Home > Mortgage Loans > Saddling Subprime Mortgage Loan Interests: When Debt is on the Rise
Saddling Subprime Mortgage Loan Interests: When Debt is on the Rise |
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Those of us with good credit can't imagine not negotiating for the best mortgage loans. We can't fathom not asking lenders to eliminate some fees or expensive loan terms. Pay a penalty for prepaying a mortgage loan? It's not likely to happen for a prime-time borrower. There are two lending worlds out there -- the prime market (people who can get loans at the best rates) and the subprime mortgage loan market (people who are offered loans with higher interest rates). True, the subprime mortgage loan lending market has allowed many credit-challenged people and those without a credit history to buy homes. But within the subprime mortgage loan industry are players who intentionally burden customers with loan terms that make it difficult for them to ever join the prime market. For example, two new studies show that subprime mortgage loan customers often get loans with prepayment penalties, which make refinancing a very costly endeavor. Prepayment penalties increase the risk of mortgage foreclosure in subprime mortgage loan home loans, even after accounting for the borrower's credit score, loan terms and varying economic conditions. A prepayment penalty is a fee charged by a lender when a borrower pays off a mortgage loan before the due date, often to refinance to a more affordable loan. For example, a $150,000 subprime mortgage loan mortgage at 10% interest could result in a $6,000 fee for prepaying the loan, according to Center for Responsible Lending. These penalties can effectively prevent a family from refinancing--something that some prime borrowers seemingly do as often as they change the oil in their cars. "Taken together, the research shows [prepayment penalties] are costly, they are applied unfairly, and--given the risk of foreclosure--they are dangerous," said Keith Ernst, senior policy counsel for the Center for Responsible Lending, during a teleconference. In a typical situation, Ernst said a subprime mortgage loan borrower might get into some financial trouble--a lost job, broken-down car or something else that makes him or her run up a credit card or cards. To get some relief, the homeowner might try to refinance to consolidate debt. "For borrowers with a prepayment penalty, this can be impossible," Ernst said. "If you owe $135,000 and call up for a payoff quote, they are going to tell you $140,000 because that figure includes the prepayment penalty. Once someone hits this roadblock, foreclosure and/or bankruptcy is likely not far off." Mortgage loan prepayment rates are impacted by the general level of and changes in interest rates. In 2004, the prepayment rate on single-family loans in the bank's loan portfolio was an average annualized rate of approximately 16% in the fourth quarter and 17% for the year, compared with 24% for the year 2003. During 2004, the prepayment rate for loans serviced for investors slowed to an average annualized rate of approximately 11% for the fourth quarter and 17% for the year, compared with 40% in 2003. As a result of these lower prepayment rates, the bank recorded a $345,000 recapture of the valuation allowance in the fourth quarter of 2004, which increased net loan servicing fees. This contrasts with mortgage servicing rights impairment charges of $1,798,000 incurred in 2003 due to higher repayment rates. As loan repayments slowed in 2004, the Bank reduced its level of amortization for mortgage servicing rights and thereby earned more net fees on a higher average balance. As a result of these factors, net loan servicing income for the year was $4,884,000 in 2004, compared with $356,000 in 2003. To be honest, if you're an investor, you should be concerned because the higher risk of foreclosures associated with prepayment penalties means greater investment losses. Policymakers should be concerned because predatory lending is draining homeowner equity and increasing foreclosures and home losses, especially in minority communities, just at the time that national housing policy is attempting to close the minority homeownership gap. Consider these findings from the recent research, Ernst said: Prepayment penalties go disproportionately to borrowers who live in rural areas and in communities with higher concentrations of minority residents. Borrowers with prepayment penalties are 16%-20% more likely to see their subprime Mortgage Loans fail. Despite having a prepayment penalty clause in their loans, 37% of all borrowers with prepayment penalties prepaid their loans, resulting in the loss of millions of dollars in home-equity-based wealth. This can worsen an already wide wealth gap for African-American and Latino families, whose homeownership rates are significantly lower than the average white household. Lenders are prohibited from charging a prepayment on a mortgage loan if the residential structure securing the loan has been damaged to such extent by a natural disaster for which a state of emergency has been declared that the structure cannot be occupied. |
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