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A workout for dubious lenders

MORTGAGE ORIGINATORS who specialize in subprime loans are the buffalo hunters of the financial services industry. They aren't queasy about tactics, and they rarely seem concerned about the havoc they leave in their wake. At last, efforts are underway at both the national and local levels to rein in the industry.

US Representative Barney Frank, who chairs the House Financial Services Committee, is scheduled to meet this morning with mortgage brokers and lenders at the Federal Reserve Bank in Boston, including those who market loans to borrowers with weak or subprime credit. Among the invited guests are the Countrywide, GMAC, Washington Mutual, HSBC, and Wells Fargo mortgage companies.

Frank got the attention of lenders earlier this week when he filed a bill that would require the licensing and registration of mortgage originators, curtail prepayment penalties that discourage buyers from refinancing on better terms, and ban lenders from paying rewards to brokers or their employees who manipulate borrowers into accepting higher interest rates than they are eligible to receive. The proposed ban on incentives and rewards irks the industry, but it is especially important if successful limits are to be imposed on dubious lending practices.

A pattern of deception
The normal "buyer beware" admonition offers insufficient protection. For two decades, mortgage underwriting has shifted away from traditional banks and toward aggressive mortgage companies that don't operate within the culture of consumer-friendly community reinvestment acts. Suddenly borrowers find themselves squeezed by high-interest, adjustable mortgages on one side and by falling real estate values on the other.

In Massachusetts alone, that crippling combination has led to foreclosure actions against roughly 25,000 borrowers over the past 12 months. And the misfortune doesn't stop at the borrower's doorstep. It spreads across neighborhoods, especially in urban areas where a foreclosed home can quickly turn into a crime-plagued abandoned property.

The problem also has spread to Wall Street, where the market for mortgage securities backed by subprime loans has come unglued. A congressional committee predicts 2 million foreclosures nationwide by the end of next year. And economists say the massive mess could cost financial firms and investors up to $400 billion.

Bad judgment on the part of some borrowers also is in play. Some homeowners who had access to prime lending through traditional banks still chose to borrow heavily against the equity in their homes through subprime lenders. But many other borrowers were simply duped and deserve an opportunity to save their homes. Local nonprofit housing groups often know the difference between the unwitting borrowers and the neighborhood speculators. Wisely, Frank plans to spend some of the day trying to encourage workout plans by introducing lenders to representatives of these nonprofit housing advocacy groups.

Carrots and sticks, too
Governor Patrick is making similar efforts. The administration is urging lenders to provide $5,000 for rent and moving expenses to families facing foreclosure. So far, only Option One Mortgage Corp. and Massachusetts Credit Union League have agreed. Administration officials, however, have more hope for a so-called short sales strategy that allows stressed borrowers to sell their homes at current market value and pay back less than the full value of the loan. Lenders in such cases would be spared the cost of foreclosing on the properties and have the added benefit of being introduced to qualified potential buyers by nonprofit housing groups.

All of this matchmaking is fine as far as it goes. But the foreclosure crisis has proven that government also needs a big stick. One of Patrick's better initiatives would create a mortgage fraud unit by raising fees on brokers and lenders.

Both the tactics of mortgage originators and the practices of traders in subprime securities have caused way too much pain already. Creative workout plans are the best Frank and Patrick can do for current borrowers facing foreclosure. But only tough regulation will keep the home wreckers from passing this way again.

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