Foreclosures linked to subprime fraud
A New York state investigation of subprime mortgage practices reveals fraud proliferated in the state, which had the eighth-highest number of foreclosures in 2007.
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NEW YORK (CNNMoney.com) -- Mortgage scammers took advantage of loopholes in New York State lending laws to defraud homeowners and lending institutions all over the state, according to a new report released Thursday.
The New York State Commission of Investigations reported that the state's mortgage borrowers need more regulatory protection from predatory lenders. It also linked subprime loans closely to New York's growing foreclosure problem; in 2007, 59% of all foreclosures statewide involved subprime loans.
New York had 39,000 properties with foreclosure filings in 2007, according to RealtyTrac, the online marketer of foreclosed properties, ranking eighth in the nation behind states like California, Nevada and Florida.
"The principle focus of this investigation was subprime mortgage fraud," stated the Commission's chairman, Alfred Lerner, in a press release accompanying the report, "but it was impossible not to recoil at the extremely worrisome statistics in the subprime lending market in general. We are seeing foreclosures among New York's subprime mortgage holders at alarming rates, a situation made far worse by unscrupulous appraisers and brokers."
Many of the most egregious cases involved clearly predatory lending practices in which there was never any possibility that the borrowers could afford to pay off their loans.
In one example from 2006, Suzette Francis, a woman with two young children, no assets, working as a $10-an-hour security guard and living in a homeless shelter, obtained a mortgage for $470,000 that, as the report stated, "exhibited...every characteristic and feature associated with dangerous subprime loans."
Francis had down payment and no proven income or assets. Her adjustable rate mortgage started at 10.8% and was capped at 16.85%. At that rate, even her initial monthly payment came to more than $4,400. She would have to work 400 hours a month just to pay her loan.
"I'm, like, in a million dollar debt in housing and cash poor," Francis told the Commission while testifying earlier this year.
The fact that this kind of lending went on in New York, which has relatively strong lending regulations, suggests that similar abuses may have been even more widespread in states with more relaxed laws.
Particularly targeted all over the nation have been minority communities. The Commission found that, all other things equal, New York state African-American and Hispanic borrowers were twice as likely to have subprime loans as whites.
"A lot of 'one-stop-shops,' where real estate agents are also mortgage brokers, operate in minority neighborhoods," said Mary Biunno, senior assistant counsel for the Commission, "and they rope in a lot of people."
Some of these operations profit by giving clients poor advice in order to get fees and commissions for arranging sales and loans. They provide appraisers and attorneys who work for them rather than for the clients.
"Customers in minority communities eligible for prime loans have been pushed into taking out high-risk subprime loans by shady mortgage brokers," the report said.
The Commission issued several recommendations to avoid future problems including:
- Instituting standardized regulations governing the industry which apply to all the professionals - real estate agents, mortgage brokers and loan officers, attorneys and appraisers. All must be licensed and fulfill educational requirements.
- Banning the practice of brokers taking on dual roles. The report stated, "The potential for conflict of interest and outright criminality is so great [when one] individual acts as both real estate broker/agent and mortgage broker...in a single...transaction [it] should be prohibited.
- Improving borrower education and outreach efforts to draw more borrowers into financial literacy programs. The state should consider mandating pre-purchase financial counseling for all subprime borrowers.
It will be a challenge to follow through on these recommendations, since federal regulations take precedence over state laws, nullifying New York's attempts to protect consumers. So the Commission also recommended that New York solicit cooperation from federal regulators such as the Federal Reserve, FDIC and the Office of the Comptroller of the Currency.
At a minimum, according to the Commission, national banks should be requested to share data on subprime loans with the states.
The single best piece of advice that Biunno had for anyone buying a home is to hire their own attorney.
"It may add to the expense a little," she said, "but when people go to buy a home, they should have a trusted attorney and they should never take a recommendation from a real estate agent." 
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