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Critics say mortgage lenders ignored market's danger signs

Herald News — Sunday, January 13, 2008

By HEATHER HADDON
HERALD NEWS

Jonathan Sang could have pocketed his commission from the $400,000 loan.

As the manager of Benchmark Lending in West Paterson, Sang had ready access to risky subprime mortgages. But as one client sat before him in early 2006 and explained her situation – a single mother from Paterson with two jobs and little savings – Sang shook his head and gave her some advice. Better to sock away more money, he said, than rush into an adjustable-rate home loan that she eventually couldn't afford.

"They always went to someone else who made a nice commission on it," said Sang, who got reactions of anger and impatience when he attempted to caution buyers during the housing boom. "The mortgage guy became more of an order-taker than an expert."

Over the last decade, such mortgages flooded housing markets to help people afford homes. The gamble worked as long as home values increased, offering a cushion to pay the escalating interest rates. But last year, the housing market softened. Thousands of adjustable-rate mortgages rose to higher rates. Borrowers slipped, foreclosures jumped and major lenders folded.

The crisis came as no surprise to critics across North Jersey who had sounded the alarm for years. As early as 2002, New Jersey lawyers lobbied for better safeguards for borrowers. Rutgers researchers documented the link between subprime loans and foreclosures in Essex County. A Clifton blogger obsessively culled evidence about the overheated market in North Jersey that would eventually cool. But public officials and lenders, these critics say, responded with disdain or apathy.

Now, as officials try to stave the crisis, local observers say the bottom will continue to drop in 2008. Researchers predict increasing foreclosures and slipping property values for all homeowners, especially in Passaic County. Federal proposals will help some homeowners who have yet to fall too far behind, but won't end the lending that fueled the crisis, critics say. And financial analysts predict Wall Street will shed billions more from the fallout.

'A license to print money'

In the late 1990s, banks began offering adjustable-rate mortgages and other loans to clients with less than sterling credit. Typically, the loans started with low interest rates that eventually rose higher. As housing prices escalated, more homeowners depended on such mortgages to get in the door. And speculators profited from them as banks sold the loans to Wall Street as investments.

By 2000, the subprime mortgage market boomed. Banks began offering exotic loans to people with only a few thousand dollars saved for a house. Lenders waived income limits and documentation of a borrower's finances. The leniency opened the door to con artists and rampant fraud. In New Jersey, FBI reports of suspicious mortgages grew by the hundreds.

"It was like a license to print money," said Wendy Nastasi, a Pompton Plains mortgage broker. In 1999, Nastasi helped to collect evidence for the FBI by digging through the trash of a Wayne man later convicted of issuing loans without a license.

Lawyers at Legal Services of New Jersey in Edison saw an influx of predatory lending cases. Phone solicitors talked hundreds of homeowners into refinancing their mortgages when they already had safe fixed-rate loans. Unscrupulous loan officers got financing approved by adding fictitious names and incomes to deeds, according to Gwen Orlowski, a state official who led Legal Services' anti-predatory lending unit when it began in 2002. Meanwhile, the number of New Jersey residents working in the loan industry swelled, more than doubling between 2000 and 2005. Cautious loan brokers said they felt immense pressure from competitors to offer the risky loans.

"We all got sucked into this thing," said Kenneth Lombardi, a loan officer with the Wayne branch of Countrywide Financial, who quit last year over their lending practices. "Sometimes you wondered, 'Did we do wrong for this person?'"

Then, as housing prices hit a plateau and interest rates on loans rose, more people had trouble paying their debt. Default rates rose, and North Jersey community groups grew concerned about the "For Sale" signs lining local streets. In response, a team of 20 student researchers from Rutgers University sifted through 430 foreclosure cases in Essex County to understand what had happened to homeowners back in 2003. Researchers say they found clear signs of lending abuse. Some homeowners went into foreclosure within 10 months or with interest rates of 21 percent.

But by that time, the loose lending had done its damage. First-time homebuyers, seniors, middle-class couples and families living in their properties for generations couldn't keep their homes, local observers say.

"It stayed under the radar long enough for no one to notice," said Jeffrey Crum, director of real estate at the New Jersey Community Development Corp. in Paterson, who worked on the report. "What's happened is an epidemic that is beyond remedy at this point."

Worries ignored

Critics of abusive lending had a hard time getting lawmakers or regulators to pay attention. Some of the difficulty stemmed from the complexity of the mortgage financing system, but critics also found resistance from the mortgage industry.

"People have been trying to bring this to a larger national attention for more than five years," said Orlowski, the former Legal Services lawyer. "But there were profits being made as long as housing prices continued to rise."

The cracks in the system became undeniable when the housing market began to cool in 2005. Loan default rates rose as homeowners could no longer refinance their mortgages through the increasing value of their house. Major banks faltered as homeowners went into foreclosure.

"The fallout is broad and deep," said Keith Gumbinger of HSH Associates, a Pompton Plains financial publisher that predicted the crisis. "We've progressed from, 'I think there might be troubles,' to 'Oh my God, look at the troubles. And it is me. It's everybody.'"

In Passaic County, sales of foreclosed homes nearly tripled between 2005 and last year, according to figures from the sheriff's department. Officials expect local foreclosures to increase "significantly" this year.

Foreclosures have a ripple effect on communities because they lower prices of surrounding properties. Researchers with the Center for Responsible Lending, a national advocacy group, estimated that in the coming years values will drop in Passaic County by $1.2 billion – one of the highest decreases among the 1,500 counties surveyed.

What next?

State bank regulators say they have taken steps to protect homeowners. Last year, they revoked the mortgage licenses of seven unscrupulous lenders, according to the Department of Banking and Insurance.

But most banking regulation operates on the federal level. For 12 years, the Federal Reserve declined to enforce laws regarding unfair lending practices. After the subprime fallout spread last year, regulators changed course. They issued guidelines for subprime loans and set standards for lenders regarding a borrower's ability to repay. For those already in a bind, Congress has proposed a flurry of legislation to ease loan payments. And New Jersey joined six states in setting up foreclosure counseling hotlines.

Local observers debate the impact of the federal proposals. Gumbinger, the Pompton Plains financial publisher, thinks that homeowners with good credit might avoid default. But property prices will continue to fall in 2008, he said, potentially preventing homeowners from refinancing into a less costly loan. And they will have fewer banks to turn to: on Friday, Bank of America announced it will buy out Countrywide Financial, once the nation's largest lender, to save it from bankruptcy.

Additionally, Orlowski thought loopholes in the lending system could allow the risky loans to proliferate in the future. And housing advocates worry about the lack of enforcement against deceptive lending.

Local critics of the mortgage excesses say they feel little vindication for being right.

Rather, some now want to clean up the mess. Sang, the West Paterson mortgage broker, said he receives several calls a day from people hoping to refinance out of their risky loans into a traditional 30-year mortgage.

MORTGAGE MELTDOWN

The mortgage crisis has broad ripple effects in New Jersey:

Number of foreclosure filings in Passaic County in 2005: 361

Number of foreclosure filings last year: 667

Number of filings projected over next three years: 2,024

Projected decrease in value of homes in Passaic County from foreclosures: $1.2 billion

Average decrease in housing value per unit in Passaic County: $9,501

Sources: State Department of Labor, Passaic County Sheriff's Office, New Jersey State Budget, "Subprime Spillover," Center for Responsible Lending

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