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State urges curbs on subprime lenders

Housing chief would add broker licenses, fund to aid borrowers

The Patrick administration's chief housing official yesterday called for better regulation of mortgage brokers and the establishment of a $5 million fund to assist the escalating number of Massachusetts homeowners facing the loss of their homes through foreclosure.

The administration said it wants to step up regulation of so-called subprime lenders, who are responsible for much of the increase in foreclosure filings, by requiring lending officers working in a loan broker's office to obtain a state license. A $250 licensing fee applied to more than 30,000 lending officers statewide would generate more than $7 million to hire more state loan-company examiners and create a rescue fund for homeowners struggling to save their property.

Subprime loans carry higher interest rates than traditional loans to offset the risk of lending to customers with poor credit or big debts. The most common subprime loan has a "teaser" rate that rises sharply two years into the loan, causing payments to increase and pushing many borrowers into foreclosure. The administration's proposals mirror a bill backed by housing and community activists that was introduced in the Legislature in January by state Senator Jarrett T. Barrios of Cambridge and state Representative David M. Torrisi of North Andover, both Democrats.

The state's Secretary of Housing and Economic Development, Daniel O'Connell, said he supports the essence of that bill in view of evidence that the majority of the record foreclosure filings in 2006 against Massachusetts homeowners -- 19,487 -- were subprime loans to borrowers with poor credit ratings.

"This is a serious problem and requires our immediate attention," O'Connell said yesterday. With lawmakers' cooperation, he said, "We think that there's a very good chance of this becoming the law."

The Federal Reserve Bank of Boston found in a new study that adjustable-rate, subprime loans accounted for more than half of 2006 foreclosure filings in state Land Court, though they are only 7 percent of all loans outstanding.

Turmoil on Wall Street underscores the nation's delinquent-loan problem. Some subprime lenders are going out of business and others are reporting losses due to delinquencies in their loan portfolios. Shares in New Century Financial Corp., a big subprime lender, fell 69 percent yesterday, to $4.56 a share. California-based Fremont General Corp., one of Massachusetts' biggest subprime lenders, said recently the Federal Deposit Insurance Corp. told the company it might order it to stop writing subprime loans, and Kevin Cuff, the Massachusetts Mortgage Bankers Association's executive director, said he was notified Fremont's lending would cease in Massachusetts.

While subprime mortgages grew to a $640 billion business last year, regulation of mortgage companies that make them has been patchwork and weak -- in contrast to the heavily regulated banks. Housing advocate Bruce Marks, chief executive of National Assistance Corp. of America, a national, nonprofit lender to working people , said regulators were "asleep at the switch" during the housing boom.

A bill to crack down on subprime lending in Massachusetts, if passed, would go beyond the sole remedy currently available to homeowners in foreclosure: Help from nonprofit and state agencies to refinance their loans at lower interest rates. Marks said his organization has refinanced more than $100 million in subprime loans, at below-market rates, in the past two years. The cities of Brockton and Boston recently introduced programs to team with banks to refinance their residents' mortgages. The Massachusetts Housing Finance Agency, a nonprofit lender, is negotiating with Fannie Mae, a federal purchaser of mortgages, to make $100 million available for home-purchase loans and refinancings at affordable rates, the administration said.

"We'd be very happy to have the governor's support" for the foreclosure-prevention bill, said Thomas Callahan, head of the Massachusetts Affordable Housing Association.

O'Connell said he would count on commercial banks to help with the state's rescue effort, but Kevin Kiley, executive vice president of the Massachusetts Bankers Association, said out-of-state mortgage-banking companies that made these loans should be tapped. Loans now in foreclosure "never should've been originated or funded," Kiley said. "Why should it be the responsibility of a bank to step in and fund that loan?"

But he supports licensing loan officers at brokers that make subprime loans and using those funds to hire more state bank examiners at the Division of Banks, which "is woefully understaffed."

Kimberly Blanton can be reached at blanton@globe.com.

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