Total Bankruptcy

Julian Delasantellis reviews a year's worth of articles on the subprime crisis for Asia Times, and tosses out a few (admittedly unrealistic) solutions for the subprime iceberg.

Here's the crux:

The reason the problem keeps getting worse all the time is that this crisis is not a static event, but a dynamic, negative feedback loop process gaining a frightful momentum all the time.

The core issue here is that every subprime property foreclosed upon and then thrown back onto the market with a foreclosure auction adds real estate supply and thus depresses prices, which makes it impossible for the next subprime borrower to re-finance, so he defaults and his property gets thrown onto the already sodden market - on it goes.

Delasantellis later claims that the media and policymakers have misidentified the crisis as "subprime" when the real issue is a "structured finance crisis."  To this writer, his explanation is a dark forest, but when he stays with basic economics, I'm getting plenty of light.  To the extent that the subprime mess started not with subprime borrowers but complicit winking between the Fed and lenders (the Fed: did they not foresee any negative consequences for capping interest rates so artifically low in the late 90s/early 00s?; the lenders: did they not foresee any negative long-term consequences for so much artifically high short-term gain?), Delasantellis is hitting the sweet spot of the real crisis.

Sure, selling off the foreclosed properties has begun to create its own market.  But just like the complicity that caused it, it's so...artificial.  And as far as the solution goes...gulp.

The New York Times recently reported that Goodwill Industries, in collaboration with Prospera Credit Union has opened payday loan operations in some stores.

The Times story focused on Appleton, Wisconsin, a town of 70,000 people, five McDonald’s, three Pizza Huts, four Starbucks, and 19 payday-loan stores. Peggy Truckey owed nearly $1,300 to four of these payday loaners and was paying about $600 per month in finance fees.

At the Goodwill thrift store, Truckey got a payday loan at half the finance charge and, more importantly, got help converting her payday debts to a single one-year loan with monthly payments of just $129. Her one year loan carries an interest rate of only 18.9 percent, compared with the 572 percent she was paying to the payday companies.

Ken Eiden, president of Prospera, said: “Our goal is to change behavior, to interrupt the cycle of debt.”

Some consumer groups have been critical of non-profit payday loans programs, like Goodwill’s GoodMoney program. Uriah King, a policy associate at the Center for Responsible Lending, said “it’s still the same debt trap.” Prospera countered that borrowers are taking fewer loans through their program than they did through commercial lenders.

With foreclosure levels reaching scary heights in the United States, it has become more and more common to hear about horror stories of mortgage fraud and predatory lending practices that have left homeowners unable to pay monthly mortgage payments and on the edge of financial desperation and even bankruptcy. With that said, the Federal Reserve Board has introduced a new mortgage calculator that would ultimately allow prospective homeowners to make more educated purchasing decisions and determine what their monthly payments would be years from now. Specifically, this mortgage calculator would allow homebuyers to compare the monthly payments and equity buildup of several different loan products over time, including 30-year and 25-year fixed-rate mortgages, interest-only fixed-rate mortgages, adjustable-rate mortgages, interest-only ARMs and payment-option ARMs. Learn more about this new federal mortgage comparison calculator here.

United States Housing and Urban Development (HUD) Secretary Alphonso Jackson said we must increase “transparency and honesty for lending on all levels and by all lenders” at a lending industry conference. Jackson said that the Federal Housing Administration needs to be modernized as an alternative to predatory lending practices --- “We must restore confidence in lending practices, top to bottom. We can begin by exposing and ending predatory lending. There is no place for it in the housing industry or as an investment practice. Predatory lenders and mortgage fraud harm everyone in the home purchasing process, making it all the more necessary that we offer a safe FHA alternative.”

At the conference, Secretary Jackson encouraged Congress to assist him to combat predatory lending by passing legislation to modernize the FHA. Last year, the Bush Administration proposed a set of changes to the FHA program that would expand its reach by eliminating “outdated” downpayment requirements, customizing mortgage premiums for each homebuyer according to risk, and raising loan limits across the country.

Minnesota’s Senate unanimously approved a bill to prohibit predatory lending practices in the mortgage industry. The Minnesota bill requires brokers and lender to ensure that borrowers have a “reasonable ability to pay.” It also bans certain types of mortgages to high-risk borrowers that have shown to be ripe for abuse.

The same bill has already been approved by the Minnesota House of Representative. It will go to Governor Tim Pawlenty for his signature. The Governor has been supportive of the legislation.

Montgomery Ohio County Recorder Willis E Blackshear is trying prevent predatory mortgage lending. “Predatory lending is a countywide problem, and I believe government should be proactive in solving it,” Blackshear said.

Blackshear has proposed having an attorney review all mortgage documents filed with the county recorder’s office for signs of predatory lending, such as large balloon payments due several years into the loan or dramatic increases in loan rates. The recorder’s office would inform homeowners when mortgages are flagged as predatory.

Under Blackshear’s plan, the recorder’s office would either hire an attorney or pay Dayton University law students to perform the predatory lending reviews.

Utah Senate Bill 16, pending Governor Jon Huntsman Jr's signature, would bar payday loan companies from using the state's bad-check law to collect on payday debts.  The bill would also allow the state to levy fines up to $500 for any payday lenders who do not register with the state.

Utah House Bill 329, still awaiting committee assignment, would require payday lenders to provide more disclosure about actual fees and penalties to consumers who apply for loans.  The bill would also bar payday loan companies from providing additional loans to consumers who are still paying off a prior loan.

While both these bills establish regulations that would ultimately protect consumers, one important issue is not addressed.  The state does not have an usury law in place to prevent lenders from charging consumers unreasonable interest rates.  Utah payday loan companies sometimes charge more than 500% interest on payday loans and will continue to do so unless legislators pass additional laws to limit the rates.

Kansas representative Melody McCray-Miller, D-Wichita, will propose legislation to create a database to track payday loans and put a cap on annual borrowing amounts for individuals.  She also wants to cap the annualized interest rate at 36%, which is similar to other state laws and a federal law that regulates lending to military employees.

Many payday loan borrowers get stuck in a cycle of  taking out multiple payday loans just to pay off other payday loans.  Borrowers can end up in a worse financial situation than they were in before they took out the initial payday loan.  It is hoped that this legislation will prevent borrowers, especially the poor, from getting into an endless and expensive borrowing cycle.