Faced with an explosion of home foreclosures this spring -- jumping 90% in May alone -- the course of action prescribed by Wall Street and Washington has been simple: do nothing. Allow the magic of the "market" to do its thing, they say; lenders will pull back, borrowers will stop borrowing, and everything will turn out fine.
But as is so often the case, the "invisible hand" of the market appears to not be getting the right signals -- or those hands are too busy grabbing the short-term profits that come from continuing to dole out loans that gouge consumers.
As the Center for Responsible Lending reports today, despite the foreclosure crisis, banks are continuing to churn out bad loans:
As home foreclosures continue to rise and homeowners struggle to pay abusive subprime mortgages, subprime lenders and some policymakers keep assuring us that the market will correct itself-in other words, that skyrocketing foreclosures and poor loan performance will be enough to make subprime lenders stop marketing and approving risky loans.
We wish. The truth is, subprime brokers and lenders continue to advertise and approve loans with abusive terms that are known to significantly increase the chances of foreclosure.
This week, the Center for Responsible Lending examined subprime loans included in recent mortgage-backed securities (subprime loans that are bundled together and sold as investments on Wall Street). We found these securities-consisting overwhelmingly of mortgages made in 2007-contained a high share of subprime loans with terms that have been key drivers in the current epidemic of foreclosures.
On average, 77% of the loans included in these subprime securities came with adjustable-interest rates, and nearly all of these -- 94% -- were dangerous "exploding" mortgages with large scheduled interest rate increases. The securities also included a high share of subprime loans with prepayment penalties and loans that were made without fully verifying the borrower's income.
You can read the full Congressional testimony of Mike Calhoun, the center's president, speaking on a Senate bill to rein in predatory and abusive lending in the subprime market, supported by groups like ACORN.