Toledoan Jeff Beatty says a 9 percent interest rate was the best he could do given his blemished credit history. The Beattys' house.
FORCED TO LEAVE his job as a Christian pastor in Pennsylvania because of illness, Jeff Beatty moved with his wife and four teenage children to a $300-a-month mountain home he unapologetically calls a "dump."
"We had to clean up 50 pounds of rat [droppings] before we could move in," the 45-year-old West Toledo resident recalled. "The only heat was a wood stove."
At a time when air
waves and news columns are filled with complaints from people who feel they've been ripped off by subprime lenders, Mr. Beatty is a satisfied customer.
New Century Financial Corp., which has drawn attention because of financial problems, helped him buy a tidy two-story near the intersection of Central and Upton avenues after he returned to the city he called home during an earlier ministerial assignment.
Yes, the 9 percent annual interest he pays on the $90,000 loan is high.
But, as Mr. Beatty sees it, it was the best he could do given his blemished credit history and modest income from Social Security disability benefits and his wife's job as a nursing assistant.
He doesn't blame subprime lenders. "I just wish I had been smarter in my early years," he said.
Amid rising home-loan default rates and growing fears that problems in the industry could derail the U.S. economy, scrutiny of subprime lending practices is increasing.
Already, lenders' financial problems have cut the amount of money available for such loans. New Century, the nation's second-largest subprime lender, halted business. So did Fremont General Corp., which later obtained additional credit but announced it was exiting the subprime market.
Now, some in the industry fear that an often-criticized but much needed source of mortgage-lending could dry up.
Essentially, a subprime loan is one made to a person with credit problems - unpaid bills, recent bankruptcies, spotty work record, low income. Terms are less favorable and often include higher interest, adjustable rates, balloon payments, and prepayment penalties.
Thirteen percent of subprime borrowers nationwide were at least 30 days late in their mortgage payments in the last quarter of 2006, compared to 3 percent for loans overall, the Mortgage Bankers Association said this month.
Even worse, Ohio led the nation with 11 percent of subprime borrowers in foreclosure at the end of 2006, and Michigan was second with 9.5 percent, the trade group said. That meant that one of every 10 such loans had payments so late that lenders were seizing the property.
For many in delinquency, the next step is foreclosure. That is especially significant for troubled housing markets in places like Ohio and Michigan, with overall foreclosure rates of first and third, respectively, in the nation at the end of 2006, according to the trade group. It said Ohio had 3.38 percent of its mortgages in foreclosure, Michigan 2.39 percent, and the United States as a whole 1.19 percent.
Many lenders, however, worry that subprime lending is getting a bad rap.
"They definitely have value," said Martha Ednie, owner of Apex Mortgage Co., Toledo.
She cited the case of a recent client who didn't qualify for a conventional loan. "He was close to 50 and had rented for years and years," she recalled. "And he had a blemished credit history. But he had an awesome job." Ms. Ednie was able to arrange financing through a subprime lender.
Subprime loans are only a small part of the loans she arranges as a mortgage broker. Still, she has witnessed changes taking place in the industry. Many lenders no longer extend no-down-payment mortgages to people with credit scores below 620 (on a scale from 300 to 850).
Some lenders nationally have backed off no-down-payment loans entirely, according to reports.
Industry colleagues have expressed concerns that the decline of subprime lending could lead to increases in currently unpopular land-contract financing, Ms. Ednie said. Many experts believe opportunities for consumer abuse are greater there than with subprime loans, she added.
Even before the crisis in subprime lending, a new Ohio law on predatory lending put significant constraints on the subprime industry's common practice of imposing penalties on early repayment of loans under $75,000.
Michael King deals with many people in financial trouble as a counselor at the Consumer Credit Counseling Service of Northwest Ohio.
"Subprime loans are necessary," he said, and they are different from predatory lending.
Abuses tend to be more common in the subprime market, but they can be found in conventional financing as well.
When predatory practices do occur, they tend to involve mortgages with rates that adjust after a year or two. An unscrupulous lender will tell a borrower: "You can re-finance before it adjusts," Mr. King recounted. But that is unrealistic for most borrowers. And signing people to mortgages they can't afford is a predatory practice, he said.
And experts say unscrupulous brokers sometimes steer borrowers to subprime loans although they are eligible for conventional financing.
With adjustable-rate loans, which are common in the subprime market, borrowers often get into trouble when the rate rises, Mr. King said.
Often, they're hit with not only a higher mortgage payment, but also some other life-altering event: job loss, overtime reduction, or illness.
Some real estate industry experts encourage people to explore loans through the Federal Housing Administration as an alternative to subprime borrowing.
Lending standards under FHA often are not as high as with conventional loans. A borrower can put down as little as 3 percent.
Broker Shane Marzullo, president of Greentree Mortgage Services in Springfield Township, doesn't arrange FHA loans. For some people, they are a good alternative, he acknowledged.
He cautioned, however, that altough people with lower credit scores can obtain FHA loans, they typically will be required to first pay off creditors. "In most situations the subprime borrower who has collections against them doesn't have the money to pay them off," the broker said.
Mr. Marzullo, who is president of the northwest Ohio chapter of the Ohio Association of Mortgage Brokers, conceded that some subprime lenders have acted irresponsibly. But they are not the norm, he said.
Critics sometimes point to the industry's practice of extending loans to people who do not provide proof that their income is high enough to make the monthly mortgage payment.
But this is not always an imprudent practice, Mr. Marzullo said. Using legal deductions and credits, many self-employed people have very low incomes for tax-reporting purposes. But their monthly cash flow is sufficient to cover mortgage payments.
Critics contend, however, that many problems in subprime market have resulted from lenders' failure to verify borrowers' incomes. More than 37 percent of such loans, or double the number of a year earlier, were made without income verification, according to a study by JPMorgan Chase.
Part of the problem is that some subprime borrowers are unsuitable for home ownership, said Jeffrey Fisher, director of the Benecki Center for Real Estate Studies at Indiana University in Bloomington.
"You have to do the math," he said. "If they're in a tax bracket that won't allow them to take advantage of the tax benefit of home ownership and they're going to have to pay a higher interest rate, it could turn out that renting makes more sense for that person," Mr. Fisher said.
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