By Michelle Phipps-Evans

 To southeast resident, Natalie Clark*, owning a home was tantamount to hitting the lottery.

“I would like to live in Virginia in a home with the nice fence so the kids could play,” said Clark, a single mom with four children, who lives in Ward 7. However, because of some bad choices, she said her credit was less than perfect.

Clark, who lives in an apartment and works as a full-time teacher, is a prime candidate for a subprime loan in the District of Columbia, according to a recently completed study on subprime mortgage lending and foreclosures, commissioned by the DC Department of Insurance, Securities and Banking (DISB). The study concluded that subprime loans disproportionately went to single,  low- and moderate-income minority households in wards 4, 5, 7 and 8. The study was part of a broader consumer protection initiative on behalf of the Government of the District of Columbia. 

“We now have a clearer picture of the make-up of the vulnerable populations in the District of Columbia and where they reside,” said DISB Commissioner Thomas E. Hampton at an event to release the study to the public on June 30.

“Interestingly, these are some of the same populations identified in earlier works produced by academics, nonprofit community-based organizations and others. And these findings are consistent with industry practices throughout the country.”

The Subprime Mortgage Lending Study in the District of Columbia, which was led by the Center for Responsible Lending with the assistance of a coalition of research organizations (Capital Area Asset Builders, National Community Reinvestment Coalition, The Reinvestment Fund and The Urban Institute), is intended to help the District better understand the impact of subprime lending on its residents and to suggest changes that might be needed to help protect residents. It contained more than 100 findings and recommendations that provide a road map for possible courses of action by District officials and agencies, lenders and consumers.

Among key findings in the 168-page study, which was finalized May 2008, was that about 11 percent of all loans originating in the District in 2005 were subprime. Out of a total of 37,385 loans, about 4,151 were subprime. These were slightly more often used to refinance an existing loan rather than to make a home purchase. Of that, almost 70 percent or more than 1,130 of subprime loans were made to African Americans to purchase a home, while almost 84 percent or 2,130 loans were made to African Americans to refinance their current loans in wards 4, 5, 7 and 8.

Only 13 percent of the homebuyers who participated in a telephone survey by the researchers had received information about the home loan process from a homebuyer training or financial education workshop. This was true for both prime and subprime borrowers. The District of Columbia has at least 15 housing counseling agencies and it seems as if the vast majority of consumers do not use their services.

More than 90 percent of those surveyed had inflated their incomes and, almost 60 percent of the stated amounts were exaggerated by more than 50 percent. The subprime market was designed to offer homeownership opportunities to borrowers with impaired or limited credit histories who have difficulty qualifying for financing under conventional terms.
 “This suggests that a significant number of foreclosures were unavoidable since the income levels needed to support the mortgage never existed,” Commissioner Hampton pointed out. “Even further, the drop in home values will make the sale of these properties difficult without lenders willing to accept a short sale where the property is at a price lower than the actual loan amount.”

The most frequently used type of subprime loan is the adjustable rate mortgage with an initial two- to three-year introductory or teaser rate followed by rate adjustments for the remainder of the loan-term.
Foreclosures were concentrated in neighborhoods in the eastern part of the District with a high concentration of low- and moderate-income households.

Authors of the study also presented various recommendations to help alleviate the foreclosure rate, which peaked at 366 home foreclosures, as of May 2008. For all of 2007, home foreclosures were at 281.  Recommendations included creating a highly visible financial-education initiative with strong city leadership to highlight the importance of financial literacy and enhance financial-education resources. This requires cooperation from public, private and nonprofit partners, and strong leadership is needed to achieve this goal. Consumer education and protection services are currently spread across several District agencies and better coordination would make it easier for residents to access the information and help they need, especially those in the most vulnerable groups.

The District should require mandatory credit counseling for high cost loans. All borrowers of “covered” loans should take credit counseling before taking out the loan to ensure that the borrower is fully informed of the terms of the loan and the possible increases in monthly payments if the interest rate were to be adjusted higher. 
 Even further, the District should expand the availability of homeownership education classes that could provide significant benefits to borrowers. District residents could benefit from classes on purchasing a home and getting a mortgage that include information on shopping for a broker/lender, the risks of refinancing and the closing process.
 
Foreclosure Prevention

Authors suggested that one way of preventing foreclosures in the District is by increasing consumers’ awareness of loss mitigation strategies. Borrowers need to communicate with their lender when things are not going well and seek assistance from housing counselors and other sources. Many owners wait until they receive a Notice of Foreclosure before seeking assistance. Yet, most borrowers could prevent or defer foreclosure if they were aware of potential loss mitigation strategies or could find a lender willing to make a new loan. They suggested that foreclosure notices should include language that urges recipients to contact an approved mortgage counseling agency.

The District of Columbia could work to establish a loan pool that could be capitalized with funds invested by active lenders in the Washington, DC, area. The loan pool could be used to help borrowers refinance and pay off their delinquent mortgages.

Consumers could be given an earlier notice of mortgage trouble. Currently, two notices are sent to homeowners when in default: a notice of acceleration from the lender telling them their loan will be foreclosed upon, and the actual notice of foreclosure from the lender’s representative. The homeowner can receive these notices at about the same time. The earlier a financially troubled homeowner can be reached, the more likely he or she will be able to recover from missing loan payments. It is important to get information to homeowners earlier about available resources.

Lastly, there should be better foreclosure-related tracking, data collection and record keeping by the Recorder of Deeds. Providing better information to homeowners and housing counselors could help prevent foreclosures. Policymakers could benefit from being able to assess current trends and predictions of where foreclosure problems may soon occur.

Ban prepayment penalties (PPPs) and yield spread premiums (YSPs) for subprime and nontraditional loans.  PPPs are often used to trap borrowers in unaffordable loans, usually subprime loans. YSPs put the broker in direct conflict of interest with the best interests of the client borrower given the broker receives additional compensation for arranging excessively expensive loans.

Require lenders and brokers to have a duty of agency, good faith and fair dealing to their customer. Stipulate that mortgage lenders and brokers act in the borrower’s best interest by holding mortgage brokers and lenders accountable for abusive lending practices by establishing rigorous affirmative duties to serve the best interests of their customers.

For right now, Clark said she is considering one of the foreclosed homes in Virginia. She has been looking through the several on the Internet and the newspapers.

“I hate to say it, but one man’s foreclosure is another man’s castle,” she added.

For a copy of the complete study, please contact Senior Public Affairs Specialist Michelle Phipps-Evans in DISB’s Office of Communication and Public Affairs at (202) 442-7822 or by e-mailing michelle.phipps-evans@dc.gov. Or visit the website at disb.dc.gov.

* Not real name

Michelle Phipps-Evans is the senior public affairs specialist in DISB’s Office of Communication and Public Affairs.