Duncan’s 69-page testimony was the equivalent of "there’s nothing to see here."
But regardless of his testimony, Sen. Christopher Dodd, chairman of the Senate Banking Committee, did not just move along.
Dodd said "sub-prime credit can be a valuable tool in helping people become home owners" but "the system is out of balance."
The Senator also saw signs that home ownership "is under grave threat from predatory, abusive, and irresponsible lending practices undertaken by too many sub-prime lenders."
Those practices have landed the bankers in the crosshairs of further Congressional hearings and almost certainly more regulation, despite their pleas of innocence.
The vise on sub-prime lenders has just gotten a little tighter.
After all, Amy Womble and the thousands like her deserve better.
By the Way: ResMae Mortgage Corp., a U.S. home lender to people with bad credit, filed for bankruptcy protection and said Switzerland’s Credit Suisse Group has agreed to buy its assets to for $19.1 million.
Closely-held ResMae is the twentieth mortgage company to be sold or closed since December as delinquencies surge and the market for home loans to risky borrowers contracts at the fastest pace ever.
Mortgage Matters will return next week
Wishing you happiness, health and wealth,
Steve Christ, Editor
The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage questions at email@example.com.