What should people do if they face foreclosure?
Families at risk of losing their homes should contact a nonprofit housing counseling agency such as ACORN Housing. They should also speak to their lenders. Half of those who lose their homes through foreclosure never attempted to negotiate.
Call 1-866-67-ACORN if you or someone you know is in danger of losing a home as a result of a subprime loan.
Why are there so many home foreclosures?
Subprime lending, virtually unrestricted over the past decade by local, state or federal regulation, has trapped millions of unsuspecting homeowners who sought either to purchase a larger home or to consolidate debt.
Subprime loans were initially created for borrowers with low incomes or poor credit histories who were unable to obtain prime loans at a standard bank rate. Many borrowers who would have been able to qualify for credit on better terms, however, were targeted for these higher-interest loans.
More than three-quarters of all subprime loans are Adjustable Rate Mortgages (ARMs), which have rates that automatically increase after two years. Lenders often consider only whether the starting payments are affordable, not the later payments, which are much higher.
What documents to I need to bring with me to my appointment?
- Any communications from your lender or foreclosure notices (court or sheriff sale complaints)
- 2 most recent monthly mortgage statements
- Your homeowner's insurance policy if your pay this directly
- 2 months of recent consecutive pay-stubs and tax returns (1040s and W-2s) for the most recent year (from both borrowers if there is more than one person on the mortgage)
- bank account statements for the past 2 months
- Proof of any other income (child support, alimony, SSI, disability, rental income, etc.)
How do people get stuck with bad loans?
Subprime borrowers are often steered by brokers into signing onto ARMs and not given the option of fixed-rate loans, nor informed of the inherent risks. Some lenders and brokers write loans they know the borrowers cannot afford just to collect the fees and commissions. Fannie Mae and Freddie Mac estimate that between 30-50 percent of all borrowers with subprime loans could have qualified for more affordable mortgages.
Lenders often deliberately deceive borrowers, who would not sign if they really understood there was an adjustable rate, prepayment penalty and that they could qualify for a lower-interest rate on a fixed rate loan.
While borrowers should always be as informed as possible about the loan they’re getting, mortgages have become very complicated. Consumers rarely understand as much about the loan process as do lenders or brokers and therefore seek out expert advice.
But mortgage brokers are not required to get them the best deal, and are generally not required to find the lowest rates. While 19 states require brokers to get a license, showing some level of expertise, 12 states only require that brokers register.
How did subprime lending expand so rapidly?
Wall Street banks and investors identified an opportunity to make large profits from subprime and predatory lending, which changed the nature of the mortgage business. Lenders who make loans routinely now sell them to Wall Street firms such as Morgan Stanley and Goldman Sachs, which repackage the loans as securities to be sold to investors.
Why is the crisis coming to a head now?
Because so many subprime loans were made with adjustable rates or interest-only payments, the payments are just now beginning to rise and thus become unaffordable.
As long as home prices continued to rise, homeowners could continue to refinance or even sell their homes at a profit. But home prices have leveled off or even dropped, leaving homeowners who face foreclosure with fewer options.
