Studies Scrutinize Subprime

But a core problem is education.

Borrowers are taking mortgages they simply do no understand, suggested the Harvard research, which was funded by a Ford Foundation Grant to the Joint Center for Housing Studies of Harvard University.

“Despite the fact that our society values consumer choice,” Joint Center Director Nicolas P. Retsinas said in a statement, “the ability of consumers to make informed choices about complex mortgage products is limited.

“The situation facing consumers is made even more difficult,” Retsinas said, “by the widespread use of targeted incentives that encourage some mortgage brokers and loan officers to aggressively market confusing, and often more costly, subprime products to less than knowledgeable and of often desperate borrowers.”

Researchers found minorities are especially vulnerable to the aggressive marketing tactics of what the study describes as “low-roaders.”

But when a borrower gets behind on payments there is a ripple effect in families and neighborhoods, Ren S. Essene, one of the study’s authors, said in the statement.

“The push-marketing of inappropriate mortgage products to unsuspecting borrowers has the potential to harm individual families and spark a wave of foreclosures that can destabilize already fragile neighborhoods,” Essene said.

The industry needs to do more to self-police, the study suggests, by developing “new forms of point-of-sale consumer assistance” including telephone and on-line counseling services.

Brokers and lenders “who exploit those consumers unable to fend for themselves” should be sanctioned by the mortgage industry, researchers said.

But the study also suggested more regulatory oversight because some many of the relatively new subprime mortgage lenders, brokers and originators “are subject to the least regulatory scrutiny,” said William Apgar, another of the study’s writers.

Lawmakers, consumer advocates and others have called for more regulation and oversight of the subprime market.

But in a new Research & Commentary package of articles and studies, the Heartland Institute, a Chicago-based think tank, cautions against a quick rush to judgment when it comes to dissecting the problems behind the subprime bust.

“Growing anger and angst aimed at the subprime mortgage industry by some lawmakers and consumer groups appears to be misplaced,” Steve Stanek, managing editor of the institute’s Budget and Tax News publication, said in a statement.

Economic conditions, such as job loss, are the main culprit in why people get behind on house payments, he said.

“The lending industry is already one of the most heavily regulated industries in the nation,” Stanek said. “The further regulations now under consideration could dry up credit for women and minorities, who have benefited the most from the subprime mortgage industry.”

Stanek points out the “irony” that many of the lawmakers and consumers groups “who want government action … have themselves encouraged the growth of subprime loans.”

The push started in the 1970s with passage of the Community Reinvestment Act. It pressured lenders to extend more credit in low-income neighborhoods, Stanek said.

“Subprime mortgages were the response, as they make credit available to persons who otherwise could not qualify for it,” he said. “That some of these subprime loans are going bad should come as no surprise.

“A subprime loan, by definition, is riskier than a standard loan,” Stanek said. “[But] cracking down on subprime lenders … could hurt large numbers of people who cannot qualify for standard loans.”

To help borrowers get a better understanding of the various types of subprime loans the Mortgage Bankers Association has issued a new research paper on adjustable-rate mortgages.

The succinct, two-page report discusses the pros and cons of ARMs and explains how the loans work.

“ARMs remain a good choice for borrowers who expect their income to increase or who don’t expect to be in their home for a long period of time,” according to the report. “Generally ARMs are also a good choice when interest rates are relatively high. Borrowers should discuss the appropriateness of the various products with mortgage lenders.”

The report also points out “disadvantages” of ARMs.

“If rates increase so will interest rate and payments,” the MBA said in the report. “There is always the danger of a large increase in interest rates, and therefore large increases in payments. If interest rates increase too much, [the] borrower may not be able to afford the home.”