Subprime loans, among the chief culprits that brought about the financial crisis of the late 2000s, continue to threaten homeowners in communities across the nation. That’s the picture painted by consumer advocacy groups and government agencies working to address problems caused by the rash of subprime loans issued to borrowers before the crisis.
Darker colors indicate higher numbers of subprime lending agreements as a percentage of total mortgages issued. Source: Federal Reserve Bank
Citing subprime lending agreements’ high interest rates and the fact that they routinely were issued to borrowers who were likely to struggle making payments, experts and official reports blame subprime lending agreements for persistent high rates of foreclosure in communities where the loans were issued in large numbers.
“We have a system that’s set up in that you had stated income as opposed to verifiable income,” said Maurice Cole, Senior Foreclosure Counselor at the Brooklyn Neighborhood Improvement Association (BNIA). “That has put people who might be making $40,000 a year in half-a-million-dollar homes. That does not add up at all.”
The BNIA is a non-profit organization whose services include counseling for homeowners whose properties may be threatened by foreclosure. Mr. Cole says his agency routinely counsels borrowers who weren’t prepared for the terms of the loans they were issued. “There was a lot of ignorance on behalf of the buyers,” Mr. Cole said. “As they got into the loans, they had no idea, some of them, what they were going into.”
“Subprime” loans, according to a report issued by the Federal Reserve Bank of California, generally are considered to be home loans that are extended by banks to borrowers with impaired credit or a history of failure to repay other financial obligations. The report also states that a subprime loan could be described as such if “limited or no documentation about income or assets, high loan-to-value ratios, [or] high payment-to-income ratios” were features of the loan’s terms. Mr. Cole said that terms like these featured prominently in loans extended to borrowers in neighborhoods throughout Brooklyn.
As early as 2007, government agencies seemed to notice the threats posed by the increasing percentage of subprime mortgages issued by banks. The New York Department of Financial Services’ 2007 Statement on Subprime Mortgage Lending shares the Federal Reserve Bank of California’s definition of “subprime.” The statement was issued “to protect consumers and promote responsible lending standards,” according to its introductory paragraph.
The statement gives some examples of what the terms of a given subprime loan might be. For a borrower earning $42,000 per year who is issued a $200,000 adjustable rate mortgage at a seven percent introductory interest rate, the total monthly payment, including taxes and insurance costs, would amount to $1,531, or roughly 43 percent of the borrower’s monthly income.
In contrast, Americans spend on average about 26 percent of their pre-tax annual income on housing, according to a report issued by the Bureau of Labor Statistics in 2011.
The NYDFS statement goes on to point out that many subprime loans are characterized by adjustable interest rates that increase after an introductory period. In the case of the example of the $200,000 mortgage at seven percent, the statement extends the example to include a rate hike to 11.5 percent, which would bring the borrower’s monthly payment to $1,956, or 55 percent of the borrower’s monthly income.
Breakdown of Prime and Subprime Loans, 2001-2007. Source: Federal Reserve Bank of California
In 2005, according to the FRBC report, close to 20 percent of all mortgages issued in the United States during that year could be classified as subprime. For that same year, the delinquency rates of subprime loans was near four percent, the report says (by comparison, prime mortgage delinquency rates for that year were between zero and two percent).
But by 2007, the report says, the delinquency rate for subprime lending agreements had reached nearly 14 percent and was rising.
Considering the possible terms of subprime lending agreements, the repayment capacity of the borrowers to whom they were issued and the frequency with which they were issued before the financial crisis began, it’s not surprising that they have made a major contribution to foreclosure rates nationwide. In neighborhoods like Crown Heights in Brooklyn, where 38.7 percent of mortgages issued in 2006 were classified as subprime, the impact continues to be severe.
Patrick Pyronneau of CAMBA, another Brooklyn-based non-profit that offers foreclosure counseling and other services, suggested that counseling services in New York generally are very busy. “There’s a great need for what we do,” Mr. Pyronneau said. “Most service providers are stretched pretty thin.”
CAMBA helps borrowers learn “how to protect themselves from predatory and improper lending practices,” according to its website. It also helps borrowers in efforts to secure loan modifications from their loan servicers.
Mr. Pyronneau added that on top of the heavy case load faced by counseling services, he believes that homeowners facing foreclosure may not be aware of the help that is available to them. “There’s certainly people out there who I think still haven’t gotten word that by simply contacting 311 they could be directed to an organization such as ours,” he said.
