Stop Foreclosure: Sub Prime Mortgage Loan
When President Bush announced an interest rate freeze recently for a small amount of subprime loans, many folks were disappointed, because the rate freeze won’t prevent millions of homeowners from facing foreclosure.
Predatory practices push people from their homes. The economy is entering a time of crisis. Let the blame fall where it should: lending companies that target “at-risk” borrowers and talk them into loans where the interest balloons in a few years. With little concern for the people who are unable to repay the loans, it’s a crazy business model for mortgages, and it’s a recipe for failure.
A business model for lenders should be based on success. Project Enterprise is an example of a lending group that bases their model on opportunity rather than failure. A recent article by Arva Rice, the Executive Director of this New York non-profit group, shows how a lending model with low, reasonable rates and a good loan repayment plan is much more effective, because borrowers have a greater chance of repaying the loans. A lender must work with the borrower. Project Enterprise does exactly that, by giving small business loans in a framework where success is likely.
These borrowers often have bad credit history, no collateral, and very low incomes. Yet their repayment rate is very high because the loan recipients are provided with tools that will enable them to come out ahead. They are taught business skills, assisted in developing a business model and loan repayment plan, and given a support network in addition to their loan.
Lending institutions that pull the rug out from people, leaving them bankrupt and homeless, are ultimately hurting not only the consumer and the economy, but they harm themselves as well. They need to imitate the business model of Project Enterprise when lending to new homeowners—creating success in the future.
Other writers have suggested a moratorium on subprime mortgage foreclosures, a quick fix by the government that will give incentives for lenders to restructure loans on terms that are fair. They say that a moratorium will create real incentives to restructure loans. That is a good first step. And the mortgage industry and government must create a program that provides for the replacement of teaser-rate loans with conventional 30-year mortgages at the teaser rate.
Often mortgage companies are rewarded when they foreclose on homes; instead, refinancing and other workout strategies should be encouraged. Servicers should be committed to reporting how many subprime loans they are servicing, how many have reset, how many have been restructured and how many foreclosures are occurring.
The federal government must outreach to subprime borrowers to give them information on how to keep their homes. We need governmental intervention to prevent a full-blown recession. The borrowers, the financial institutions and the investors must all be protected if people are to avoid foreclosure in mass numbers.