Youth Surviving Subprime: Shady Lending Hits Home

The
subprime crisis gives young homeowners a harsh education in predatory
lending. When I heard about the subprime mortgage crisis, it sounded
eerily similar to the shady credit card lending practices found on most
college campuses. I imagined yet another financial bubble floating down
from Wall Street,
filled with the gelatinous slime of adjustable interest rates; one that
would inevitably pop somewhere over Poor People, U.S.A., blanketing the
unsuspecting citizens below.


I knew the country's economic situation was bad, and as usual, the poor
would suffer the most. However, I did not foresee the trickle-down
effect of the subprime fiasco where even my peers -- recent college
graduates and first time homeowners -- would feel the sting from
predatory lenders.

"They go after young adults because they
know we have to start building our credit and that we need money," says
25-year-old Vanessa Valenzuela from Norwalk, California. She and her husband went bankrupt after dealing with predatory lenders.

College Loan Connection

But
Vanessa and her husband aren't alone. Predatory subprime lenders prey
on the ignorance of inexperienced homeowners, especially young couples,
who know little about the dangers of adjustable interest rates.

Andrew Lockwood and Peter Ratzan are co-owners of College Planning Specialists in Florida,
and post debt-related advice on their website, College Planning Advice.
They instruct families on how they can send the kids to school without
the family going broke, and are also deeply aware of the connection
between the subprime crisis and student debt.

"Unfortunately,
most parents and college-bound students do not realize that student
borrowers are not-so-distant cousins to headline-making borrowers with
subprime mortgages," Lockwood points out. "In fact,
many experts believe that the student loan market is poised to
experience the devastation currently affecting the subprime mortgage
industry."

This consensus comes after bond-rating agencies noticed an increase in defaults on private educational loans, and the U.S. Department of Education
reported that nearly 12 percent of all federal loans due in 2001 are
already in default. Experts worry that millions of college grads have
borrowed too much in loans, which creates parallels to the subprime
crisis when students, like homeowners, inevitably default on
overwhelming debt.

"The
main culprit behind the subprime crisis are adjustable-rate mortgages
(ARMs) resetting to high interest rates," Lockwood writes.
Inexperienced borrowers, like Vanessa and other young people, are
particularly vulnerable to ARMs because they don't understand that
their interest rate can wildly fluctuate throughout their contract.
High interest rates prevent families from making payments on time and
result in defaults, foreclosures, and ruined credit.

Like credit
card companies, mortgage companies tempt clients with low starter
rates. However, when the ARMs shoot upward, families begin to struggle
to pay their monthly bills.

With terms like ARMs, subprime, and housing bubble, it's easy to forget that there's a human price paid in the mortgage
fiasco. Predatory lenders are taking advantage of real families.

Planning Pays Off

NeighborWorks
America, an organization that creates opportunities for people to live
in affordable homes, posts testimonials on their website from families
who have experienced foreclosure because of the subprime crisis. One
such story is about Denise and Lenwood Shaver, a young couple from Columbus, Ohio.

The
Shavers were thrilled to have bought their first home, a perfect place
for the young couple to start their life together. Denise, a financial
services tax specialist for BMW corporate headquarters, also taught
history at a local community college in between working to complete her
Master's thesis. Her husband, Lenwood, cared for developmentally
disabled adults.

Denise gave birth to their first child within
months of moving into their new home, and then a second child 11 months
later. "We don't have a strong support system," Denise told
NeighborWorks. "No parents nearby. For the first child, I was able to
work around our schedules because Lenwood worked second shift. He would
watch the baby during the day, and I'd watch the baby during the
evening. When I was pregnant again, they weren't as flexible with my
schedule. They wouldn't allow me to leave early enough for Lenwood to
get to work on time."

A
tight budget and busy work schedule caused a lot of stress in their
home. At first, they fell only a little behind on their bills, but
their debt accumulated over time. "Without the additional $1,300 a
month in take-home pay," Denise says, "we were hit hard."

What
Denise did next was the smartest avenue for anyone worried about the
possibility of foreclosure: she recognized her pattern of debt and
sought assistance. Lockwood and Ratzen emphasize how important it is to
act preemptively like Denise: "Plan early so you can avoid the
consequences."

In Denise's case, asking for help possibly
saved her family from bankruptcy. The Shavers contacted the Columbus
Housing Partnership, a NeighborWorks organization, and a counselor
helped them create a spending budget. Some careful planning helped the
Shavers scrape by so they could make their monthly payments until
Denise could get back to work after her pregnancy. While the Shavers
were able to keep their home, not all families are so lucky.

Poor Evicted More

Foreclosure
is a difficult time for any family, but it's particularly hard in
communities of color. Two NeighborWorks studies (PDF): Mortgage Foreclosures
in Atlanta: Patterns and Policy Issues and Mortgage Foreclosure Trends in Los Angeles
show that foreclosures are most likely to happen in neighborhoods
consisting primarily of minorities. The subprime crisis not only
affects homeowners, but also renters in houses whose owners default on
their mortgages.

One such renter, Adriana Diharce, 29, first learned
of her foreclosure when she found an envelope taped to her front door.
Adriana, her husband and their two young children would have to
immediately move out of their California home. She tried to call their
landlady, but the phone had been disconnected. Homeless, and unable to
reclaim their deposit, she was understandably upset. "As a tenant, we
have no rights, no deposit and nowhere to go."

Adriana's story
is one of thousands of American families who lose their homes without
ever missing a rent payment. They have few rights even though the
homeowner is the one who defaulted on a payment, not the renters
themselves.

Their situation is typical of the crisis' impact on
communities of color where, according to an ACORN study, African
American and Latino homeowners are more than three times as likely as
whites to have a high-cost loan.

Once evicted, former tenants
find they have few rights. Unless they live in a city with rent control
and are covered by eviction regulations, they are at the mercy of state
laws, which give evicted tenants limited recourse. And the laws don't
look like they'll change any time soon.

Bills and Remedies

In late January, the California State Senate defeated a bill sponsored by Senator Don Perata (D) of Oakland
that would have required banks to give 60 days notice to tenants in
foreclosed properties. The bill would have also required lenders to
provide homeowners with four months' notice before mortgage payments
increase by 10 percent or more.

"For folks who have been paying
their rent on a regular basis, to simply be evicted without cause
because the owner has been unable to maintain their mortgage payment is
a real problem," said Paul Leonard, director of the California office
in Oakland
for the Center for Responsible Lending."In an already flagging market,
the idea that foreclosures displace renters without adequate notice
creates a level of upheaval and distress that could be mitigated with
more reasonable notice provisions."

In
a classic example of adding insult to injury, the floundering
Congressional bills offered as solutions to evicted families fuss with
superficial details like the date of their eviction rather than
bailouts. That's like asking a prisoner if he prefers being executed on
Tuesday or Friday.

"Young couples are losing their first homes
because they can't pay the mortgage. Parents are pulling their children
out of college because they can't pay the bills," Senator Edward Kennedy wrote to President Bush
in an open letter: "We need a simple, effective plan to stimulate the
economy and also put money back in workers' pockets and give them the
support they need to weather the storm."

But Kennedy and other
Democrats have failed to introduce a detailed, comprehensive plan for
what that support to "weather the storm" entails. Surely, it must be
more than the $600 rebate check Bush is planning to mail to taxpayers.

Waiting for Solutions

The
government needs to do more than issuing frivolous rebates to reverse
what NYU professor Noureil Roubini calls "the worst housing bust ever."
A good start would be to pass legislation that protects bankrupt
tenants, even during foreclosure. I'm not talking about irresponsible
borrowers. I'm talking about people that were deliberately misled by
predatory lenders who offered wildly excessive ARMs, ones that
low-income families have no chance of repaying.

And those pesky
ARMs are definitely demon babies that need to be tossed out with the
bathwater. Even the bureaucratic drones over at the House Financial
Services Committee agree, and they've all managed to nod their heads in
the same direction when asked if it was a good time to help maneuver
borrowers out of their adjustable-rate mortgages.

Unfortunately,
this agreement came in April 2007, and little has been done since then
to help individuals facing eviction. Unless, of course, you count Barack Obama and Hillary Clinton squabbling over if it's fair to evict families from their homes after 90 days.

So if you are looking for deeper solutions, don't look to Washington.
Politicians have been scrambling to protect the loan dealers rather
than the victims of predatory lending. The government's big, shiny
solution comes in the form of "Project Lifeline," a program that asks
the mortgage lenders to (pretty, pretty please) wait 30 days to
foreclose on houses.

Really? This is the best we can do? In a
great country like America, no con artist, even one who happens to be a
banker, should have the right to trick citizens into a scheme like
predatory lending. Thirty days' notice isn't fair. In the case of the
subprime mortgage crisis, the government must stop protecting the banks
and Wall Street and start protecting American citizens.