Foreclosing America

For many in the United States, the family home is their largest asset, and homeownership is an American dream. This dream, however, is turning into a nightmare because of nontraditional mortgage products. Poor lending practices, often called predatory lending, are becoming a national trend and expanding into neighborhoods.

Nontraditional mortgages, such as option adjustable rate mortgages (ARMs), interest-only mortgages, and no-money-down mortgages, allow homebuyers to purchase more expensive homes than they can normally afford. The market recently expanded to less creditworthy borrowers as well. In 2006 option ARMs accounted for 12.3 percent—a large increase from the previous year—of all mortgages. Of these borrowers, 80 percent use the minimum-payment option, suggesting that their income can accommodate only small monthly payments. On average, a house goes into foreclosure 10 months after an open ARM is made. This affects not only the family losing its home but also the community because of decreased home values and abandonment. Local institutions making these loans in these communities are also affected.

The government is working to deal with the foreclosure problem. Illinois is reviewing its current law, House Bill 4050, which had originally designated areas and zip code requirements to educate consumers. Expanding the current law to include the entire state is a step in the right direction because the problem reaches all communities in the state, not just sections of it. As was the case when the legislation was drafted, insight from community groups will be taken into account to fight predatory lending practices. At the federal level the industry and community advocacy groups are preparing a number of bills to introduce in the House.

In the end, homebuyers must review their loan applications and consider such factors as property taxes, insurance, and interest rates. Consumers should also talk with a home-buying counselor to learn how state laws affect their mortgage. The industry can slow foreclosures by changing the way that it advertises mortgage products, thereby allowing consumers to make informed decisions. Monthly statements should show the principal, interest, and any increased balance. Institutions must review applications carefully to be sure that borrowers can repay their loans, especially in light of recent findings from the U.S. Department of Commerce that Americans are spending more than they earn.  These changes will give homebuyers a better understanding of what they are getting into, keeping them off the path to foreclosure and on the path to homeownership.

To learn more about predatory lending, contact Patrick Hain at patrickhain@povertylaw.org or 312.368.1104.