Center for Responsible Lending: Explore Subprime Florida Home Loans

In the face of desperate buyers trying anything to purchase their first home with a Florida home mortgage, Michael Calhoun - president of the Center for Responsible Lending (CRL) - urged policymakers to address high-risk “exploding” ARMs in the subprime market before subcommittees of the Senate Committee on Banking, Housing and Urban Affairs.

“Nontraditional loans in the subprime market are seriously eroding the traditional benefits of homeownership,” said Calhoun. “By their very nature, they pose a high risk of losing valuable home equity or foreclosure.”

This is the argument: Hybrid ARMs and nontraditional Florida mortgage loan products in the subprime market are structured to cause families to fail. Mortgage brokers and lenders use the initial low teaser interest rate to entice debt-strapped families into the loans. When the rate adjusts higher, homeowners are faced with the choice of another expensive refinance or struggling to pay an unaffordable loan.

Particularly in regions where housing prices are relatively flat, foreclosures are rising as many homeowners feel the pinch from “payment shock”—the large interest rate increases that result from most subprime Florida home loans.

Analysts expect payment shock to be a growing concern. As of September 2005, about 80% of subprime home loans were adjustable-rate mortgages—mostly 2/28 hybrid loans. Such 2/28s operate as two-year loans that lead to another dangerous ARM (or even foreclosure) after the introductory teaser rate expires. Because subprime lenders typically qualify borrowers based on the introductory payment amount, most borrowers cannot afford to remain in these arrangements even if interest rates do not rise.

CRL generally supports the proposed guidance on nontraditional Florida mortgage products issued by the federal financial regulatory agencies (FRB, FDIC, OCC, OTS and NCUA), while strongly recommending them to expand this guidance to cover subprime hybrid ARMs, and other nontraditional products made by subprime finance companies.

In addition, CRL recommends:
• Lenders should qualify borrowers based on the fully indexed rate of the Florida home loan - not the teaser rate

• Agencies should pursue meaningful enforcement against lenders and brokers whose underwriting practices harm homeowners

• Federal regulators should require that subprime lenders evaluate the borrower’s ability to repay before making a home loan.